Saturday, 29 June 2013

Graph of the week: The Great Gatsby curve

I've posted this curve in my previous blog:
Source: Alan Krueger: "The Rise and Consequences of Inequality in the US"
(FYI: The Great Gatsby is a famous novel by an American author Scott Fitzgerald describing the decadence of the US upper classes in the "roaring 20-ies". There is (another) movie released about the book recently, staring Leonardo Di Caprio).

The source is Krueger's presentation from January last year at the Center for Economic Progress. You can see the slides here. The curve depicts a relationship between inequality (measured by the Gini index) and intergenerational earnings elasticity (if it's more elastic then people find it harder to move between income classes). The US, even though it's positioned pretty high (relative to other developed nations), is projected to be even higher if 2010 Gini were to be taken into account. This means that among the developed countries the US is by far the worst in its high inequality and its lack of upward social mobility, a phenomenon that is both worrying and puzzling for a country that once strived as the land of opportunity (and still is for many). 

But even more interesting than the curve itself was this graph pointing out to the reasons why inequality is said to have expanded in the past few decades:
Source: Alan Krueger: "The Rise and Consequences of Inequality in the US"
The primary reason is said to be technological change. Long behind are reasons such as international trade, minimum wage decreases, decline in unionization and rising immigration. All of these causes certainly did contribute (some more than others in my opinion) to the rising gap between incomes, but technological progress, and more importantly the failure to adapt ones skills to this progress made the situation worse.

The culprit for higher inequality, in my opinion, can be found in the interaction of several factors. Rapid technological progress in the past 30 years resulted in a typical creative destruction process where new jobs and careers made certain types of old jobs obsolete (automated work). Some of these obsolete jobs were outsourced to Asia (even though one phenomenon followed the other, this doesn't imply a direct link of causality; one has to test this hypothesis to see if it holds). In addition, a lot low-skilled labour entered the market (mostly via higher immigration) who failed to adapt to the changes and were left stranded either at lower paid jobs or long-term unemployed. Poor education played an important role as well, while stagnating wages in the "dying" sectors only widened the gap. On the other hand, the innovative part of the equation was working quite well taking advantage of the new technological wave, thus further raising the income of the top 10% (hence the great disparity between college and non-college degree workers). Its not hard to imagine how these two pulling forces (one downwards, one upwards) managed to widen the US inequality gap. 

But none of the aforementioned factors can be held responsible for the lack of social mobility. Furthermore, is low social mobility a consequence of higher inequality, or a cause? Or is it both? As some sort of a negative self-enforcing spiral. Whatever the reason, this is the axis of the curve that the US should worry about. The inequality issue is a result of a changing economy. Social mobility problems lie elsewhere. 

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