What’s a Kuznets Curve?

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The Kuznets Curve shows that as a country’s economy improves, income inequality worsens, but eventually levels out. The curve was first observed by economist Simon Kuznets and has been applied to both economic and environmental perspectives.

The Kuznets Curve is a curved image that characterizes the hypothesis that, as a country’s economy improves, the inequality between people’s income level worsens. This is the case where people say, “The rich get rich, while the poor get poorer”. The hypothesis behind the Kuznetz Curve was the observation of Simon Kuznets, an American economist who went on to become the winner of the Nobel Prize in Economics.

While teaching at the University of Pennsylvania, Kuznets studied economic inequality and how economic resources – financial and otherwise – were allocated to working society. During this period, he observed a pattern in which a large part of a country’s per capita income would be allocated to a low percentage of the population, mainly the upper class. This inequality would peak and eventually level out as the country continues to develop. Kuznets presented his findings in 1955, and the hypothesis became influential in the economic world. Kuznets illustrated his observation using an inverted U, the very image of a Kuznets curve.

There could be several reasons explaining the illustration of the Kuznets curve. A likely reason for inequality is the tendency of the rural population to migrate to urban areas in search of better jobs and “greener pastures”. These people would start with low-paying, entry-level jobs, which would result in low income. In agricultural developing countries, many agricultural workers also tend to move into industry-related occupations, a phenomenon that would also bring low incomes, while the “big bosses” in companies earn more money. Eventually, as migrant workers move up the business ladder, they earn more and economic equality diminishes over time.

In addition to an economic point of view, the Kuznets Curve has also been applied from an environmental perspective. In this case, as a country’s per capita income increases, concern for the environment decreases. It can easily be seen that the more industrialized cities would almost always be more polluted than the less progressive ones. A likely reason for the occurrence would be an increase in population: more trees are cut down to make room for skyscrapers, more cars are moved, more trash is thrown away, and more waste is accumulated in sewer systems.

Like the economic Kuznets curve, the environmental Kuznets curve would eventually indicate a decrease in economic degradation. This could likely be a result of people’s perception of the repercussions of economic development and would compensate by helping “Mother Nature”. Many companies would strive to reduce carbon footprints by building “greener” equipment and systems and recycling waste.

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