Simon Kuznet came up with a bold presidential address for “American Economic Association” in 1954, which proposed the “law of motion” for the distribution of income. The topic chosen is largely unstudied by others due to lack of data. Theory was presented on the basis of data present for the USA, UK and two states in Germany. Kuznet was very confident about the outcome of his theory according to which as the economy develops, market forces increase in the first phase and then decrease the economic inequality.
If we see the representation of Kuznet’s curve in the graphical form the curve comes out to be very smooth and symmetrical. Empirically observed curves are neither smooth nor symmetrical. Kuznets curve implies that when a nation is going under the process of industrialization (majorly the mechanization of agriculture) the center of economy is going to shift to cities. This behavior can typically be observed in developing economies where investment opportunities for those who are already rich, multiplies and huge influx of cheap labor into the cities are going to hold down the wages. As Kuznets curve mainly talk about the mechanization of agriculture, the influx into the cities will be of farmers in search of better paying jobs. At this stage the rural and urban inequality gap is at its peak. In this situation owner is going to get the maximum benefits, rate of increase in income will be marginal for labors and in case of farmers turned labors incomes are going to get decreased.
With decrease in rural population and increase in urban population the inequality is going to get decreased with the process of increase in per capita income, industrialization, democratization and welfare state coming into picture. Although the variables on both the axes of Kuznets curve are mixed and matched by social economists, it is an inverted U curve with “inequality” on the Y axis and “per capita income” on the x axis。