The Kuznets Curve (Cambridge (CIE) A Level Economics): Revision Note

The Kuznets curve

• The Kuznets curve is defined as an inverted U-shaped curve showing the hypothesised relationship between per capita income and income inequality as an economy develops

  • Proposed by economist Simon Kuznets in 1955

• The curve suggests that inequality first rises then falls as a country grows richer, tracing an inverted U shape

The mechanism - three stages

• Early development (low per capita income)

  • As an economy begins to industrialise, workers move from low-productivity subsistence agriculture into higher-wage urban manufacturing;

    • inequality rises because only a small share of the population initially benefits from industrial growth

• Turning point (middle income)

  • Inequality reaches its peak at a critical level of per capita income;

    • The benefits of growth are concentrated among a relatively small urban industrial class, while the rural majority remains poor

• Advanced development (high per capita income)

  • As more workers move into the modern industrial and service sectors, wages converge

    • Governments also accumulate sufficient tax revenue to fund redistributive policies such as social insurance, public education and progressive taxation - inequality falls

Diagram analysis

• The y-axis measures income inequality (e.g. the Gini coefficient); the x-axis measures per capita income

• Developing economies sit on the upward-sloping left side of the curve — growth initially worsens inequality

• The turning point income is the peak of the curve — the level of per capita income at which inequality is greatest

• Developed economies sit on the downward-sloping right side — further growth is associated with falling inequality

Evaluation of the Kuznets Curve