Sunday, January 3, 2010

The Kuznets Curve

The evidence for the original Kuznets curve - a supposed inverted-U shape relationship between inequality and income per capita - is not very strong either. The Y axis shows an average of the available data on the Gini coefficient of income inequality for the period 1971-2007 (mostly from the World Development Indicators) and the X axis average income per capita over the period in 2007 PPP Dollars. The data is for 85 non-petroleum economies. Of course, it would be more desirable to plot 2007 Gini coefficients, but data on inequality is very sporadic and so we would be only able to investigate a small number of countries. The fitted curve is a simple quadratic.

There does seem to be less inequality at higher income levels and a greater variability of inequality at lower income levels. If you were to drop the former communist countries in Eastern Europe from the sample then more of an inverted U would result. Middle income levels would then be dominated by Latin American countries, which has historically been a more unequal region than other parts of the world at similar income levels.

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