According to Nobel Prize winner Simon Kuznets, inequality in developing countries is a temporal phenomenon (qt. in Chang 387). The hypothesis proposed by the economist stated that as the economy develops, a country experiences an increase of inequality followed by its decrease. He has argued that a period of transition from an agrarian to an industrial economy is associated with the increase in inequality between people working in the industrial sector and those that are employed in the agricultural sector (qt. in Chang 387). However, as the developing economy progresses even further, the income distribution becomes less skewed. Unfortunately, the existing empirical evidence is too scarce to confirm Kuznets’ hypothesis. The developed countries like England and the United States saw the precipitous rise of income inequality in the mid-nineteenth and early twentieth centuries that was followed by a period of its decline. However, income inequality started to grow again in the 1980s (Chang 390). The majority of today’s developing countries experience a similar trend.
Even though income inequality is probably the most salient and the most discussed type of economic imbalance, there are also inequalities of wealth and human capital distribution. Other factors that could contribute to inequality in some societies are caste, ethnicity, religion, gender, and sex among others (Chang 391). The most common method of measuring income inequality is the Gini coefficient. It allows us to “compare real-life income distribution with the situation of total equality” (Chang 391). Gini coefficient matches a cumulatively earned income of the bottom x percent of a countries population with a total national income. There is also a measurement known as the Palma ratio that allows disregarding the middle fifty percent of the total income distribution (Chang 391).