The underlying message – that rising inequality is an inevitable stage on the journey towards economic success for all – was too good a story to doubt and the Kuznets Curve was taught to every student for at least the next 50 years. The study finding shows that the relationship between inequality and economic growth mainly depends on the different income levels. They indicated that the long-run growth elasticity of income inequal¬ity is negative. She finds a strong, positive, and significant effect of inequality on economic growth in the short run of 1 to 5-year growth periods but by using long run of 10-year growth periods the effect is less significant and steady. Based on the study of Shahbaz (2010), the Kuznets’ inverted U-curve in Pakistan is existed. Barro (1999) has recently showed that a greater inequality can have a di¤erential impact according to the nation’s income: it lowers the growth rate in poor countries and increases it in rich ones. Furthermore, Galor and Moav (2004) describe a unified theory that combines two contradictory approaches at different stages of the development process. 1 (1955): 1–28. In 1955, Simon Kuznets published a paper asserting that the correlation between economic growth and income inequality resembles an inverted U-shaped curve. Thus the relationship between income distribution and income level can be described by an inverted U-curve. 11. (2009) suggest that inequality may bring out incentives for the wealthy to hamper institutional policies and changes that facilitate human capital formation and economic growth. In economics terms, income inequality is the large disparity in how income is distributed between individuals, groups, populations, social classes, or countries. They do not have the opportunity of investing, and extremely poor people in income inequality cannot even participate in product activity. GDP counts the value of goods and services exchanged within a country. This in turn would affect incentives, and thus decrease growth. Finally, Galor and Moav suggest that both mechanisms dim with development. Kuznets says that in the initial period, agriculture represents the majority of a country’s economy, which is also characterized by low levels of inequality. Data from developing economies indicate that the earlier phases of economic development tend to be characterized by increasing income inequality, as those engaged in the small but growing modern sector of the economy pull away from those still left in agriculture and other subsistence activities. In common, inequality is dangerous to economic growth. Yet, an evergrowing income inequality risks harming future growth by creating support for bad policies. relationship between per capita income and income inequality—based on a model where individuals migrate from a low-wage rural sector with little inequality to an urban sector characterized by high income inequality and high average income. In addition to Panizza, Stewart and Moslares (2012) studied the Indian states for the period of 1980-2010, and demonstrated that income inequality affects growth negatively, and achieve that regional Gini coefficients affects the growth rate negatively, by means of the literacy rate and the coefficient of variation of the growth rate as control variables. Even if we had data to approximate the income structure just out-lined, the broad question posed at the start-how income inequality changes in the process of a country's economic growth-could be For instance, the hypothesis holds that in the early development of an economy, new investment opportunities increase for those who already have … With a low GDP per capita inequality has a negative effect on growth, while the effect is positive when GDP per capita is high in other words Concludes that the effect of income inequality on economic growth is different contingent on the state of economic development. Kuznets is also known for the Kuznets curve, which hypothesizes that industrializing nations experience a rise and subsequent decline in income inequality. A popular method of measuring degree of income inequality is Kuznets’ ratio after the name of Simon Kuznets who has been a pioneer in the study of income inequality. "Economic Growth and Income Inequality." Using a similar data on U.S. states, with unlike conditions, but finds no evidence of a positive result of inequality on growth. development, Beyond Kuznets: Inequality and the size and distribution of cities, The Impact of a Carbon Tax on Inequality in the United States, 2min+ Book Summary: Bourguignon's The Globalization of Inequality, Gimpelson and Treisman: Misperceiving Inequality. She also focused on using more measures for inequality than just the general measures, such as the Gini index. Though various research have found some support for the Kuznets hypothesis but some studies such as Ahluwalia, (1976); Bruno, Ravallion and Squire, (1995) and UNCTAD, (1997), found no such relationship between growth rates and income inequality. This shift would lead to the inverted U-shaped relationship between real GDP per capita and inequality. on. These actions can even threaten the country’s political system, which may make a more insecurity in the country’s governmental institutions. In his article, Kuznets shows how demographic changes followed by industrialization alter income distribution within a country. The Russian-born Simon Kuznets left Soviet Russia in 1922, emigrating to New York. Beside this Partridge (1997) finds in contrast to Persson and Tabellini, that there is a positive effect of inequality on growth in the sense that the Gini-index is positively correlated to economic growth. Labour productivity growth is found to have contributed to rising market income inequality, while this was partly mitigated through government redistribution, on average across OECD countries over the past three decades (Chart 1, Panel A). Kuznets established the association between economic growth and income inequality as:... a long swing in the inequality characterizing the secular income structure widening in the early phases of economic growth when the transition from the pre-industrial to the indus? It should be noted, however, that the Kuznets hypothesis associated the evolution of inequality with economic growth (Kuznets 1955). It is a major part of how we understand socioeconomic statuses, being how we … Get Your Custom Essay Let Professional Writer Help You, 6000 Fairview Road, SouthPark Towers, Suite 1200, Charlotte, NC 28210, USA. He became a student of Wesley Mitchell at Columbia and subsequently a researcher at Mitchell's National Bureau of Economic Research (NBER) in 1926. Don't use plagiarized sources. Tiwari, Shahbaz and Islam (2013) investigated the impact of financial development on the rural‐urban of Indian data for period 1995-2008 and found that the relationship is positive in the urban areas and negative in the rural areas. As a result, we can conclude that income inequality makes economic growth lower and income equality makes it higher. Simon Kuznets, 1901-1985. Studies on the relationship between income inequality and Growth initiated from the pioneering research by Simon Kuznets (1955) where deliberated economic growth and income inequality and came up with a hypothesis that is currently called as the Kuznets hypothesis or the inverted U-Curve. According to Kuznets, a shift towards the secondary and the third sectors has in nature two effects in the short term. Remember. The Kuznets hypothesis therefore showed connection from Growth to income inequality. Looking at annual income levels over the course of roughly 50-75 years Kuznets finds that beginning in as early as the nineteen-twenties, the inequality of income distribution in the UK, US, and Germany narrowed rather than widened. In developed countries, the saving rate of rich people is higher than that of the poor. Deininger and Squire (1996) also did not find any evidence for the existence of such (Kuznets Relationship) a relationship between development and inequality. Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review 45, no. In a more general perspective, Bénabou (1996) argues that high overall inequality may give rise to sociopolitical instability, which in turn reduces growth. Similarly, Abida and Sghaier (2012) they look empirical relationship between economic growth and income inequality for 4 countries in North Africa (Tunisia, Algeria, Morocco, and Egypt) for the 1970-2007 periods. In a seminal paper, Kuznets (1955) argued that as countries developed, income inequality first increased, peaked, and then decreased, and documented this using both cross-country and time-series data. can use them for free to gain inspiration and new creative ideas for their writing assignments. This shows that not all economies follow the inverted U-Curve hypothesis during their development path but Kuznets theory marked an important starting point for many inequality studies that followed. KUZNETS: ECONOMIC GROWTH AND INCOME INEQUALITY 3 groups that, judged by their secular levels, migrate upward or down-ward on the income scale. The two separate literatures on the Kuznets curve and the EKC provide an-other possible explanation for the environmental impact of inequality. 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