In the speech he gave at the Center for American Progress on January 12th, Alan Krueger, the Chairman of the Council of Economic Advisors, presented the “Great Gatsby” curve: the relationship between inequality and generational earnings mobility, citing in part a 2011 paper of mine.
Here is the draft of the paper from which some of the data he used were drawn, in particular see Figures 1 and 2:
Inequality from generation to generation the United States in comparison
Here is Figure 2, my version of the Great Gatsby Curve for a wider set of countries:
The discussion I offered in an earlier post also uses this information and relates to this theme: Inequality and Occupy Wall Street 5: decline of the American Dream
Here is the text of Krueger’s speech Alan Krueger, The Rise and Consequences of Inequality, Text, and here are the associated slides Alan Krueger, The Rise and Consequences of Inequality, Slides .
[Update: this post was updated on January 27, 2012 with a new version of the text “Inequality from Generation to Generation…” and the associated figure. This text can be cited as:
Miles Corak (2013), “Inequality from Generation to Generation: The United States in Comparison,” in Robert Rycroft (editor), The Economics of Inequality, Poverty, and Discrimination in the 21st Century, ABC-CLIO.
A complete list of references used to develop the estimates of the Intergenerational Earnings Elasticity is available here: References for intergenerational earnings elasticities. The following is a graph showing the exact values of the estimates.
Update, July 12, 2016: the published version of “Inequality from Generation to Generation …” is available as IZA Discussion Paper No. 9929. ]
Economics for public policy 
You mentioned in a separate post that this paper is forthcoming. Could you provide information on where is will be published so it can be properly cited? Thanks!
The paper will be published under the same title in Robert Rycroft (editor), The Economics of Inequality, Poverty, and Discrimination in the 21st Century. ABC-CLIO.
My understanding is that the publication date will be 2012, but I am not certain about that.
The version of the paper I have posted is a draft version, and I will be re-posting the final version shortly.
Fascinating. What of intergenerational elasticity per income percentile? Is it higher at the top and bottom than in the broader middle class?
This is an important question, and thanks for raising it. Much of the literature assumes that the elasticity is the same regardless of the father’s place in the income distribution, and as such the resulting calculations should be considered as an overall average indicator of the degree of relative mobility.
It is a challenge to get estimates of the elasticity for each percentile of the father’s distribution because of the need to have a very large number of observations on father-son earnings. In some countries this is possible because researchers use administrative data associated with government programs.
Using Canadian data a co-author and I have found that the elasticity does change according to the father’s ranking: being lowest at the bottom, rising over the lower half of the earnings distribution, and falling over the upper half, before rising sharply for very high earnings — the top 5% and higher. See the paper we published in the Journal of Human Resources.
Nathan Grawe also discusses this issue, and the proper interpretation in a series of papers, one of which is also published in the Journal of Human Resources.
The evidence for the United States is a bit ambiguous, in part because of data limitations associated with sample sizes, but there is a good comparative study suggesting that in the US and UK the pattern is linear, which differs from the findings for the Nordic countries they study. The abstract of the paper — which was published in the Economic Journal — reads:
Ok so I’ve just scratched the surface of the Gatsby Curve and its implications but was wondering if “father-son” income really means exactly that of father to son rather than household income to children. I know I live in a two income home as do many if not the majority of my neighbors. Many are also having fewer children. Granted this is one very unscientific observation but if these factors were even marginally wide spread would that not have a dramatic change in the curve? Would really appreciate some more education on these thoughts and rantings.
Cheers,
Thanks Geoff. Yes, strictly speaking this is exactly what it is: the percentage point difference in a son’s adult earnings associated with a 1 percentage point difference in the father’s earnings. This is the most common way of measuring relative generational mobility, and therefore offers the most scope for comparing as many countries as possible. By focusing on father’s and son’s this puts aside issues associated with changing labour force participation of women, and with the dynamics of the marriage market.
But this is not to say these other dimensions, including the use of family income, have not been done in the research literature. In particular, some of the recent findings from the PEW Charitable Trusts Economic Mobility project tend to focus on family income, and a whole host of academic studies do as well. There is not much difference between these estimates and the father-son estimates for countries, like the US, where both sets of estimates are available. But even so, to answer your question — the Great Gatsby Curve depicts father and son earnings, and it does so to get as many countries as possible into the analysis.
I hope this helps, but let me know if you want more detail.
best, m.
Does Figure 1 present a picture of the world in 2012, or does it refer to a different year?
Thanks
It refers to the adult outcomes of a group of children who were, roughly speaking born in the mid 1960s, and whose adult earnings were measured, again roughly, around the year 2000.
What does “income” entail in this study? Does it incorporate social transfer payments and after-tax income?
In this case it refers to market earnings only.
Isn’t the relationship shown in the Great Gatsby curve almost obvious, due to the denominator of the IEE? I mean: shouldn’t we intuitively expect to see this correlation just because -by definition- there is greater dispersion between data points in a more unequal database? And therefore, the “distance” that needs to be cut in order to reduce inequality by X% is greater in a more unequal country?
A simple example: Imagine there are two families in a very unequal country: One makes $1 and the other makes $1,000. It will take a huge, huge change to cut the difference by 20% in one generation. Assuming the rich family maintains its income, the poor family will need to grow its income 200 times to achieve this.
On the other hand, imagine there are two families in a very homogeneous country: One makes $500 and the other makes $510. In this case, it will take a very small change to cut the difference by 20% in one generation. Assuming the rich family maintains its income, the poor family will only have to grow its income 0.004 times (2 dollars) to achieve this.
Am I missing something here?
So, in everyday English, would you say these findings prove that in the US (unlike Sweden,Finland,etc.) father-to-son inheritance makes a bigger difference in determining the future success or failure of the new generation? Thanks for the clarification.
Hi Miles, I´m working in my university thesis, and I´m doing it about the great gatsby curve. I want to focus on my country, Perú. I need your help because is difficult to find data here about fathers and sons incomes. So please if you can help me by telling me what sources did you use, it would be really helpfull.
The estimate for Peru is from a chapter that Nathan Grawe wrote in a book I edited. The book is called Generational Income Mobility in North America and Europe, published by Cambridge University Press. Here is the link http://www.cambridge.org/us/academic/subjects/economics/microeconomics/generational-income-mobility-north-america-and-europe?format=PB . Good luck with it, and let me know if I can help.