Is Higher Income Inequality Associated with Lower Intergenerational Mobility?

A lot of our political debate boils down to questions about equality of outcomes versus equality of opportunity. But it turns out that they’re pretty closely related. Take a look at the chart below, which is from a terrific recent speech (with charts!) by Alan Krueger:

The horizontal axis shows the Gini coefficient, which is a summary of the degree of income inequality for each country. I think of this as a measure of inequality of outcomes. The United States sits out there on the right, which says that we have high inequality, which I bet that doesn’t surprise you.

The vertical axis shows a measure of intergenerational mobility, which summarizes the relationship between your income and your parents. A score of zero means that we have equality of opportunity — the kids of rich people earn as much as the kids of the poor. A high number means that the rich parents have rich kids and poor parents have poor kids. The U.S. has a score of 0.4 which means that, on average, you pass on 40% of your economic advantage to your kids: if I earn $100,000 more than you, then on average, my kids will earn $40,000 more than your kids. So I think of this as a measure of inequality of opportunity. You’ll notice that the U.S. also scores high on this measure. Americans are often surprised to learn that in the land of opportunity, your life outcomes are largely determined by your parents.

It’s striking just how closely related inequality and mobility are. And it’s political dynamite.  Why? If income inequality in one generation can be linked to unequal opportunity in the next, then income inequality can’t just be dismissed as the politics of envy. My bet is that this chart that will launch a thousand papers, as economists try to sort out just what these linkages are. Whatever the answer, it will transform our thinking about inequality.

But in the political arena, the first instinct is to deny. And so not surprisingly, this chart has led to a wonk-fight.  If you want the dirty details, here’s Scott Winship’s critiqueMiles Corak’s replyWinship’s counter, and Corak’s response. I score this fight for Corak. It’s not even close: he’s the leading figure in international comparisons of mobility, and he’s put together the best data around. Other authors and other datasets yield the same conclusions.

There’s a broader lesson here for what we learn from these sorts of data debates. Basically, Winship has a bunch of complaints about how the data are constructed — and many are valid. He says that it’s difficult to construct internationally comparable measures of income inequality – that the chart should use inequality from an earlier era, and that only some types of inequality would generate immobility. He also points out that mobility is difficult to measure: the data come from different countries with different researchers using different methods. It’s a standard play from the wonk-fight playbook: throw lots of mud at the data, and hope that this leads people to mistrust the conclusions that follow.

Here’s the thing: his criticisms actually strengthen the original finding.

Think about it. Imagine how strong the “true” relationship must be if it shows up even when using only rough proxies for the “true” levels of inequality and immobility. In light of Winship’s criticisms, the high correlation in this chart is all the more remarkable.  If his gripes are correct, then graph understates the correlation between inequality and mobility.

Now there’s one more possibility to consider.  If mis-measurement of inequality were related to mis-measurement of mobility, then the chart could reflect correlation in these measurement errors. But the two measures come from different datasets, different researchers, and different methods — so that’s pretty unlikely. And the measurement errors involved aren’t big enough to drive a correlation this strong.

Predictably enough, I spent yesterday reading lefty blogs trumpeting Corak’s analysis, and right-leaning blogs who didn’t want to believe the inequality-mobility link, endorsing Winship. But both missed the bigger picture implications. Either you’re convinced by Corak that the data can be trusted, and that they show there’s a strong link between actual inequality and actual mobility.  Or you believe Winship that the data are a pretty poor proxy for what’s really happening, and so there’s actually a very strong link that’s being disguised by imperfect data.

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  1. Scott Winship says:

    Hidden due to low comment rating. Click here to see.

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    • Mike B says:

      Hidden due to low comment rating. Click here to see.

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      • Michael Peters says:

        If you’re saying it’s all in the genes, then how do you explain that people in the US are less economically mobile than in other countries? Do the laws of genetics somehow not have any effect in countries with more income equality?

        Well-loved. Like or Dislike: Thumb up 58 Thumb down 13
      • Independent Girl says:

        I’m actually trying to reply to Michael Peters below, but for some reason can’t do that. It’s not that the laws of genetics don’t apply in those other countries, but the laws of taxation that do apply take away any extra earning that the high performers would otherwise receive.

        Hot debate. What do you think? Thumb up 18 Thumb down 20
      • Cor Aquilonis says:

        That’s funny. I thought the whole children-of-the-rich-and-powerful-have-superior-genes-and-parenting-and-are-thus-deserving-of-their-wealth-and-privilege idea went out of vogue with eugenics.

        Also, please quit equating wealth and social standing with performance. There are plenty of worthless rich and famous people (See: TV), and there are even more high performing, unsung middle and lower income people (See: people around you.)

