Kuznets’ Hypothesis
In the 1950s and 1960s, Simon Kuznets hypothesized that as an economy develops, market forces first increase then decrease the overall economic inequality of the society, which is illustrated by the inverted U-shape of the Kuznets curve. For instance, the hypothesis holds that in the early development of an economy, new investment opportunities increase for those who already have the capital to invest. These new investment opportunities mean that those who already hold the wealth have the opportunity to increase that wealth.
Conversely, with the influx of inexpensive rural labor to the cities keeps wages down for the working class thus widening the income gap and escalating economic inequality.
The Kuznets curve implies that as a society industrializes, the center of the economy shifts from rural areas to the cities as rural laborers such as farmers begin to migrate seeking better-paying jobs. This migration, however, results in a large rural-urban income gap and rural populations decrease as urban populations increase. But according to Kuznets’ hypothesis, that same economic inequality is expected to decrease when a certain level of average income is reached and the processes associated with industrialization, such as democratization and the development of a welfare state, take hold. It is at this point in economic development that society is meant to benefit from trickle-down effect and an increase of per-capita income that effectively decreases economic inequality.
Kuznets’ HypothesisIn the 1950s and 1960s, Simon Kuznets hypothesized that as an economy develops, market forces first increase then decrease the overall economic inequality of the society, which is illustrated by the inverted U-shape of the Kuznets curve. For instance, the hypothesis holds that in the early development of an economy, new investment opportunities increase for those who already have the capital to invest. These new investment opportunities mean that those who already hold the wealth have the opportunity to increase that wealth.Conversely, with the influx of inexpensive rural labor to the cities keeps wages down for the working class thus widening the income gap and escalating economic inequality.The Kuznets curve implies that as a society industrializes, the center of the economy shifts from rural areas to the cities as rural laborers such as farmers begin to migrate seeking better-paying jobs. This migration, however, results in a large rural-urban income gap and rural populations decrease as urban populations increase. But according to Kuznets’ hypothesis, that same economic inequality is expected to decrease when a certain level of average income is reached and the processes associated with industrialization, such as democratization and the development of a welfare state, take hold. It is at this point in economic development that society is meant to benefit from trickle-down effect and an increase of per-capita income that effectively decreases economic inequality.
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