Climbing the ladder or falling off it E-Book

Gonzalo Schwarz

• Herausgeber: LID Editorial
• Kategorie: Geisteswissenschaft
• Sprache: Spanisch
• Veröffentlichungsjahr: 2021

Seitenzahl: 265

Beschreibung

The autors of this book are: Schwarz Gonzalo, Rehbinder Caspian, Liss Erik,,Agerup Martin, Heiberg Carl-Christian, Durana Radovan, Kamall Syed, Vaine Aneta All around the world, the most critical public policy conversations revolve around the fields of social mobility and inequality. Despite widespread interest, there are many issues and questions that are either misunderstood or under researched when it comes to these fields. And in addition, for those seeking to make it easier to climb the income ladder, the terms inequality, poverty and mobility continue to be used interchangeably, further complicating many of our policy discussions, as these issues have different definitions and implications. This book centers around the most vital of these topics, social mobility, and the concern that there is still no consensus on the main barriers to social mobility. Conducting a broader analysis of the relationship between structural factors and social mobility can offer important clues to understanding why even some developed countries are struggling to increase upward economic mobility.

Leseprobe

Contents

Cover

Back Cover

Contents

Introduction. Gonzalo Schwarz

1. Raising the Ladder: Increasing Income Mobility with Institutions and Incentives. Caspian Rehbinder and Erik Liss

2. Inclusive Growth and Income Mobility from a Dynamic Perspective. Martin Ågerup and Carl-Christian Heiberg

3. Slovakia Income Inequality: Focus on the Poor, Not the Rich. Radovan Ďurana

4. Welfare Beyond the State. Syed Kamall

5. The Unemployment Trap in Lithuania: Among the Highest in Europe. Lithuanian Free Market Institute

Copyright page

Introduction

By Gonzalo Schwarz

Archbridge Institute

All around the world, the most critical public policy conversations now revolve around the fields of social mobility and inequality. Despite widespread interest, there are many issues and questions that are either misunderstood or under-researched when it comes to these fields. One of the most misleading yet popular understandings casts income inequality itself as a main obstacle to upward economic mobility. However, despite some research showing that inequality and mobility are correlated, a definitive causal relationship has not yet been established in the academic literature. Unfortunately for those seeking to make it easier to climb the income ladder, the terms inequality, poverty, and mobility continue to be used interchangeably, further complicating many of our policy discussions.

The most vital concern is that there is still no consensus on the main barriers to social mobility. As the old economics joke goes, whenever you ask two economists a question, you get three answers. And in the fields of social mobility and inequality, that certainly applies. However, because of that lack of a consensus, policy debates are dominated by a focus on income inequality, poverty management, and Band-Aid solutions instead of policies that will increase upward economic mobility and reduce poverty across generations in a more permanent way.

With the focus trained primarily on mechanisms to reduce income inequality, much of the current academic research fails to consider potentially important policies and economic indicators that might be affecting both economic mobility and income inequality. Rather than interpreting the relationship between income inequality and economic mobility as causal, these two issues can be influenced by differences among countries related to more structural and fundamental variables. There are good reasons to believe that these more fundamental variables are just as relevant in wealthier nations as they are in those that are developing. Factors such as the rule of law, prevalence of corruption, opportunities for innovation, and a dynamic ecosystem for entrepreneurship are associated with economic growth and development.

In a seminal paper in the Handbook of Economic Growth (2005),[1] Daron Acemoglu, Simon Johnson, and James Robinson distinguish between causes that are fundamental and causes that are proximate to long-term economic growth. They state: “[T]o develop more satisfactory answers to questions of why some countries are much richer than others and why some countries grow much faster than others, we need to look for potential fundamental causes, which may be underlying these proximate differences across countries. Only by understanding these fundamental causes can we develop a framework for making policy recommendations that go beyond platitudes (such as ‘improve your technology’) and also minimize the risk of unintended negative consequences.”

These distinctions and framework are also essential to making progress in the social mobility and inequality conversation. Regrettably, many current proposals aimed at improving economic mobility focus on what could be thought of as proximate causes and solutions. With this mindset, policymakers typically seek to enhance people’s income in the short run, for example, through reforming welfare programs and expanding the social safety net, increasing the minimum wage, or mandating paid leave policies. But while it is worthwhile to improve living standards in the short term, policymakers should be cautious of negative long-term effects from short-term policies.

