The Great Gatsby Curve

I've started playing around with Threads and the community formerly known as EconTwitter has been posting their favorite charts. I wouldn’t say this is my “favorite”, but this one of a few that are motivating my dive into inequality models. The authors Carroll and Chen (2016) share what they call the Great Gatsby curve, which captures the inverse relationship between earnings mobility and inequality.

Image from Carroll and Chen, Economic Commentary, 2016.

Despite what most Americans think, we are much less likely than similar earners in other high income nations to be able to change our income rank over time. The key relationship that a mathematical model needs to produce is that mobility measures a rate of reordering among individuals in a population while the Gini captures something about the distribution of the values the individuals carry (incomes, in this case).

If you meditate on it, it’s intuitive that if agents in a population are able to change their rank, their relative incomes must be not be too spread out.

More mobility leads to less inequality!

Hmmm ... or is it instead that less inequality leads to more mobility?

Building a mathematical model using stochastic processes that looks economically credible while also being analytically tractable is quite a challenge. But once you have it, you can ask questions about causation that are not possible (or at least not responsible) when you’re staring at a chart showing correlation.