Great Gatsby Curve

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21 Aug, 2024

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The Great Gatsby curve is an economic concept that illustrates a potential relationship between income inequality and intergenerational mobility. It aims to demonstrate the link between the two, with the ultimate goal of informing policy decisions, raising awareness, and promoting discussions about income inequality and social mobility.

The curve visually demonstrates the potential trade-off between income inequality and intergenerational mobility. Societies with high levels of income inequality may face challenges in providing equal opportunities for upward mobility to individuals from lower-income backgrounds. Moreover, it was first introduced by economist Alan Krueger in 2012. Policymakers often use this curve to argue for policies to reduce income inequality and improve social mobility.

What Is The Great Gatsby Curve?

The Great Gatsby Curve is a concept economist Alan Krueger introduced in a 2012 research paper. It is a graphical representation that illustrates the relationship between income inequality and intergenerational mobility in a society.
The Great Gatsby Curve is inspired by F. Scott Fitzgerald's novel "The Great Gatsby," which explores themes of social mobility and the American Dream.
It serves as a visual representation of the notion that income inequality can affect equal opportunity and upward mobility within a society.
This curve depends on the quality of data, measurements and timeframes which can vary., impacting the accuracy of the curve.

Great Gatsby Curve Explained

The Great Gatsby curve is based on the observation that there appears to be a correlation between income inequality and intergenerational mobility. Income inequality refers to the unequal income distribution within a society. Where some individuals or groups earn significantly more than others. Intergenerational mobility, on the other hand, refers to the ability of individuals to move up or down the socioeconomic ladder.

Moreover, the Great Gatsby curve illustrates this relationship graphically. It is a scatter plot with two axes. On the vertical axis, it measures intergenerational mobility, typically represented by a measure such as the elasticity of income or educational attainment between generations. This axis represents the likelihood that children's economic outcomes will differ from their parents.

Furthermore, on the horizontal axis, the curve represents income inequality, usually measured by the Gini coefficient or another relevant indicator. Hence, this axis quantifies the extent of income disparities within a society.

Additionally, the curve suggests that intergenerational mobility tends to decrease as income inequality increases. In other words, societies with more significant income disparities are likelier to have lower social mobility. Hence, this means that individuals from lower-income backgrounds face more significant challenges in improving their economic status than those from higher-income backgrounds.

Therefore, the concept gained prominence as it highlights the potential consequences of income inequality on social and economic mobility. It suggests that when wealth is concentrated in the hands of a few. It can limit opportunities for individuals from lower-income families to advance economically, perpetuating inequality across generations.

Thus, it serves as a tool for policymakers, researchers, and advocates to discuss and address economic inequality and vertical mobility issues.

Examples

Let us look at some examples to understand the concept better.

Example #1

Imagine two countries, the USA and Australia, with different levels of income inequality and intergenerational mobility.

The USA has relatively low income inequality, meaning the income distribution is relatively equal among its citizens. As a result, there is a higher level of intergenerational mobility, meaning that children have a better chance of moving up or down the socioeconomic ladder than their parents. Moreover, the Great Gatsby curve for the country would show a scatter plot with a relatively low level of income inequality on the horizontal axis and a higher level of intergenerational mobility on the vertical axis. Therefore, this would indicate a positive relationship between income equality and social mobility.

In contrast, Australia has a higher level of income inequality, meaning there is a more significant gap between the incomes of the rich and the poor. Hence, this more substantial income disparity in the country is associated with lower levels of intergenerational mobility. The Great Gatsby curve for this country would show a scatter plot with higher income inequality on the horizontal axis and more downward intergenerational mobility on the vertical axis. Hence, this would indicate a negative relationship between income inequality and social mobility.

So, in this hypothetical example, this curve visually represents the differences in income inequality and intergenerational mobility between the two countries. In the USA, where income is more evenly distributed, individuals have a higher chance of upward mobility regardless of their family background. In contrast, in Australia, where income inequality is more elevated, individuals from lower-income backgrounds face more significant challenges in improving their economic status than individuals from higher-income backgrounds.

Example #2

The U.S. Government used a condensed model to predict the future in December 2011 to demonstrate how increasing income disparity in the US would reduce upward mobility. However, the Administration upgraded the Great Gatsby Curve to version 2.0 to make the case that increased inequality would limit mobility.

Using a figure that economist Miles Corak had been working on for years, Alan Krueger arranged ten nations according to how much inequality and stagnation they had. The chart showed each nation as a dot, and an upward-sloping straight line was created between them to show that nations with more economic disparity also had more significant immobility.

Krueger predicted lower levels of mobility for the United States in the future—lower than any other country currently experiences—by placing current American inequality on the graph and using the upward-sloping line.

Implications

It suggests that higher levels of income inequality can hinder intergenerational social mobility. Therefore, this means that individuals from lower-income backgrounds face more significant challenges in improving their economic status than those from higher-income backgrounds. Hence, this can perpetuate social and economic disparities across generations, potentially leading to decreased social mobility and the entrenchment of inequality.
The curve underscores the notion that income inequality can lead to unequal opportunities for individuals. When wealth and resources are concentrated in the hands of a few, those from lower-income backgrounds may have limited access to quality education, healthcare, housing, and other resources necessary for upward mobility. This can create barriers that impede the ability of individuals to improve their socioeconomic status.
High levels of income inequality can have economic implications. Research suggests that excessive income inequality can dampen overall economic growth and productivity. When a significant portion of the population has limited access to resources and opportunities, their potential contributions to the economy may be hindered. In contrast, reducing income inequality and promoting social mobility can lead to a more inclusive and dynamic economy.

Criticism

The Great Gatsby curve relies on data that may have limitations. Data quality, measurement techniques, and timeframes can vary across studies and countries, impacting the accuracy and reliability of the curve's representation. Critics argue that the curve's findings may be sensitive to the specific dataset and not universally applicable.
Moreover, the curve often relies on cross-country comparisons, which can overlook important national context and cultural differences. Socioeconomic systems, historical factors, and institutional frameworks can vary significantly between countries, impacting income inequality and mobility differently.
It represents a correlation between income inequality and intergenerational mobility but does not establish a direct causal relationship. Factors beyond income inequality, such as education, family structure, and cultural factors, can also influence social mobility.

Frequently Asked Questions (FAQs)

1. Why is the Great Gatsby Curve important?

It's important because it highlights income inequality's potential societal and economic consequences. It suggests that high income inequality can hinder social mobility, leading to persistent disparities in wealth and opportunities across generations.

2. What does the Great Gatsby Curve say about the American Dream?

The Great Gatsby Curve, as a concept, provides insights into the challenges and limitations faced by individuals in achieving the American Dream. The American Dream embodies the idea that anyone can achieve success, upward social mobility, and material prosperity through hard work, determination, and opportunity.

3. Is the Great Gatsby Curve based on real-world data or a theoretical concept?

The Great Gatsby Curve is based on empirical data and real-world observations. It uses income inequality and intergenerational mobility data in different countries or regions to illustrate the relationship between these two variables.