For example, by mandating minimum wage increases or generous paid leave policies, the labor market becomes less flexible, and it becomes more expensive for entrepreneurs and businesses to expand employment opportunities. As essential as a public safety net is to helping people get back on their feet after hard times, it should not generate dependency or a deceptive sense of economic security that could serve as a barrier to seeking pathways up the income ladder. We must always remember that the main way to climb the income ladder—that which represents people’s main source of income—is a job.

Academics and policy scholars should take a step back and analyze the structural or fundamental factors (and their appropriate indicators) that could be the key to boosting upward economic mobility. A more holistic approach is needed, one that focuses on the causal barriers that hinder upward economic mobility on all rungs of the income ladder. This approach should model the one followed by Acemoglu and his coauthors in looking for the fundamental causes of economic growth. Such a shift will not be made easily. In this case, social mobility is a much more multifaceted phenomenon and requires a multidisciplinary approach. While more in-depth research is needed to definitively identify structural or fundamental causes of upward economic mobility, there are several areas that stand out as prime candidates for potential research.

In his work on the relationship between economic mobility and income inequality, Miles Corak[2] correlated income inequality, as measured by the Gini coefficient (a standard measurement of income inequality), and economic mobility, as measured by Intergenerational Elasticity (IGE). Corak found that countries with low rates of economic mobility also tend to have higher rates of income inequality. That relationship was presented by Alan Krueger in a chart dubbed “The Great Gatsby Curve.” The curve shows that there is a statistical relationship between inequality and mobility. However, researchers still don’t know much about the extent to which that association reflects a causal relationship. Other fundamental or structural factors may affect both variables at the same time. So, despite the possibility of a causal relationship between the two, researchers should consider a scenario in which both of these variables are endogenous with respect to potentially the same set of variables.

There are very important differences across the countries shown in the Great Gatsby Curve. Some of the differences in mobility and inequality are not necessarily related to public policy, and it can be difficult to make an international comparison due to differences in history, culture, or political processes. Such factors are clearly relevant and should not be discounted. Studying these areas more closely is an essential part of a holistic conversation around the potential determinants of social mobility. Additionally, lower-income countries have unique structural problems that make comparisons more difficult. But it is precisely those structural problems in low-income countries that might provide the most informative explanations about the main determinants of and barriers to social mobility, many of which have been overlooked in much of the most recent literature.

Conducting a broader analysis of the relationship between structural factors and economic mobility can offer important clues to understanding why even some developed countries, such as the United States, are struggling to increase upward economic mobility. This publication is a first step in that direction and tries to discern and discuss social mobility and some of its main determinants and barriers in five European countries. The diversity of countries includes some of the best-faring countries in terms of social mobility and inequality, such as Denmark and Sweden; another that sits a bit further down the spectrum, the United Kingdom; and two interesting case studies of post-communist countries, Lithuania and Slovakia.

The first chapter, authored by Caspian Rehbinder and Erik Liss from the Swedish think tanks Timbro and Ratio Institute, respectively, discusses some of the most pressing questions around social mobility and inequality and the relationship between these two concepts. It also examines the state of economic mobility in Sweden and other OECD countries, as well as the importance of the Great Gatsby Curve—what it tells us, but also what it does not and cannot tell us. The authors conclude by highlighting the importance of economic growth, entrepreneurship, and strong institutions for more upward social mobility and less unfair inequality.

The second chapter, by Martin Ågerup and Carl-Christian Heiberg from the Centre for Political Studies in Denmark, highlights the importance of thinking about social mobility and inequality in a dynamic fashion rather than taking a more static view. The authors analyze social mobility and income distribution in Denmark throughout recent decades to show how much movement there has been across the income ladder over time. They also show how Denmark’s success as the leading nation for social mobility, as represented by the percentage of people who move up from the lowest rungs of the income ladder, is mostly a result of jobs and wage income rather than the result of government transfers and the welfare safety net.

The third chapter, by Radovan Ďurana from the Institute of Economic and Social Studies in Slovakia, discusses social mobility and inequality in post-communist Slovakia. Ďurana shows how, despite having some of the lowest inequality figures in the OECD, the country’s policies are still geared toward reducing inequality and the gap between the rich and poor, instead of focusing on policies that would increase the lot of the poor and improve social mobility—a badly needed outcome. The chapter includes an important discussion on the measurement of inequality and some pro-mobility policies that could be undertaken by the country’s policymakers.