        Well-loved. Like or Dislike: Thumb up 54 Thumb down 13
      • Patrick says:

        I’m not sure why people would be against passing on economic advantage. “Economic advantage” does not involve just money, it involves good parenting, education, and values. “Economic advantage” is just one outcome of many successful families. Unless the state is willing to assume the role of parent/family in many cases, children’s incomes will be significantly affected by their parents.

        Well-loved. Like or Dislike: Thumb up 20 Thumb down 5
      • Patrick says:

        The main concern here is economic opportunity, rather than economic outcome. A great source for information on economic opportunity would be to look at different subcultures within the same area–who have access to the same jobs and schools and such.

        Given the success of subgroups such as Asian American immigrants, disparities in economic outcomes are not always created by differences in economic opportunity.

        Well-loved. Like or Dislike: Thumb up 16 Thumb down 1
      • LA-CC says:

        I don’t think they isolated for a ‘gene only’ control factor. So, you can’t really assume it’s simply genetic. It could be that it’s a lot easier for a rich kid to drive the beemer daddy gave him to his ivy league (tuition paid by daddy) classes with books bought with daddy’s credit card and certainly no need to have a job while he has serious study to do (and term papers he can pay a poor kid to do for him)… than, let’s say … a poor kid going to the local junior college paying his own way or maybe with the help of a $2k Pell grant or student loan, taking the bus to school, then to work, then to home to study while the rich kid is out shopping for the ipad.
        Yep, it’s all nature/nurture.

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      • aepxc says:

        @Patrick:
        “I’m not sure why people would be against passing on economic advantage. “Economic advantage” does not involve just money, it involves good parenting, education, and values. “Economic advantage” is just one outcome of many successful families.”
        ===============

        Was a similar argument not made by aristocrats against democracy?

        Well-loved. Like or Dislike: Thumb up 20 Thumb down 7
      • Consumer says:

        ” The United States wastes the natural talents of its top children LESS than every other industrialized country.”

        Are you saying that low Gini coefficient countries are wasting the talents of those with rich parents? How about the opposite: these countries actually are boosting the talents of children with poor parents. So who is better off as a society?

        Well-loved. Like or Dislike: Thumb up 15 Thumb down 3
      • Jorge says:

        Are you seriousely saying my talent (I live in Spain) is less wasted than yours? In fact, I believe the contrary is true: because my country worries about income re-distribution, low-income people’s kids DO HAVE an opportunity. It seems my country is far better than yours in terms of being “the land of opportunities”

        Well-loved. Like or Dislike: Thumb up 12 Thumb down 2
      • TallDave says:

        Good points Mike B.

        Probably more more important than genetics is choice.

        The term “mobility” is misleading is this context — what is really measured here is tendency to move along the income distribution. Not everyone wants to spend 70 hours a weeks for forty years at work instead of having fun, and I don’t know that there’s a good argument that everyone should.

        And choice often has strong cultural aspects — as with other comparisons to OECD countries such as life expectancy, adjustments for ethnicity probably make the disparity disappear. Also, I would bet with immigration factored in the U.S. has the highest true mobility in the world.

        Thumb up 3 Thumb down 1
      • Lex Apostata says:

        If inequality was somehow genetic, as your post presumes, the results would be the same in every country.

        Thumb up 0 Thumb down 0
    • Jonathan says:

      Scott,
      Why not make the argument here or point us to a location where you make your case rather than bring up an irrelevant issue.

      Thumb up 3 Thumb down 3
  2. Michael says:

    A couple questions come to mind: their dataset and conclusion seem to ignore the differences in intrinsics between people, which are very important. If we assume that better outcomes are associated with positive traits like intelligence, work ethic and risk taking (all of which can be viewed as heritable) then should we be surprised at this conclusion? Smart successful people are going to have kids that are on average smarter than their peers.

    Additionally, wrt mobility – how much mobility is there really in places like Finland, Denmark and Norway? Where exactly is there to go? Their analyses dont seem to allow for the differences in numbers of social strata, so you would expect that with a smaller scale top to bottom, that movement is easier.

    Well-loved. Like or Dislike: Thumb up 31 Thumb down 19
    • Michael Peters says:

      While I agree with you about inheritance of successful qualities you seem to be implying that Sweden and Norway are communistic societies where everyone is the same. Have you ever been to either? They are democratic market contries (with socialist influences) and there are definitely rich and poor. There are even people who are extremely rich and obscenely rich. So there are definitely places for people to move up or down the ladder.

      Well-loved. Like or Dislike: Thumb up 13 Thumb down 4
    • Kyle says:

      That’s the point of comparing income inequality with mobility. If there’s more stratification (larger inequality) then there’s less mobility. If you believe in the American dream, equality of opportunity, then this is a bad thing.

