Chart of the week: The Great Gatsby Curve

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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.

The curve shows that children from poor families are less likely to improve their economic status as adults in countries where income inequality was higher – meaning wealth was concentrated in fewer hands – around the time those children were growing up.

Countries such as Italy, the UK and the US, which are at the top of the curve, find themselves in an increasingly rigid economic structure, with rich children predestined to grow up wealthy, and poor children more likely to remain impoverished in childhood.

Chart of the week: The Great Gatsby curve – showing the correlation between generational mobility (y-axis) and income equality (x-axis) in developed countries
Source: Corak (2013)

Generational mobility (y-axis)

Y-axis position represents the degree of income mobility across generations in a country. Higher values on this measure reflect a lower degree of economic mobility across generations. (source: Miles Corak).

Income inequality (x-axis)

X-axis position is the Gini coefficient for after-tax income (a measure of the extent of inequality in that country in the mid-1980s); it ranges between 0 in the case of perfect equality and 1 in the case of perfect inequality (source: OECD).

This chart shows these two different data values separately:

Source: Bloomberg, BNP Paribas Asset Management, as at 03/10/2013

The Great Gatsby curve

On his website, Miles Corak, a US labour economist, explains how he created this graph to depict the relationship between inequality and intergenerational mobility.

Corak’s work subsequently came to the attention of Alan Krueger, then Chairman of President Obama’s Council of Economic Advisors, who was working on a speech on the rise and consequences of inequality in the United States. His insistance on a better ‘label’ for the graph led fellow economist Judd Cramer to suggest the Great Gatsby Curve (F. Scott Fitzgerald’s novel ‘The Great Gatsby’ highlighted the inequality and class distinctions in America during the Roaring 20s).

In 2013, a dynamic version of the Great Gatsby Curve was published on the White House’s website. The accompanying text referred to “the sharp rise in inequality in the US since the 1980s” and the fact, that on the eve of the Great Recession, income inequality in the US was as sharp as it had been at any period since the time of The Great Gatsby.

President Barack Obama “increasing inequality challenges the very essence of who we are as a people”

On 4 December 2013 then President Obama spoke in length about declining economic mobility in the US. He highlighted the diminishing levels of social mobility in the US:

“A child born in the top 20% has about a 2-in-3 chance of staying at or near the top. A child born into the bottom 20% has a less than 1-in-20 shot at making it to the top. He’s 10 times likelier to stay where he is. In fact, statistics show not only that our levels of income inequality rank near countries like Jamaica and Argentina, but that it is harder today for a child born here in America to improve her station in life than it is for children in most of our wealthy allies — countries like Canada or Germany or France. They have greater mobility than we do, not less”.
President Obama went on to review changes in income inequality in America since World War II (For a full version of his review click here).

But wealth inequality in America continues to worsen…..

US wealth inequality continues to worsen. Since 2013, the wealth owned by the top 1% of Amercians rose by 3%. Today the wealthiest 1% of Americans own 40% of the country’s wealth, more than the bottom 90% combined. US income inequality rose by 24.5% between 1983 and 2016.

How does inequality affect the big picture ?

Large inequalities of income are regarded as divisive and toxic for a society. But contrary to conventional thinking the issues go far beyond the poor having shorter lives or suffering more from social problems. Research, over long time periods, has shown that the more unequal a society is, the worse it is for all, rich and poor.

Inequality does not just have adverse consequences for the least well-off.  Across whole populations, rates of mental illness are five times higher in the most unequal compared to the least unequal societies. Similarly, in more unequal societies people are five times as likely to be imprisoned, six times as likely to be clinically obese, and murder rates may be many times higher. Almost every modern social and environmental problem is more likely to occur in a less equal society.

 


For previous charts of the week, click here >

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