The fourth chapter, by Lord Syed Kamall from the Institute of Economic Affairs in the United Kingdom, discusses the increasing role of government welfare in helping people who have slipped down the social ladder and how non-state assistance such as “friendly societies” and mutual aid associations have been squeezed out. Kamall highlights the importance of what is called the “independent sector,” or the third sector in addressing poverty and setting people up for success with regard to upward social mobility. With politicians facing questions about the effectiveness, affordability, and merits of a growing welfare state, this chapter looks at how we can encourage the establishment of local community and civil society projects. These local and community-based nonprofits promote direct services to individuals and are usually better at addressing the more fundamental and personal barriers to upward mobility that are not easily solved by a quick policy change.

The fifth and final chapter from the Lithuanian Free Market Institute in Lithuania focuses on a discussion of the country’s unemployment trap. The unemployment trap is a relative indicator that represents the level of social benefits received as a share of the potential income an unemployed person could earn if they take up employment. Getting this policy wrong could result in making a short-term unemployment problem turn into a long-term concern. Again, the most important way to climb up the income ladder is through a job. A job is not only the most important source of income, but it is also a vehicle through which people gain experience and valuable on-the-job skills, both hard and soft skills, that could lead to further wage growth and opportunities later in life. At the same time, if people are trapped by unemployment benefits and the middle and upper classes continue gaining experience, important social connections, and higher incomes, even inequality will continue to increase over time. So, any unemployment trap should be a very important topic to understand as part of any discussion on upward social mobility.

The main objective of this publication is to give an overview of a broad array of socioeconomic issues affecting social mobility and discuss the policy environment and challenges faced by each of these countries. This is an attempt to broaden the conversation and have a more expansive discussion about the sets of ideas and variables that affect social mobility across Europe. I hope you enjoy the insightful essays from all five groups.

Gonzalo Schwarz

May 15, 2021

Washington DC

Notes

[1] Acemoglu, Daron, Simon Johnson, and James A. Robinson. (2005). “Chapter 6: Institutions as a Fundamental Cause of Long-Run Growth” in Handbook of Economic Growth, ed. by Steven Durlauf and Philippe Aghion, 385–472. DOI:10.1016/s1574-0684(05)01006-3.

[2] Corak, Miles. (2016). “Inequality from Generation to Generation: The United States in Comparison,” IZA Discussion Paper No. 9929, May 2016, https://www.iza.org/publications/dp/9929/inequality-from-generation-togeneration-the-united-states-in-comparison.

About the Author

Gonzalo Schwarz is the President and CEO of the Archbridge Institute. Gonzalo specializes in researching and writing about the American Dream, social mobility, and entrepreneurship. Gonzalo has a BA in economics from the Catholic University of Bolivia and an MA in economics from George Mason University. Before founding the Archbridge Institute, Gonzalo was the Director of Strategic Initiatives at the Atlas Network, where he worked for six years.

Archbridge Institute

Increasing opportunities for social mobility and human flourishing is the defining challenge of our time. Through rigorous academic research, sound public policy solutions, and reviving the spirit of entrepreneurship, the Archbridge Institute works to empower individuals to achieve better, richer, and fuller lives by identifying and removing the barriers that constrain their potential. The Archbridge Institute is a non-partisan, independent, 501(c)(3) public policy think tank.

Chap. 1

Raising the Ladder: Increasing Income Mobility with Institutions and Incentives

By Caspian Rehbinder and Erik Liss

Timbro

The Ratio Institute

Introduction

Economic mobility has increasingly become an area of interest in research as well as policy debate. Economic mobility reflects that individuals are not bound by their origins but have the possibility to stake out their own life paths. In many respects, economic mobility could therefore be seen as how well a society is providing freedom and liberty to its citizens. If certain groups are not allowed to participate fully in society, in the labor market, or politically, then these groups will have no path for upward mobility, and economic mobility will be low. Economic mobility could also be seen as a reflection of how meritocratic a society is and therefore will be an indicator of how well society is exploiting its potential ability and talents (OECD 2018). Mobility across generations also has a strong dimension of fairness, since absence of income mobility could be viewed as a reflection of prevalence of corruption, nepotism, and inequality of opportunity.

Economic mobility is often related to the much broader debate of income inequality. If there is a substantial number of individuals moving from “rags to riches,” and if the wealth generally is the result of effort, risk taking, education, or entrepreneurship rather than privileges or one’s origin, one could argue that income inequality is not only less of a concern for a society but may be beneficial, as it incentivizes the long-term determinants for economic growth that benefits society.