      Thumb up 10 Thumb down 7
    • aepxc says:

      When it comes to intelligence, beyond something like 120, better outcomes are not associated with IQ. And how is work ethic hereditary?

      I am actually quite surprised at the debate over this. It is trivial to observe that the amount of value that a person is capable of creating given a set of external conditions is a product of effort x talent/skill x control over tools. And the more advanced (i.e. too-dependent) society becomes, the greater the weighting of “control over tools” in that product. The most genius eye surgeon with only a chopstick will not be as capable as his mediocre colleague with the latest surgical tech, for instance. Under such circumstances, how can a disparity in capital access NOT destroy equality of opportunity? Indeed, such disparity is self-reinforcing – control over greater amounts of capital enable a person to create more value, for which one is more highly compensated, allowing the person to acquire control over even more capital, and so on.

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      • Enter your name... says:

        As I understand it, most of these studies chop up the population into quintiles, so the top group is the top 20%.

        Since only a few percent of the population has an IQ over about 120, and since IQ isn’t the only factor in what we think of when saying someone is “smart” (e.g., high IQ plus poor working memory generally results in failure), the effect of bright people is pretty much going to be lost. Even if they were all in the highest quintile, they would be only a small minority in that group.

        Additionally, high IQ is associated with several income-destroying problems, including greater rates of mental illness, greater rates of addiction, and greater rates of absurd risk-taking. The first two result in high-IQ people being disproportionately present in the lowest quintile due to disability, and the third results in them being in the lowest quintile due to bankruptcy.

        If you want your child to be financially successful, an IQ equal to about 120, not higher than that, is apparently the ideal. Excellent social skills are also very helpful.

        Well-loved. Like or Dislike: Thumb up 8 Thumb down 1
  3. Shane L says:

    Why are there so few countries on that graph, I wonder? There are many more OECD member states. Just curious: I’d like to see if the trend stands up with the inclusion of the other countries.

    Well-loved. Like or Dislike: Thumb up 48 Thumb down 1
  4. David says:

    I wonder how much the mobility data is skewed by the extremes of the top of the wealth chart. A billionaire is likely to have billionaire children. It is easy to see how that could demolish the impact of lots of kids from poor parents joining the middle class, which is arguably a more important piece of economic mobility to the real people involved.

    I think it would be more interesting to examine how wealth disparity impacts the ability of the poor to move out of poverty. I’m not convinced that the extremely wealthy are really all that important to the welfare of the rest of society (other than that they should pay more taxes). People moving from little or no income to $50k incomes are more important, I think, than the smaller number of people in the ranks of the financial elites no matter where they started. The impact of the extremely wealthy comes in big numbers, but it is more important how the economy is working for the rest of us.

    Well-loved. Like or Dislike: Thumb up 51 Thumb down 4
    • Richard says:

      Hereditary wealth building up is kind of important (even more important than giving poor kids a chance to move to the middle class, IMHO) because we live in a political system where wealth can influences laws and politics (as of now, the laws that get passed are the ones that a majority of the top 10% income earners endorse or at least do not oppose; when it comes to political influence, the bottom 90% literally doesn’t matter). Now, if everyone is looking out for their self-interest (as capitalism assumes), what would the children of the wealthy do? Enhance the opportunities for others or find ways to keep and enhance their wealth, whether it is through free & fair competition or through passing laws that favor them? Luigi Zingales has a great piece out there called “Saving Capitalism from the Capitalists”.

      Thumb up 4 Thumb down 2
    • Brandon Berg says:

      I’m fairly certain that the mobility data are based on quintiles, which means that multi-millionaires are essentially irrelevant. Which I think is a big problem with a lot of the rhetoric around this. People want to make it about the super-wealthy, and it’s not. The super-wealthy are a rounding error in the mobility data.

      Well-loved. Like or Dislike: Thumb up 6 Thumb down 0
  5. Recent Penn Grad says:

    I’m sure this data is legitimate and these patterns in fact do exist. In fact, through my own personal experiences and observations, I can attest that this may make sense.

    I do think that this chart can be oversimplified in terms of causes. I think this has to be controlled for education and socioeconomic group.

    In terms of education, higher income families tend to be highly educated and push their children towards education. It is much less likely for lower educated groups to make school such a significant factor in their lives.

    Secondly, if you see, all of the top three countries with the most intergenerational earnings elasticity, they tend to have a minority underclass problem. In Europe, the Muslim immigrants have had trouble integrating. In the US, there’s the perpetual African American problems of prosperity and the new Hispanic problem. The major factor I feel is the educational factor. These groups tend to be poorly educated and not make education a top priority. Coming from a Hispanic family, I have seen this tendency personally.

