January 25th, 2012
Econintersect: Alan Krueger, Professor of Economics, Princeton University has a graphic that he has called “The Great Gatsby Curve.” That is shown below. But first, here is what Krueger is talking about. Income inequality is much in the news and refers to the fact that share of income going to the top few percent of the population is the largest it has been since the late 1920s. The other factor that Krueger discusses is social mobility. This refers to the probability that children will move out of the social class of their parents.(Wikipedia) Krueger discusses the observation that as income inequality has increased social mobility has decreased.
The two parameters displayed in The Great Gatsby Curve, attributed to Miles Corak (University of Ottowa) relate to social mobility and income distribution. The vertical axis, labeled intergenerational earnings elasticity, increases as the probability of offspring moving out of their parents’ income level. The horizontal axis, the GINI coefficient, increases as income inequality increases.
The blue data points represent the data as of 1985. The red points indicate the projections for the U.S. up to 2010. The U.S. occupies the unenviable position among developed countries of having the poorest social mobility and the greatest income inequality.
There is more to the story. In a 2011 paper by Corey the same graph is generated with a larger group of countries.
In this graph the U.S. is no longer the outlier but is exceeded on both axes by several emerging market countries. Also, the slope of the line in the second graph is much less than in the first. Is the solution to the problem of rapidly rising GINI being associated with rapidly decreasing social mobility to be lessened by the U.S. becoming a third world country?
One final note: Prof. Krueger clearly infers that decreased social mobility is the result of growing income inequality. There is no a priori reason that the reverse could not be true. Obviously, many social factors other be involved. These clearly should be examined, as intuitively appealing as Kueger’s idea of cause and effect is. Many an economic sin has been committed using intuitive reasoning and accepting assumptions that are “intuitively appealing” or “intuitively obvious.”