Because of this, economic mobility has almost been presented as an alternative to income redistribution by some of the foremost classic liberal thinkers. For example, Milton Friedman discussed economic mobility in his 1962 book, Capitalism and Freedom, in which he compared two countries with the same economic inequality but where one society had a high degree of economic mobility while the other country had low economic mobility. Friedman much preferred the former country to the latter. Joseph Schumpeter (1955) explained economic mobility with the metaphor of a hotel where the guests would have different standards of rooms, implying that there is inequality in the standard of the rooms on any given night. However, Schumpeter imagines that individuals change rooms from one night to another; thus, there is constant mobility between the rooms. Income inequality is less of a concern if there is a substantial amount of economic mobility.

However, the dichotomy of choosing either income inequality or mobility has increasingly come into question as a result of novel research evidence indicating that more equal societies also have higher economic mobility—a relationship that is often referred to as the “Great Gatsby Curve.” Scandinavian countries such as Sweden have both low-income inequality and high income mobility, while many countries in the Americas are immobile and unequal. This relationship would also mean that the recent decades’ increasing income inequality should materialize into reduced economic mobility for current and coming generations. This chapter seeks to give an interpretation to this narrative and the general topic of income inequality and economic mobility, with special focus on Sweden.

To be sure, economic mobility could have many meanings, with one main distinction being that between absolute and relative mobility, where the former focuses on changing real standard of living across generations and the latter focuses on mobility between the relative ranks in the income distribution, holding economic growth constant. Economic growth is the only channel through which long-term upward absolute income mobility is possible. As Friedrich Hayek noted in The Constitution of Liberty, in a stagnant society “there will be about as many who will be descending as there will be those rising” (2011 [1960], p. 95–96). Thus, in a growing society, income inequality and the relative rank positions should rather be interpreted as a snapshot of how progress has reached certain parts of society before others.

While making everyone better off should be the main policy goal in terms of economic mobility, this chapter is mainly focused on relative mobility. The topic of growth versus equality already has a long history and in large parts has already been addressed. However, there is yet no clear classically liberal answer for the ongoing debate around the topic of economic mobility and inequality. Quite the opposite: the old conflict of equality of opportunity versus equality of outcome has turned into the idea that equality of outcome will give equality of opportunity. Policymakers can both have their cake and eat it. We question the merit of this argument with the following conclusions.

First, we show that the alleged relationship between income inequality and economic mobility denoted as the Great Gatsby Curve may not hold for OECD (Organisation for Economic Co-operation and Development) countries when using new and more robust measures for economic mobility.

Second, one needs to separate two different mechanisms for how equality and redistribution can cause higher economic mobility. Redistribution could equalize opportunities by providing welfare services that level the playing field, such as public education. Redistribution could also increase economic mobility through a direct mechanical effect by compressing the income distribution, making mobility easier. We denote this as the compressed ladder effect. Using Sweden as a case study, we argue that this type of mobility is very different than that of leveling the playing field. We argue that increasing economic mobility through redistribution (compressing the ladder) implies that policymakers are subject to the same kind of policy trade-offs as if they wanted to reduce income inequality through redistribution. While compressing the ladder could increase mobility by making it easier to jump between the rungs, it could have the opposite effect if economic mobility is defined as a more dynamic concept than just simply jumping between the rungs, since these redistribution policies may harm growth, innovation, and the incentives for upward mobility.

We argue that Sweden in the 1970s to the 1980s was characterized as being a compressed ladder regime, where incomes and wages were compressed with high taxes on incomes and capital, while Sweden in the period after 1990 in many ways left the compressed ladder regime. New empirical results indicate that economic mobility has increased slightly compared to when Sweden (to a higher extent) was a compressed ladder regime.

Third, the Great Gatsby relationship, in large part, could be explained by the fact that many countries with low mobility and high income inequality fail to provide basic libertarian rights, which both makes them economically immobile and unequal. This includes failing to provide 1) judicial efficiency, 2) low levels of corruption, 3) a well-organized public bureaucracy, 4) well-defined private ownerships, as well as failing to provide basic public goods investments, such as 5) early childhood health and education (Ali 2003; Acemoglu and Robinson 2012). Following Acemoglu and Robinson (2012), we denote this set of institutions as inclusive institutions. For individuals with high abilities, this set of institutions opens up the path for upward mobility (Acemoglu and Robinson 2019). Countries lacking these institutions will instead inhibit institutions that favor the elites or special-interest groups. This institutional setup is incapable of investing in the public goods necessary for upward mobility and is also incapable of allowing economic creative destruction to occur. This will hamper the economic forces, ensuring that the most competitive individuals and economic sectors expand at the expense of less productive ones, which in turn reduces economic mobility. We argue that Sweden has a high economic mobility, in large part due to a long tradition of inclusive institutions after a series of reforms in the nineteenth century. We argue that while the policy debate on economic mobility has often been focused on equalizing opportunity through redistribution, the most obvious low-hanging fruits are actually these libertarian institutions.

