Countries with high income inequality tend to have low upward economic mobility, which can affect the opportunity for future generations to move up the social ladder.

The “Great Gatsby Curve” was made famous by Alan Krueger, late economist and former chairman of the Council of Economic Advisers.

Krueger expanded upon research about the association between a country’s income inequality and the relationship between children’s and their parents’ income.

Nordic countries that have low inequality and low elasticity fall at the bottom of the curve, while the US falls in the middle.

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Countries with high income inequality experience low upward mobility – the opportunity for a child born into a low-income family to climb the economic ladder – meaning social stratification could persist if nothing is done to improve mobility.

According to The Organisation for Economic Co-operation and Development’s Society at a Glance 2019 report, income inequality within countries has continued to increase over the past three decades. The income distribution gap is particularly bad in developing countries.

The “Great Gatsby Curve” highlights differences in mobility across countries. The scatter plot shows the relationship between income inequality and intergenerational income mobility. It became a popular concept in 2012 after late professor and Chairman of the Council Economic Advisers Alan Krueger explained the curve and its implications during a speech at the Center for American Progress.

The following chart shows the Great Gatsby Curve. The vertical axis shows the intergenerational elasticities compiled by Corak using previous research papers that focus on intergenerational mobility in different countries. A lower intergenerational elasticity means that there is higher income mobility in that country because there is a weaker relationship children and their parents’ incomes. The details are explained below the chart:

Foto: sourceBusiness Insider/Madison Hoff, data from Miles Corak (2012), OECD, and World Bank

The horizontal axis shows the Gini coefficient using values from World Bank data from 2013-2017 (except for Japan, with a coefficient from 2008 and New Zealand, from the OECD 2014 Gini coefficients.) A higher value on the horizontal axis means a country has a more unequal distribution of income.

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The scatter plot shows just how hard it is for someone living in a country with high income inequality to get ahead in their society. Data points in the lower-left area of the plot are low-inequality, high-mobility countries, while those in the upper-right are high-inequality, low-mobility countries.

The name of the curve, which was suggested by Judd Cramer, former staff economist at the Council of Economic Advisers, is inspired by the F. Scott Fitzgerald novel where a man from humble beginnings turns financially successful. However, Gatsby’s story doesn’t end well; he is shot by a mechanic after he takes the blame for hitting the mechanic’s wife with a car – even though it was really Gatsby’s love interest Daisy driving Gatsby’s car.

Although the book shows opportunity for people from low-income families to move upward in economic status (even if it may end in tragedy,) the reality is social mobility in general has declined over time in the US.

The Great Gatsby Curve shows that in countries where income inequality is low, someone born in the bottom economic class may have a good chance to move up to a better economic situation than their parents. Alternatively, in countries where income inequality is high, a child in a low-income family may have a harder chance of climbing the economic ladder. The US falls somewhere in the middle.

The concept is based on previous research by economist Miles Corak and others who examined the relationship between a country’s inequality and its income elasticity. Corak used the Gini coefficient, a standard measure of a country’s income inequality. The coefficient ranges from 0 to 1, where a score of 0 means complete equality and a score of 1 means the country has complete inequality.

In Corak’s research, income elasticities were based on father’s and son’s earnings for sons born in the 1960s. The elasticity measure indicates how much of a child’s income is dependent on their parents. An elasticity of 1 means where a child ends up in the income distribution is completely dependent on the parents’ financial circumstances, and so it would be very hard for a child to move upward or downward the economic ladder.

Although there is no clear solution to the issue of unequal opportunity between countries, The Organisation for Economic Co-operation and Development presented in its recent social mobility report different policies that could help close the gap between disparities in intergenerational upward income mobility. Some of the suggested policies include apprenticeships and educational outreach to help low-income children have better opportunities for their future employment.

Read on to find out which kind of countries someone born in a low-income family can get ahead, where the US falls on the Great Gatsby Curve, and inferences drawn from the curve.

