February 2, 2014
Social Mobility and Income Inequality
Social Mobility and Income Inequality—Posner
As Becker notes, recent research indicates that social mobility (how much a person rises or falls in the income distribution relative to his or her parents) in the United States has remained constant, albeit at a low level by comparison with other wealthy countries (for a partial summary of this research, see Raj Chetty et al., "The Equality of Opportunity Project," www.equality-of-opportunity.org/) at the same time that inequality of income in the United States has risen, and now far exceeds that in the other wealthy countries.
A striking finding by the researchers is the high geographical variance in mobility. The probability that a person whose parents were in the bottom fifth of the income distribution will rise to the top fifth is roughly twice that for persons living in the northeast or on the west coast than for for persons living in the south and the midwest—about 10 percent versus 5 percent. This is probably related to the pattern of immigration, the quality of schools, and the fact that educated and ambitious people tend to find the northeast and far west culturally more congenial than the south, the border states, and the midwest, with their religiosity, conservatism, gun mania, Confederate nostalgia, higher crime rates, and greater poverty.
The fact that mobility has not declined during a period in which inequality of incomes has grown may seem paradoxical, but is not. Imagine that all incomes were close to being equal. Then social mobility would be close to zero because there would be so little to gain from getting a better job or working harder. And by the same token social mobility might be very great in a society yet income inequality also be very great. For suppose that whether one had a high or a low income was almost entirely a matter of luck. Then the children of rich and of poor families would be quite likely to changes places in the income distribution, regardless of how skewed that distribution was.
But while social mobility and income inequality can thus move together, I am surprised that social mobility does not decrease as income inequality rises. The wealthier a family is, the more likely its children are to be secure against dropping significantly below their parents' rank in the income distribution. One reason is that wealthy people (unless they are sports or entertainment figures) are apt to have high IQs, especially now that, with the decline of discrimination, there is more assortative mating than there used to be. Another reason is that the children of wealthy people have a better shot at admission to the best schools and colleges. This is partly because the kids tend to be smart, partly because the parents provide positive role models for the children and also can invest heavily in tutoring and other aids to their children's education, and partly because colleges and universities tend to favor the admission of rich kids, who can be expected to become generous donors. And finally the children of the rich receive excellent nutrition and medical care, hence tend to be healthier than the average child.
One reason social mobility seems not to have been significantly affected by the rising inequality of income in the United States is that much of the growth in inequality is a result of increased incomes of the wealthiest 1 percent of the population, whose share of national income has grown from 13 percent in 1982 to 22 percent today, and whose after-tax income has increased almost threefold in that period. Even if one percent of the population can immunize itself from downward mobility, overall mobility should not be greatly affected. This is so even though if the top 1 percent have become richer, the bottom 99 percent have become poorer. But becoming poorer needn't make a person likelier to climb out of poverty, since the poorer one is, the harder the climb.
There are several reasons for encouraging social mobility, and this should make us resist complacency about the fact that it hasn't changed much despite the increased inequality of incomes, and focus rather on the fact that it's much lower than in our peer countries. One reason for trying to increase mobility is to stimulate ambition and effort. If people born into families who are low on the income distribution sense few opportunities to rise, they will have little incentive to try to better their lot. A related reason is that many highly successful people had humble beginnings; and we would like our educational and social welfare systems to discover and assist and encourage these people when young. A further reason for trying to increase mobility is to discourage people from seeking betterment of their lot through crime or gambling, activities that can be attractive to people who despair of improving their lot by lawful work rather than crime and by effort rather than luck.
And finally, although the fact that social mobility has not fallen as income inequality has risen may seem to imply that reducing inequality would not increase mobility, that may not be correct. Social mobility may not have fallen, I have suggested, only because the rise in inequality has been so skewed in favor of a small fraction of the population. A significant redistribution of wealth to the poorer part of the population might, by improving nutrition and family stability, generate increased upward mobility.
Generational Mobility in the United States-Becker
The degree of mobility over time measures how the income and education of children of parents with relatively low education and income compares to the income and education of children from more successful families. President Obama along with many others, has claimed that the degree of mobility in the US declined over time. Yet the limited available evidence does not support these claims about declining mobility during past 20-30 years (see the recent study by Chetty, et al, "Is the United States Still a Land of Opportunity?" January, 2014).
Some of the claims about declining mobility appear to depend on the large increase in income inequality since 1980. Not only have the incomes of the top 1% increased much faster than other incomes, but also incomes of college graduates have grown substantially relative to the incomes of persons who did not graduate from college. Nevertheless, an increase in the spread of incomes at a moment in time does not necessarily imply a change in the degree of mobility of their children. For example, income inequality in the parents' generation could increase, and that higher inequality could be maintained into the children's generation, and yet the upward mobility of children from poorer families (or the downward mobility of richer children) could be increasing over time.
Although there is no necessary connection between inequality and mobility, one should expect some causation from lower mobility to greater inequality in succeeding generations. For lower mobility means that children from poorer families tend not to do as well as they formerly did, and children from richer families do better than formerly. Over time, this stretches out the income distribution and produces greater inequality. In this case, the causation runs from mobility to inequality, not from inequality to mobility.
A few economists have produced evidence that countries with greater inequality tend to have lower mobility (see Corak, Journal of Economic Perspectives, 2013). For example, Scandinavian countries tend to have both relatively low inequality and high mobility. The causation in their analysis usually runs from greater inequality to lower mobility. Nevertheless, a close examination of the empirical basis for this claim suggests that the relation between inequality and mobility across countries may actually be quite weak (see the preliminary work by the Chicago graduate student Bradley Setzler).
Just as many forces determine the degree of income inequality, so too does the degree of mobility in income and education between parents and children have many determinants. The most important ones are 1) the investment of time and money by parents with different levels of education and income in improving the human capital of their children, 2) the degree of transmission of various types of abilities from parents to children, 3) the magnitude of government spending on the human capital formation of children, and 4) whether this government spending is relatively greater or smaller for children from disadvantaged backgrounds.
The nature of these influences on the degree of mobility implies that greater mobility is not necessarily "better", at least as judged by the degree of efficiency of the human capital investment process and the market for earnings. For example, if the parent-children transmission of abilities is high or parental education is highly productive in raising the human capital of their children, one would expect an efficient investment process to have a low degree of parent-child mobility in education or earnings. On the other hand, low mobility may be a sign of inefficiency if say able children of poorer parents are unable to obtain the education consistent with their abilities.
These reflections are relevant in trying to evaluate the degree of mobility in the US compared to other countries. The intergeneration elasticity (IGE) measures the effect of an increase or decrease in the income of parents relative to the mean income of their generation on the incomes of their children. An IGE of say 0.4- about the IGE for the US- means that a 10% increase in parental income raises their children's income on average by 4% relative to the mean income of the children's generation.
The IGE for the US is higher than those for Japan and many Western European countries, and is below those for many Latin American countries. Even though mobility in the US may not have fallen over time, does the relatively high IGE for the US compared to other developed countries indicate that American mobility is too low?
A major reason why the answer to this question may be in the affirmative is the high and relatively stable American dropout rate from high school of poorer African Americans and Hispanic Americans. I believe much of the blame rests with the fact that many children from minority families are raised with a single and not very educated parent, and that the quality of the schools attended by minority children is deficient. The interaction of these two forces produces a deadly mixture holding back the progress of minority children. The degree of mobility would increase significantly if ways could be found to efficiently lower the high school dropout rate.