Measuring Economic Mobility

Economic mobility is measured by estimating the elasticity or the rankcorrelation between parents’ and their children’s incomes at adulthood. Common for these measures is that they measure the degree that parents’ and children’s incomes are inherited across generations. To ease interpretation, we will invert this measure so that a value of 0 means that there is no mobility between the income positions of the parents and their child at adulthood.[1] This means that all children attain the same position as their parents as adults. A mobility value of 1 means that there is no correlation between children’s and parents’ incomes, and thus that the income of the parents has no influence on the income of their children. Roughly speaking, we say that if economic mobility is 0.7, it means that the rank correlation is 1–0.7=0.3, which indicates that a parental income 10 percent above the mean of his ancestors will be associated with his child’s income being 3 percent above the mean.[2]

The research literature shows a rather large difference in the estimated intergenerational economic mobility. For both Sweden and the United States, for example, there are mobility estimates ranging from 0.8 to 0.2, suggesting that mobility is either very high or that it “barely exists” (Clark 2014). Furthermore, some studies show that there is great variation across countries, with some countries being much more mobile than others, while other studies show very little variation across countries (Corak 2013; Clark 2014). This shows that it is difficult to estimate how high (or low) economic mobility across generations really is. However, this should not be interpreted as that the estimates are random or pointless. On the contrary, by following how the estimates change depending on the assumptions, definitions, and countries studied, it helps us understand the interaction of income inequality and economic mobility.

Life is more important than one year

This chapter mainly focuses on economic mobility across generations, but measuring mobility is sensitive to what assumptions we make about mobility within generations. While income inequality is mostly measured using annual incomes, economic mobility across generations, on the other hand, tries to capture an individual’s lifetime income, which requires using an individual’s income over several years.

Imagine an economy consisting of only two individuals, where person A has twice the income of person B, but the following year, the relation has reversed, so that person B has twice the income of person A. Measuring income inequality annually, this would be regarded as a substantial inequality. But if we take the average income of both individuals both years, there would be no income inequality at all. It just happens that we measure income inequality in a single year instead of several years or over a lifetime. For a more realistic example, if someone sells their house and receives a big income shock as capital gain, that really is an income that has been built up over several years, but because the house is sold in a specific year, it will seem as though the whole sum was earned that year. The same could be said about entrepreneurial activities. If an entrepreneur builds a business over several years and then sells it, that whole income shock will be registered as income in one year, despite the fact that the income actually has been earned over several years. Human capital is accumulated in much the same way. Students typically have low incomes when building their human capital, but high incomes later, when they get return on their invested education. The bottom and top of the distribution is especially sensitive to this income variation across years. In Sweden, about 40 percent of households with top incomes are in that range only temporarily (Government of Sweden 2018), and even if only 13 percent of the population pays the top marginal income tax in a given year, more than half of the population will belong to that 13 percent at some time in their lives (Lundberg 2016).

This points to the fact that some of the cross-country differences in income inequality could be due to incomes varying more over a lifetime in some countries than in others. Gangl (2005) studies this empirically for several developed countries, including Sweden and the United States, and shows that if incomes are averaged over six years, income inequality is reduced by between 10 and 25 percent compared to if income inequality is measured at one year. However, this still does not change regarding the order of countries after income inequality.

Most important, however, are the implications of this when estimating economic mobility across generations. Early research papers studying economic mobility across generations compared incomes of parents at a single year with their children’s income at a single year (often at around age thirty for both parents and children). This resulted in an intergenerational mobility of 0.8 for the United States, which would suggest that economic mobility would be very high. This high estimate was due to the fact that a single year of income was a poor prediction of the “true” economic status of the parents and their children. Subsequent research, therefore, used average income over several years in order to reduce the “noise” caused by income volatilities across years. Doing this resulted in a much lower economic mobility, with estimates for the United States intergenerational economic mobility at between 0.6 and 0.4 (see Björklund and Jäntti 2009; Solon 1999).

