The Great Gatsby Curve illustrates the connection between concentration of wealth in one generation and the ability of those in the next generation to move up the economic ladder compared to their parents.
Countries with high levels of income inequality typically also have low upward mobility. This refers to the opportunities presented to a child from a low-income family to climb the economic ladder.
What this means is that true social stratification could continue if something isn’t done to address the issue and improve mobility.
According to a survey by OECD (Organization for Economic Co-operation and Development), levels of income inequality has continued to rise over the past 30 years. This gap is especially bad in developing nations.
The Great Gatsby Curve shows differences in mobility between countries. The scatter plot indicates the relationship between intergenerational income mobility and income inequality. This concept gained traction during President Obama’s adminstration in 2012 when Alan Krueger, ex-Chairman of the Council Economic Adviser, explained both the curve and what it implies at a speech given at the Center for American Progress.
The chart below shows the Great Gatsby Curve. On the vertical axis, you see intergenerational elasticity based on the mobility between generations across various countries. Lower elasticity between generations shows there is greater income mobility due to a weaker relationship between children and the incomes of their parents.
The horizontal axis displays Gini coefficient values taken from 2013-2017 World Bank data. The only exceptions are Japan (2018 coefficient) and New Zealand (2014 coefficient). The greater the value on this horizontal axis, the more unequal the income in that country is distributed.
In countries with high levels of income inequality, it’s tough to advance in society. These data points are found in the upper-right area of the scatter plot. The lower left area, by contrast, shows data points for countries with low levels of income inequality and correspondingly high levels of mobility.
The curve is named for the F. Scott Fitzgerald novel. The eponymous protagonist from humble beginnings becomes financially secure. The story doesn’t end well, though. Gatsby is killed by a mechanic after taking the blame for hitting the wife of the mechanic with his car. In truth, it was Daisy, his love interest, who had been driving Gatsby’s car.
The novel shows that people from low-income families can move up the trajectory of social status, even if it doesn’t always turn out well. In reality, though, social mobility has declined over time in the United States.
This curve shows that someone born in a country with low income inequality into the lower economic class could have a decent chance of moving to a superior economic position that their parents managed to achieved. Conversely, this is tough in countries with high levels of income inequality. The US comes somewhere roughly in the middle.
The concept of the Great Gatsby Curve is predicated on research conducted by Miles Corak, an economist, along with others who explored the relationship between the income inequality levels of a nation and the level of income elasticity. In Corak’s research, he utilized the Gini coefficient. This ranges from 0 to 1 with 0 representing total equality, and 1 expressing total inequality.
Income elasticity in the research carried out by Corak was based on the earnings of fathers and sons, based on children born in the 1960s. The elasticity shows how much the income of a child depends on their parents. Elasticity of 1 shows that a child is totally dependent on the circumstances of his parents finances. This would make it practically impossible to move either up or down the economic ladder.
There’s no easy fix for this inequality of opportunity between countries. The OECD suggests apprenticeships and educational outreach could be beneficial.
The US is in the center of The Great Gatsby Curve
In the US, there’s an unequal distribution of income with great dependency on the income of parents. This means there is less chance for children to move upward on the economic scale than elsewhere.
The US has an elasticity score of 0.47 based on Corak’s research. This means that roughly half of what a child expects to earn is linked to their parents’ incomes.
Nordic countries grouped closely together in the high-mobility, low-inequality part of the curve
Finland, Norway, and Denmark all provide better opportunity for a child born into a low-income family to advance.
Nordic nations have the overall highest social mobility among the 82 economies studied in the social mobility index from the World Economic Forum. The WEF states that there’s better opportunity for all residents whatever their background primarily because of the high quality, equitable education systems in these countries.
Developing countries like Chile often fall in the low-mobility, high-inequality part of the Great Gatsby Curve
Countries at the top-right of the Great Gatsby curve include developing countries.
Chile, for example, scores 0.52 elasticity with a Gini coefficient of 0.46. These are both high scores. A child born into a low-income family will find it harder to move upward than a child born in a country with low levels of income inequality and low income dependency.
This is causing many people in developing countries to stall.
Other mobility measures
In nations with superior upward mobility, it would require fewer generations to climb the social ladder.
In Nordic countries, for instance, it would take 2 to 3 generations. In China, where inequality and elasticity are higher, it would take 7 generations.
Also, in countries where there is upward mobility in educational attainment, countries with lower levels of income inequality translates to more upward educational mobility.