On Growth and Income Distribution in a Globalizing World

Abstract

The basic idea explaining the relationship between economic growth and income distribution is the “U- shaped hypothesis” postulated by Simon Kuznets. This can be shown in a dual-economy model with technical progress. Initially, inequality is low, but as labour participation in the modern sector increases, higher wages in this sector tend to increase inequality. However, if enough labour is incorporated in the modern sector, wage inequality begins to diminish. Income inequality continues to worsen between the two sectors, if a new modern economy (e.g. IT-based technical change) is introduced and potential GDP shifts to a new trajectory before the turning point is reached. In a globalised word, the substantial unskilled-labour-saving technical progress puts pressure on wages of unskilled workers (in industrialized countries). Also, globalization may be blamed for leaving many nations and millions of people out from reaping the benefits of globalization. This problem can only be overcome by appropriate reforms of the international economic system.