This leads us to an important conclusion about inequality and intergenerational economic mobility. Income inequality is higher when incomes are measured at just a single year (instead of averaged over several years), while economic mobility across generations is lower when incomes are measured at just a single year. Averaging incomes over several years increases income equality, but it decreases the estimated economic mobility. Thus, if one argues that the recent rise in economic inequality should have led to lower economic mobility, one must first prove that the rising income inequality is not merely due to the fact that incomes have become more volatile than before.[3] Splinter (2018) shows that between zero and three-quarters of United States income inequality could be explained by incomes being more volatile than before. Furthermore, he shows that the top percent is the most mobile of all income groups. Therefore, we can predict that the increasing income inequality during the last decades in the United States should not have resulted in decreasing economic mobility, which Chetty et al (2014a) show indeed is true. So, despite the fact that income inequality is rising in many parts of the Western world, this does not seem to have reduced economic mobility.

Is the Gatsby Curve great?

The most straightforward way of exploring the dynamics of income inequality and economic mobility would be to test whether unequal countries are also less mobile. The Great Gatsby Curve was popularized in Miles Corak’s (2013) paper, where he estimated economic mobility and income inequality for several countries, shown graphically in Figure 1.1. The vertical axis shows economic immobility, and the horizontal axis shows income inequality measured as the Gini coefficient. The positive relationship indicated by the dotted line suggests that income inequality would cause lower economic mobility.

Figure 1.1The Great Gatsby Curve

Source: Corak (2013).

So how well does the Great Gatsby Curve hold up empirically? Recent research shows that the Gatsby Curve does not hold when using alternative, more robust measures for income mobility. The previous estimates used a measure that is sensitive to whether inequality increases between the parent and child generation. Winship (2015) shows that if you change to the more robust measure, “rank persistence,” the relationship collapses. Setzler (2014) points out that Corak uses data before taxes and transfers for incomes in the mobility estimates but after taxes and transfers when calculating inequality (measured as the Gini coefficient). When adjusting this, the correlation is no longer statistically significant for OECD countries. Therefore, it is not certain that there is a Great Gatsby relationship at all. While we will let future research settle the question of the exact economic mobility estimates for cross-country comparisons, we will, in this chapter, explore the suggested link explaining the Great Gatsby Curve, assuming that the estimates from Corak are correct.

Another flaw to be considered with the Great Gatsby Curve is that it might not be comparable entities being studied and compared. It could be argued that it is not feasible to compare small and historically homogeneous countries such as Denmark and Sweden with large and historically diverse countries like the United States. The population of Denmark at below six million, for example, is lower than just the San Francisco Bay Area. We could expect that countries with large regional heterogeneity to have higher income inequality across regions. Because many people tend to stay in the same region where they were born, this income inequality across regions will also affect the way that economic mobility is measured. This is because if two regions have different average incomes, and people generally tend to stay where they were born, this regional difference in average incomes will be captured as economic immobility.

To explain how cross-regional income differences affect income mobility, following Solon (2018), suppose there is a country with two regions with equally big populations, and that the income difference across regions converges only slowly to the national average.[4] Also suppose that economic mobility within each region is 0.7. Finally, suppose that one region has a 40 percent higher average income than the other.[5] This yields an aggregated economic mobility of 0.5 for the country as a whole. If the regions instead were separate countries, the economic mobility would have been 0.7 for each. So, even though there is very little convergence across regions during this time period, there is still considerable income mobility within regions, which in this case yielded an aggregated economic mobility in the middle of these two estimates.

This is likely one explanation of why economic mobility in the United Kingdom, for example, is surprisingly low. Northern Ireland and Wales have traditionally had lower incomes than England, and London has a particular dominating role economically. The same applies for Italy, where the northern region is much more prosperous than the southern. This is a very different form of income inequality being passed down through generations than the one suggested by the Great Gatsby Curve, with a story more along the lines of “rags to riches.” It should rather be regarded as these countries having underlying regional heterogeneity in how different regions perform economically, with some poorer regions not converging to the richer regions. This also suggests that cross-regional inequality within countries should capture some of the correlation suggested in the Great Gatsby Curve.

We test this in Figure 1.2, showing income mobility on a vertical axis and two different cross-regional income inequality measures on the horizontal axis. Both measures for regional inequality are statistically negatively correlated to economic mobility, suggesting that regional inequality partly explains the correlation observed in the Great Gatsby Curve.

Figure 1.2 Economic Mobility and Regional Income Inequality

Source: Corak (2013), OECD (2016).