Andrew Leigh

This week I was fortunate enough to be invited to speak at the OECD-NBER Conference on Productivity Growth and Innovation in the Long Run in Paris. My theme was the relationship between inequality and social mobility; here's the details.

DOES TOO MUCH INEQUALITY PREVENT SOCIAL MOBILITY?

 OECD, PARIS

FRIDAY, 26 SEPTEMBER 2014

For much of the time we’ve been on the planet, humans have led a static existence. We lived where our parents lived. We did the jobs our parents did. The chances of moving up or down the ladder were limited.

 Indeed, that era was so recent that most of us still carry the mark of it. Most Anglo-Saxon surnames denote occupations (Smith, Archer, Miller) or places (Marsh, Hill, Lake), reflecting a time when few left their village or rose above their station.

 There’s nothing wrong with living in the same town as your parents, or following them into the same career. But for many of our forebears, this wasn’t a choice: it was a necessity. As recently as a few centuries ago, virtually everyone on the planet was consigned to a caste system.

 The lack of mobility wasn’t just unfair – it was extraordinarily inefficient. Imagine how many talented youngsters from poor backgrounds lived and died without a chance to use their skills. How many potential Mozarts were lost because they never got to hold an instrument? How many would-be Darwins were denied a decent schooling? How many budding Bill Gateses languished because they couldn’t get financial backing for their entrepreneurial idea?

In short, how much happier, more productive, and more interesting would our world be today if we had made use of all the natural talent born on the planet, rather than just a tiny sliver of it?

Thankfully, while the societies of centuries past have regarded stasis as natural, today we value the opposite. Across the advanced democracies, people express a strong sense of pride in the notion that in their countries ‘anyone can make it’. We want to live in places where class-jumping is the norm rather than the exception.

A belief in mobility isn’t confined to progressives either; it cross-cuts the ideological spectrum. While those on the left are more likely to say they care about inequality, a belief in social mobility is common to left and right.

Indeed, inequality and mobility are connected in most people’s minds. For example, one survey found large majorities in Britain, Germany and the United States agreeing with the statement ‘It’s fair if people have more money and wealth, but only if there are equal opportunities.’^[i]

Now, a growing body of research is exploring the relationship between inequality and social mobility, asking whether moving from rags to riches is harder in countries with a bigger gap between rich and poor.

The question sounds easy, but economists have been somewhat slow to answer it because it has taken us time to develop precise measures of mobility. Incomes fluctuate from year-to-year, so using a single year of data creates the statistical illusion of mobility. But with the advent of longitudinal surveys (which follow the same people over time) and more use of administrative data, economists have done a better job of pinning down the relationship between incomes in one generation and the next.

The key measure of mobility used by economists is the intergenerational income elasticity, which measures the percentage change in children’s incomes that results from a given change in their parents’ incomes. This measure ranges from zero (which means that parents have no impact on their children’s incomes) to one (which generally means that parental income entirely determines children’s incomes).

Because women’s labour force participation rates have traditionally been lower than men’s, researchers have argued that the father-son elasticity is a better metric of mobility in a society than the mother-daughter elasticity (or, for that matter, the father-daughter or mother-son elasticity). For simplicity, comparisons across countries have tended to look at the father-son elasticity.

To get a sense of how the intergenerational elasticity works, let’s turn to a well-known relationship: the intergenerational elasticity of height. An elasticity of zero would mean that knowing a father’s height provided you with no useful information about the height of his son. On the flip side, an elasticity of one would mean that if you saw a 6 foot tall father, you could be guaranteed that his son was also the same height.

In reality, geneticists have determined that the father-son elasticity is about 0.5, which means that if a father is 10 centimetres taller than average then we expect his sons to be 5 centimetres taller than average. Sure, there are tall fathers with short sons (and vice-versa), but basketball dads are generally taller than gymnast dads.

In the United States, early estimates put the intergenerational elasticity at 0.2, suggesting that fathers’ incomes didn’t have much impact on their sons. As the University of Chicago’s Gary Becker summarised it in his 1988 presidential address to the American Economic Association: ‘earnings are not strongly transmitted from fathers to sons’.

However, what looked on first blush like a mobile society was actually just a function of the fact that researchers were using inadequate data. Four years after Becker’s presidential address, economist Gary Solon re-analysed the data using multiple years of income, to take into account year-by-year variations. This pushed intergenerational income elasticity in the United States up from 0.2 (implying a pretty mobile society) to 0.4 (implying a far more static society).^[ii]

That puts the relationship between parental income and future earnings in the same ballpark as the father-son height elasticity. American fathers have almost as big an impact on their sons’ earnings as on their sons’ stature.

As we have estimated mobility measures for many different nations, a pattern has emerged that contradicts some of the old nostrums about mobility. It turns out that the United States – the nation with a strong Horatio Alger sense that anyone can make it – is not only very unequal, it is also very immobile. By contrast, the more egalitarian nations of Scandinavia are also more mobile. Countries like Australia, Canada and the United Kingdom are in between.^[iii]

If we think of inequality as the gaps between the rungs of a ladder, then this finding suggests that as the distance between the rungs increases, it becomes harder to climb the ladder over the course of a lifetime. Princeton’s Alan Krueger refers to this as ‘the Great Gatsby Curve’.^[iv]

What is true across countries also appears to hold across cities in the United States. Places like Boston, San Jose and Pittsburgh tend to be more socially mobile than Atlanta, Indianapolis and Detroit. And it turns out that the more mobile places are also more equal.^[v] The Great Gatsby Curve holds across cities as well as countries.

* * * *  

If you’ve been lucky in life, it’s easy to mistake your success for pure skill. US coach Barry Switzer used to refer to those ‘Born on third base… thinking they hit a triple’. But a substantial body of research has shown that schools, family upbringing and money matter. As Chicago University economist James Heckman puts it, choosing the ‘wrong’ parents is ‘the biggest market failure of all’.

Boosting social mobility requires an educational system that backs a smart child from a disadvantaged background. For workers, it means less nepotism in the job market. And for entrepreneurs, it entails a venture capital system that functions effectively, not one that throws innovators back on the resources of their family.

But social mobility is also likely to be higher in an egalitarian society. This means that as societies grow more unequal, they may also become more static.

To Americans, the ideal of a society where anyone can make it is called ‘the American Dream’. But there’s nothing uniquely American about it. Australia shares this ideal. So do most – if not all – developed nations.

The challenge is that rising inequality does not merely reduce the share of the pie enjoyed by those at the bottom. It also reduces the chance that they will ever get their hands on a larger slice. Increased social mobility is one of the great features of the modern age. We need to ‘mind the gap’ if we are to preserve mobility into the future.

Notes