‘The Great Gatsby’, set in the America of the 1920s, is considered a classic work of fiction. It correctly captures the hopes and aspirations people had about the stock market. Many tried their hand at it, expecting to strike gold. However, another major thread it highlights is the struggle people would face trying to break from their low-income group into the high-income group amidst great inequality in terms of earnings. The decade preceding the Great Depression was one of great income inequality. The top 1% of the population had about 24% of the total US income at its peak. The inequality intensified even more as one advanced further up along the social rungs of society. The top 0.01% controlled around 5% of the US income.
The years following the depression saw the inequality decline to a low of 8.9% of the total income being diverted towards the top 1%. The share of the even more elite 0.01% fell to an even lower 0.8%. However, these numbers seem to be on the rise. The share of the top 1% had risen to about 22% by 2013, almost catching up to its peak value in the pre-depression era. The even more shocking revelation comes from the figure of the top 0.01% population’s share which is 5.1% as of 2013.
This inequality only seems to be increasing. From 2010 to 2013 the incomes of people other than the ones belonging to the top stagnated or fell but from 2013 to 2016 the income of every group rose. Despite this, according to the Federal Reserve report in 2016, the top 1% controlled about 38.6% of the country’s wealth which was twice the amount controlled by the bottom 90%. Even the income share has gone back to the pre-depression levels.
The Great Gatsby Curve
What does this inequality mean? Just as ‘The Great Gatsby’ brought to light the struggle of breaking into the high-income bracket at the time of great income inequality, so does The Great Gatsby Curve. This curve was introduced by Alan Krueger, who was the then chairman of the Council of Economic Advisors, in 2011. This curve shows the relationship between the income inequality a country faces and the intergenerational social mobility.
Even though the second parameter reads as something disconnected from an average individual it actually is very important as it acts as a proxy for the opportunities the individual would enjoy within the economy. It measures how likely it is for your income to be dependent on the income of your parents. A high rating on this scale means that your income is pretty much the determined by the income of your parents, which implies that it would require a lot of fight along with a touch of luck to make it big if your parents were poor.
Source: Miles Corak, ‘Income Inequality, Equality of Opportunities and Intergenerational Mobility”, Journal of Economic Perspectives, 2013
Clearly, the more income inequality that persists, mobility falls. What this means is that with greater inequality comes fewer opportunities. The United States ranks high in terms of income inequality but low in terms of social mobility. This is in contrast to the idealised American Dream, which propagates the idea that anyone can make it big in America.
The purpose of this curve is to urge policymakers to look into the matter and come up with better policies. This curve does not ask to be interpreted as a causal relationship. Different countries will have different reasons for the inequalities and lack of opportunities based on their different societal structure along with institutions. One proposed reason is education. People belonging to the higher income group understand the value of education and make it a point to ensure that their child gets the very best of it. This will eventually lead to a divide between the quantity and quality of education received by the different income groups. As is the conventional wisdom, more are the educational qualifications, higher is the incomes.
There are two more reasons that may help explain this particular relationship in the context of US. The first one has to do with the shift in employment opportunities. The labour unions have lost their power to bargain for higher wages. There is also a huge amount of outsourcing that strips away from the working class the jobs that they had relied on for so long. This causes structural unemployment, the one that results from a misalignment between the skills possessed by the workers and the skills the firms are looking for.
Keeping the American Dream Alive
The ones losing their jobs are members of the lower part of the income division. Another reason behind this disparity may be the financial market. In 2013, the richest 20% owned about 93% of all stocks. The poor don’t have the extra money to invest in the markets while the rich enjoy riding one of the longest bullish markets in history. This propagates the divide between the haves and the have-nots. Furthermore, it becomes hard to break out of this cycle.
The Great Gatsby Curve does not mean to lock in the position of the country. It should be studied to counter the inequality. Some may argue that inequality is a non-negotiable for the country to grow. However, for a country like the US which leads the world in terms of GDP and already has a per capita income of around $57,500, it needs to reevaluate the prevalent income inequality. Otherwise, people would have to go elsewhere to realise the American Dream.
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