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The Great Gatsby: Inequality does get passed down, but there are proven offsets

The Great Gatsby: Inequality does get passed down, but there are proven offsets

CORAK AND STABILE

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Alan Krueger, the Princeton economist and former chair of President Barack Obama’s Council of Economic Advisers, has christened the relationship between inequality and family background’s influence on earnings as the “Great Gatsby curve.”

More inequality means more inequality gets passed on to the next generation. Children from advantaged families are more likely to be relatively advantaged as adults, and their poorer counterparts also more likely to stay poor.

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There is, in fact, a stronger association between father and son earnings in more unequal countries, such as the United States and Britain, than in many other countries, including Canada. To dismiss this relationship as purely a statistical artifact or myth would be a mistake.

Britain and the United States sit toward the upper end of the Gatsby curve, where parents making twice the average income can expect to pass as much as half of their advantage on to their children. In Canada, parents can expect to pass on between a fifth and a quarter of their advantage. Canada’s relative equality is due, in part, to the ability of low-income children to receive reasonably high-quality education and health care. However, there are reasons to be concerned that Canadian intergenerational mobility has been falling.

Parents influence their children in all sorts of ways, and most would agree that this should not be a concern for government bureaucrats – or if it is, the problem involves how the labour market determines pay and employment in ways not associated with productivity. However, when family background extends to the point of determining access to investments in human capital (such as health care, education and access to employment) that are central to allowing children to be all that they can be, then most of us might agree that the American Dream is being challenged.

Inequality lowers mobility because it shapes opportunity. It heightens the income consequences of innate differences between individuals. It changes opportunities, incentives and institutions that form, develop and transmit characteristics and skills valued in the labour market. And it shifts the balance of power so that some groups are positioned to structure policies or otherwise support their children’s achievement independent of talent.

So, those concerned about equality of opportunity should also care about inequality of outcomes.

The good news is that a number of countries have invested in programs to help low-income families overcome these barriers. Examples include the Earned Income Tax Credit in the United States, the Working Tax Credit in Britain and the National Child Benefit in Canada.

These programs help poor families in a number of ways: First, they provide much-needed income. Second, they allow these families to keep a greater share of that income if they move out of social assistance and into employment (in the U.S. and Britain, parents must work to qualify). Third, they phase out this support slowly as families earn a little more income so that families are not hit hard as soon as they begin to get their feet solidly on the ground.

We know these programs work. They reduce inequality by transferring money from higher-income families to lower-income families. They promote work among families who are on social assistance. And perhaps most importantly, they directly help children.

Evaluations of Canada’s National Child Benefit, for example, show that increases in the child benefit resulted in better math test scores, decreased aggression and less maternal depression. It also reduced child hunger. One particularly interesting finding was that while both boys and girls benefited, they did so in different ways. The boys had bigger improvements in test scores and hunger. The girls had bigger improvements in mental health.

Overall, the improvements were quite large, consistent with evidence from other countries. In the U.S., for example, researchers found that the Earned Income Tax Credit also improved math and reading scores – a modest $1,670 increase in income resulted in substantially better results.

So while we’ve seen a large increase in inequality over the past few decades and a corresponding decline in the ability of children to move up the social ladder, there is cause for hope. Programs such as the National Child Benefit have reduced both poverty and inequality. And they’ve improved educational and health outcomes for our children.

While the ultimate impact of these programs remains to be seen, the fact that poor children have better skills and health with which to tackle the labour market is a first step in reducing the impact of the Gatsby curve, regardless of what country they live in.

Miles Corak is a professor of economics at the University of Ottawa. Mark Stabile is director of the School of Public Policy and Governance and a professor at the Rotman School of Management, University of Toronto.

The authors participated in this week’s Fall Institute at the School of Public Policy & Governance, University of Toronto, which this year is examining the politics and policy of inequality in Canada and internationally: www.publicpolicy.utoronto.ca.

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