The Great Gatsby Curve (GGC) is the cross-sectional observation that countries with higher income inequality exhibit stronger parent-child economic persistence, i.e. lower intergenerational mobility. Jerrim and Macmillan (2015), analyzing the Programme for the International Assessment of Adult Competencies (PIAAC) across 23 countries, showed that inequality is associated with the education-mediated components of intergenerational transmission (access to higher education, returns to education, and the residual effect of parental education on earnings), but their design was cross-sectional and could not support causal claims. They identified as the key unresolved issue whether within-country changes in income inequality over time lead to changes in intergenerational mobility — the longitudinal test needed before the GGC can be read causally — and recorded, as a limitation of their own design rather than as a request for future work, that the parental capacity-to-invest channel and the incentive-to-invest channel cannot be estimated separately because both are influenced by income inequality at the same point in time and are therefore confounded. Later literature has delivered the pieces of this test but not its resolution: cohort-based within-country evidence from Latin America and cross-country panel estimates support a dynamic GGC; a century-long US county analysis finds the relationship weak and unstable at two-decade horizons but significantly negative over the long run; and the US national record shows relative mobility flat while inequality rose sharply. No identified causal estimate of inequality change on mobility change exists across countries, and the capacity-versus-incentive decomposition remains empirically unimplemented. The problem asks for a within-country dynamic test of the GGC with causal interpretation, at the cross-national generality of the original question, together with the related channel question of whether inequality operates through parental capacity to invest or through incentives to invest.

Background

Intergenerational mobility measures how strongly a person's economic position depends on their parents' position. The two standard summary statistics are the intergenerational earnings elasticity (IGE) — the coefficient from regressing a generation's (log) income on their parents' (log) income — and the rank-rank slope, the slope from regressing children's income percentile ranks on their parents' income percentile ranks (a closely related but distinct statistic is the rank-rank correlation between parent and child positions in their respective income distributions); higher values of either mean lower mobility. The Great Gatsby Curve (GGC) is the empirically observed negative cross-country association between income inequality (e.g. a Gini coefficient, the standard 0-to-1 index of income inequality) and intergenerational mobility: more unequal countries transmit advantage more strongly. The association was prominently discussed by Corak (2013) and became a staple of policy debates about whether rising inequality self-reinforces through unequal opportunity. Jerrim and Macmillan (2015) asked whether education is the key link. Using PIAAC — the OECD's cross-nationally comparable Programme for the International Assessment of Adult Competencies, which surveys adults' skills, earnings, and parental education — across 23 countries (18 when transition economies — formerly centrally planned economies — are excluded), they decomposed intergenerational transmission into access to higher education, the financial returns to education, and the residual direct effect of parental education on earnings, and found income inequality associated with each component. Their theoretical frame distinguishes two channels through which inequality could raise persistence in human-capital-investment models of family investment: a capacity-to-invest channel (richer parents in more unequal societies can simply invest more in their children, especially under credit constraints) and an incentive-to-invest channel (higher inequality raises the payoff to education, inducing greater investment by families who can afford it). The analysis, however, was cross-sectional, used parental education rather than parental income as the measure of social origin, and rested on few countries, so the authors explicitly flagged that it established association only and that the two investment channels could not be estimated separately in their design. Three strands of evidence frame why the causal, within-country question is hard and still open. First, US national time-series evidence is flat: Lee and Solon (2009) found no trend in the US intergenerational income elasticity, and Chetty, Hendren, Kline, Saez and Turner (2014), using administrative earnings records, found percentile rank-based mobility extremely stable for the 1971–1993 birth cohorts even as inequality rose — the consequences of the birth lottery grew only because the income distribution itself widened. This is the central puzzle any dynamic reading of the GGC must confront. Second, the GGC does replicate within countries in the cross-section: Chetty, Hendren, Kline and Saez (2014) showed that US commuting zones (collections of counties around a labor market) with higher income inequality have lower upward mobility — though, as the authors stress, descriptively and without causal identification. Third, the mechanisms remain contested: Durlauf, Kourtellos and Tan (2022) synthesize statistical models in which a GGC-like relation arises mechanically from the persistence of income dynamics, alongside five classes of behavioral theories (family investments, skills, social influences, political economy, and aspirations), and conclude that the causal status of the curve and its mechanisms is not settled.

Problem Statement

Does a within-country change in income inequality over time cause a change in intergenerational mobility — the dynamic version of the Great Gatsby Curve — and, if so, through which channel? Concretely, the question concerns (1) the relationship between changes in income inequality and subsequent changes in intergenerational mobility (intergenerational earnings elasticity, rank-rank slope, or transition probabilities between parents' and children's income groups) using within-country variation over time — successive cohorts or periods within the same countries, at the cross-national scope of the original question rather than a single country — and the horizon at which any response appears (the timing of the inequality measure relative to the child's childhood matters for interpretation, since the capacity and incentive channels may respond to inequality observed at different times), given that US national mobility has remained flat while inequality rose; (2) whether a causal interpretation is supported by an identification strategy that distinguishes the effect of inequality from co-trending factors such as economic growth, educational expansion, and welfare-policy change; and (3) whether the parental capacity-to-invest channel can be empirically separated from the incentive-to-invest channel within the dynamic design, or, if not, why that design cannot separate them. The mechanism question, raised by the source about its own design rather than resolved by it, is which of the two channels is at work — the parental capacity-to-invest channel (financial resources available for investments in children) or the incentive-to-invest channel (expected returns to education). Jerrim and Macmillan (2015) report that the two cannot be estimated separately in a single cross-sectional distribution, because both are influenced by income inequality at the same point in time, and they offer only indicative evidence, tentatively favoring capacity to invest; an empirical separation of the two channels within a dynamic design therefore remains open, and a dominance verdict inferred from theory alone does not settle it. Alternative social-origin measures (parental occupation, parental income) and larger, more diverse country samples are within scope; the source lists parental occupation and its restricted country coverage among its limitations, while arguing that parental education may be preferable anyway as a measure capturing a broader array of parental inputs into children's development.

References

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