Inequality and Mobility, Revisited

January 14th, 2012 at 10:57 pm

The Chairman of the White House Council of Economic Advisers, Alan Krueger, gave a great talk on inequality the other day, definitely worth a read (slides here, though why they’re not in the same doc as the talk is beyond me).

What’s particularly notable about Alan’s approach to the issue is his emphasis on the consequences of such high levels of income inequality as have developed here in the US.   Too often, analysts just cite the problem without explaining why it’s a problem.

Alan focuses on inequality’s negative impact on macroeconomic growth, and thus job growth.  That’s obviously extremely important, given our recent history (predating the Great Recession) as shown here.

But the consequence I wanted to amplify was one I’ve discussed frequently: the link between higher inequality and diminished mobility.  Check out this slide from Alan’s talk:

This scatter diagram compares something called the “intergenerational earnings elasticity” (y-axis) with a measure of income inequality on the x-axis.  The former measure links kids’ earnings when they’re adults to that of their parents.  It’s one of those “how-far-does-the-apple-fall-from-the-tree” metrics, wherein higher numbers represent less mobility.  So, basically, this figure is asking whether countries with higher inequality are countries with less mobility.  Clearly, the correlation is strong.

The points cluster around an upward sloping line, indicating that countries that had more inequality across households also had more persistence in income from one generation to the next…Countries that have a high degree of inequality also tend to have less economic mobility across generations.

This is extremely important in the political debate.  We often hear politicians claim that we shouldn’t worry about growing inequality—Romney’s taken to calling such concerns “the bitter politics of envy”—because we’ve got the mobility to offset it.  Not only is that wrong on the facts—you actually need more mobility to offset more inequality, and mobility has certainly not been increasing.  But it also appears to be the case that higher inequality is itself associated with less mobility.

The transmission mechanisms for this are not well known, but surely have to do with educational access, employment networks, and so many other mobility enhancers that grow further from the reach of the have-nots in a highly unequal society…things like quality pre-school, good libraries, safe neighborhoods, environmental benefits, stimulating vacations and summer camps, and so on.

One of the saddest things is life—and one of the most wasteful, from the economy’s perspective—is a child blocked from realizing his or her potential.   That’s what’s embedded in the slope of that graph and it’s something this nation needs to elevate to its top problem.

Here’s a thought: instead of all these budget deficit commissions that never amount to anything anyway, how about we get serious about tackling income mobility?

 

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10 comments in reply to "Inequality and Mobility, Revisited"

  1. Jean says:

    There is a good article by David Callahan on the subject of the income mobility “myth”.

    http://blogs.reuters.com/great-debate/2011/10/27/the-income-mobility-myth/


  2. Steve says:

    First, let me say that I agree with everything you said in this post. But, you also recently had a blog post talking about correlation of inequality and mobility which added an important point: When there is less inequality there is higher mobility largely due to the fact that it requires less of a change in income to travel the rungs of the income ladder. I’d be interested in seeing exactly how much this affects the mobility stats. Rather than using inter-generational quintile to quintile movements to measure mobility, is there a metric which would filter out this problem? Inflation-adjusted inter-generational changes in income, perhaps? I’m no economist, and I’m just thinking out loud here.


    • Jared Bernstein says:

      Well, the greater distance affects the stats because it should affect the stats…more inequality mechanically has this affect as I’ve stressed in comparing mobility between say, US and Denmark.

      But you get similar mobility results with statistics that don’t depend on quintile analysis. This paper, which is heavy sledding if you’re not familiar with the various metrics, shows that the mobility results in the US data are not particularly sensitive to measures, including those (like rank measures) that don’t depend on income quintiles or deciles. http://www.bos.frb.org/economic/wp/wp2011/wp1110.pdf


  3. Russ Abbott says:

    Without trying to excuse our inequality and immobility, it seems to me that the correlation is at least partly built into the measures. A society in which there is very little inequality will be of necessity extremely mobile: one can go from the lowest quintile to the highest by changing earnings by a very small amount. Quintile changes will be much more random.


  4. JGBellHimself says:

    The Land of “Opportunity” is no mo’.

    When we graduated from a CC and then college, we owed nobody anything; and received nothing from anyone to get there. When we graduated from law school, with a scholarship that only covered tuition, we still owed nobody anything.

    That is no longer possible, and has not been for over a generation. And, it never will ever be again, for U.S.

    The Good News is that even if we can’t beat’em, we can still bomb them into oblivion. And, eliminating those not worth bombing, we can target, personally, all the people who are – in our own opinion, as a Christian Nation – worth eliminating.

    See, that is what makes U.S. different from “Them”

    See, we still have “mutually self-assured destruction”.

    The End is Near !!!

    So, get out your Mayan calendar, and mark the day before Christmas for your last sex. We might as well go out with a bang.


  5. wkj says:

    This post and Krueger’s paper take what I would call a macro view. There is also a micro view, namely that those in the upper middle class and above are devoting tremendous resources to child rearing–and appear to be getting some results.

    At the extreme, there are the articles in the NYT about the competition among the 0.1% to get their offspring into the 92nd St Y kindergarten. For a broader income group, there is the point made by Elizabeth Warren in “The Two Income Trap” (and by others as well) that many couples struggle and pay a premium to buy homes in “good” school districts.

    I think this is also a factor in the unpopularity of the “death tax”. People with significant incomes and savings know how tough the world has gotten and want to give their children a leg up to the extent that they can.


  6. jo6pac says:

    Interesting that Finland with one of if not the best education systems scores well. Think there is any connection?
    The dumbing down of Amerika seems to be working just fine thank you. How sad, then just look at what is running for office more cycle-o-paths and people wonder how we got here, how sad indeed. This cycle won’t change until money is taken out of elections and I don’t see today criminals in congress doing that any time soon. Main Street won’t be helped by all the lovely charts in the world.


  7. Fred Donaldson says:

    Education helps, but it isn’t the answer.

    Friend of my son was valedictorian of his 1200-member public high school graduating class with a 4.0 averaqe and 1600 SAT (out of 1600 at the time).

    Attended CMU and got his BS in Mechanical Engineering.

    In 2006/2007 he searched for any kind of engineering job for seven months, finally got a lower end ($50k) job.

    His brothers and father are all engineers. He’s Asian.

    Perhaps, he should have gone to private school, where the “better” people attend?

    Couldn’t make any money as an engineer, because so many are “imported,” pushing down salaries, so now he’s been accepted to medical school.

    If you want to be rich, inheritance helps – a lot, and picking science or engineering is not a good move, even if you are smarter than the average MBA.


  8. perplexed says:

    In 2009 Richard Wilkinson and Kate Picket published a book called “The Spirit Level” that points out and documents the damage done by inequality. Wilkinson has an an excellent presentation of their findings on line at: http://www.ted.com/talks/richard_wilkinson.html

    But keep in mind that the media and most economists give it very little attention because it’s really one of those “quiet room” topics not fit for Americans to discuss out in the open.


  9. Joel Rice says:

    Even if everyone could ‘reach their potential’ what reason is there to think there is a market for whatever that potential brings ? Things become more specialized, for example in computer programming, and it takes quite an investment to go from one specialized environment to another. That affects the ‘quality’ of opportunities and whether there is a lot of competition or not.


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