The US falls in the middle of The Great Gatsby Curve.

Foto: sourceBrendan McDermid/Reuters

In the US, an unequal income distribution and a higher dependency on a parent’s income means there is less opportunity for children in different economic classes to move upward than elsewhere.

With an elasticity score of 0.47 from Corak’s research, about half of what a child is expected to earn when they have a job is related to their parents’ incomes.

Differences in upward mobility can be seen internally in the US as well. Research conducted by economists Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez using US commuting zones’ Gini coefficients and upward mobility percentiles show that areas with higher income inequality have lower upward mobility than those with less inequality.

Nordic countries are closely grouped together at the low-inequality, high-mobility part of the curve.

Foto: sourceJacob Gronholt-Pedersen/Reuters

Denmark, Norway, and Finland all fell at the bottom-left part of the curve. This means that a child in a low-income family has a better opportunity to move up the economic ladder than a child in a similar situation in a country with higher inequality and higher elasticity.

Overall, Nordic countries have the highest social mobility among the 82 economies studied in the World Economic Forum’s new social mobility index. The World Economic Forum notes that one of the reasons there is better opportunity for all residents regardless of background is because of “high quality and equitable education systems” available in these countries.

In other countries that have a Gini coefficient between 0.3 and 0.35, their elasticity ranges between 0.2 and 0.5. Those with higher elasticity scores are associated with less upward mobility.

For instance, the UK has a Gini coefficient of 0.33 and an elasticity of 0.5, while Canada has a Gini coefficient of 0.34 and an elasticity of 0.19. This means that Canada experiences more upward mobility than the UK – or even the US.

Developing countries, such as Chile, tend to fall in the high-inequality, low-mobility section of the Great Gatsby Curve.

Foto: sourceRodrigo Garrido/Reuters

Countries that are at the top-right of the curve include several developing countries. For instance, Chile has an elasticity of 0.52 and a Gini coefficient of 0.46, both high scores compared to other countries on the Great Gatsby Curve.

This means that it is harder for children born into the 25th percentile to move up the economic ladder compared to a child in the same percentile in a country with low inequality and low income dependency on their parents’ income.

More people in developing countries are having difficulty moving up the economic ladder, according to a 2018 World Bank report.

Carolina Sanchez, senior director of the Poverty and Equity Global Practice at the World Bank, said in the report that developing regions like South Asia and Africa are experiencing “stalled mobility” because children’s economic success is dependent on their parents’ income.

The Great Gatsby Curve can be seen in other mobility measures, such as how many generations it takes for a low-income family to reach the average income.

Foto: sourceBusiness Insider/Madison Hoff, data from World Bank and OECD

Interestingly, and not surprisingly, the relationship between inequality and mobility can also be seen using the number of generations it will take for someone in a low-income family to move up the social ladder. In countries with better upward mobility, it would take fewer generations for low-income families to reach the country’s average income.

The OECD created a bar chart that compares the number of generations that it would take for low-income families to reach the average income in countries part of the OECD.

For instance, in Nordic countries, it only takes about two to three generations, while in China where there is higher inequality and high elasticity, it takes seven generations, according to the OECD report.

The same is true for educational mobility: Upward educational mobility tends to be higher in countries with low income inequality.

Foto: sourceBusiness Insider/Madison Hoff, data from World Bank and OECD

If we examine upward mobility in educational attainment, we see that countries with less income inequality tend to have higher upward educational mobility, where a child earns a degree at a higher education level than their parents.

Using OECD upward educational mobility data from its 2018 education report, we measured upward educational mobility, on the vertical axis, against income inequality, on the horizontal axis. Unlike the previous charts, higher values along the vertical axis means more upward mobility.

So, a child born into a family at the 25th percentile in a country with low inequality has a higher chance of having a better education than their parents than someone born into a place with greater inequality.

The OECD notes using findings from academic research that policies that aim for educational equality regardless of parents’ educational background can help improve economic mobility in a country.