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Poverty, Income Inequality and Economic Growth in U.S. Counties: - page 8 / 33





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rates of growth and investment. However, he finds that income inequality tends to retard

growth in poor countries and foster growth in rich countries.

Economic Growth on Inequality and Poverty

Kuznets (1955) in his seminal paper posits that income inequality follows an

inverted U-shape in the process of economic growth. According to Kuznets, income

inequality worsens at the early stages of economic development, before improving during

the later stages. In the early stages of economic development, people migrate away from

the egalitarian rural agricultural sector to the relatively unequal, yet richer industrial

sector. These migrating workers experience an increase in their per capita income, which

worsens income inequality initially. Eventually, when sufficient number of rural workers

move to the industrial sector, the decreasing size of the agricultural sector drives up the

relative wages in that sector. Moreover, early workers who started out at the bottom of

the industrial sector move up in relation to the richer workers in this sector. These two

processes close the gap in income inequality. Hence, inequality first rises and eventually

decreases as the economy becomes more developed, yielding an inverted U-shaped


As Goudie and Ladd (1999) argue, the effect of economic growth on income

inequality can go either way depending on country specific characteristics. For instance,

the magnitude and effectiveness of transfers will largely determine the effects on

inequality. An open economy, which is more likely to experience growth, would also

experience improvement in income distribution if the exported goods are labor intensive.

At the same time, when the exported goods are capital intensive, it may worsen the


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