    What this tells me, is that the problem lies more in the bottom half than the top half. I think it is very important to push for a fair, practical, and comprehensive solution to drive these under educated groups out of poverty. But what we can’t do is blame the higher earning for an uneven playing field and rashly act to “make things fairer.”

    Well-loved. Like or Dislike: Thumb up 33 Thumb down 11
  6. Jeff Schnitzer says:

    I fail to understand why this is political dynamite, or by itself suggests any political action at all.

    Do you mean to suggest that inequality is bad because it causes immobility? Even if the correlation is solid, there is no causal link established (or even suggested). It seems likely to me that behaviors that tend to discourage wealth production & accumulation are culturally “inherited” generation-to-generation, so why wouldn’t there be a correlation between inequality and social mobility?

    Well-loved. Like or Dislike: Thumb up 23 Thumb down 17
    • Travis says:

      Because it undermines the assertion that with hard work one can pull onself up by their own bootstraps that is fundamental and integral to the republican message.

      If you go down the road you want to walk, with these conclusions, you reach the end that says people who are poor simply don’t try as hard as people who are rich, or, more likely you realize that people who are born rich have several advantages that “hard work” can’t make up for, such as access to credit, influential connections in industry, and access to education.

      It undermines the whole “land of opportunity” ideal. There is opportunity there, but it’s largely skewed to those who were born into opportunity.

      No matter how you look at it, either that income immobility is causation or other social factors are causation, it turns out to be a pretty powerful political message.

      Well-loved. Like or Dislike: Thumb up 28 Thumb down 5
      • Norm says:

        I don’t see how it logically undermines any such notion. Certainly if parents “buy” their children good jobs we would get the correlation shown. But if children get merit (in the form of health, personality, intelligence and willingness to work hard and defer gratification) to any extent from their parents then we would get the correlation shown.
        I cannot imagine that genetics and upbringing have nothing whatsoever to do with the ” merit” parameters. This correlation may just as well show that the US is more meritocratic and anyone can bring themselves up by their bootstraps if they have the right stuff.

        Hot debate. What do you think? Thumb up 9 Thumb down 13
      • Donnie says:

        Norm, below, I couldn’t reply directly to you.

        Of course genetics and good parenting play a part. The correlation between inequality and mobility will be partly explained by that. But unless you believe that the variance between countries is largely explained by different ditributions of ‘talent genes’ and parenting skills, the data here shows that money is also involved in the correlation.

        Also, it’s very clear that parents spend money to improve there kids chances of doing well in life (perfectly naturally), and that rich parents spend more. Unless this money’s wasted it’s common sense that inequality and mobility are linked.

        Thumb up 5 Thumb down 1
  7. Scott A. says:

    The New York Times had a lengthy article 7 years ago detailing this EXACT issue over multiple generations.

    http://www.nytimes.com/pages/national/class/index.html

    Thumb up 6 Thumb down 2
  8. Patrick says:

    It seems that the way to counter the argument that this represents a legitimate problem is to follow michael above and claim that it represents inherited traits and sub-culture rather than unequal opportunity.

    Knowing what I know about differing educational opportunities in the US that seems unlikely, however.

    Thumb up 7 Thumb down 5
    • David says:

      As others have pointed out, this assumes that high inter-generational earnings elasticity is a good proxy for equality of opportunity.

      Other comments have suggested reasons that this would not be true, but look at causes of high inequality. I think that the hypothetical, opposite extreme is also interesting.

      If a society awards earnings completely randomly, then the inter-generational earnings elasticity would be very, very low. In such a situation, there is also no reason for anyone to earn more than others, which could motivate low income inequality.

      Well-loved. Like or Dislike: Thumb up 8 Thumb down 2
      • TallDave says:

        Great point! There’s no reason to think a random distribution is preferably.

        Note too that standards of living (as measured by PPP GDP per capita) in the U.S. are the highest for any large country in the OECD.

        Thumb up 0 Thumb down 0
    • Mike B says:

      Poor public school is only one factor in this equation. Good parenting can overcome poor schools any day, but the reverse is probably less true. Take the example of Charter Schools. When Charter Schools first open, the students that attend perform better than average…but this is largely due to a selection bias as the best parents are the ones that care enough to get their kid into a better school. As charters serve more and more of the student population, subsequent waves regress to the mean.

      You can’t get anywhere without ability, and ability cannot flourish without support. In certain populations in this country there are strong penchants towards anti-intellectualism and poor life choices. Moreover, those with the greatest mobility are now more than ever able to pick up stakes and leave the community, further sapping the local population of those genes that could improve it. This isn’t about any one race or group, its about sub-cultures that through a combination of external and internal pressures, doom their own future.

      Well-loved. Like or Dislike: Thumb up 19 Thumb down 1