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. Eric M. Jones. says:

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

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  2. Mike B says:

    Why is it surprising that wealthy parents will have wealthy children? I mean nobody seems to think it odd that fast racehorses will sire fast children. Life isn’t a lottery where wealth is all undeserved (like I am sure many on the left believe). Surprise surprise, some people do earn their happy ending through a mix of nature and nature factors that include intelligence, work ethic, ability to delay gratification, susceptibility to addiction, lack of mental illness or disability, etc.

    Yes the children of the wealthy my be ensured a quality education, but they also have the tools to take advantage of it. Consider the alternative. If the best and brightest actually earn their wealth, and the best and brightest have the best and brightest offspring, then the fact that only 40% of those top offspring maintain their top position indicates that 60% are not living up to their potential. I would be more worried about that than our least and lowest not vaulting to the head of the class.

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  3. Ben says:

    I do not see how it could be any other way.
    How could low-Gini populations pass on advantages or disadvantages to their children, when clearly those advantages or disadvantages did not exist in the first place? Michael hits on that- in Norway, where is there to go? How can a wealthy parent give a child a boost on the ladder when there is no ladder?

    Although I am surprised to see that people only think in terms of passing on advantages, as if, we are all average, but rich people are more so.

    I would suspect that it’s true both ways: in the extremely competitive US environment, the most successful people tend to pass their advantages to their offspring. The least successful tend to pass on their disadvantages.

    Certainly, some of those advantages are purely social. A Harvard student does not learn more than a state university student. If that was all there is, every state college could simply teach the same course material. But the Harvard student is exposed to a much more advantageous peer group. But there are other advantages and disadvantages as well, starting with attitudes towards family and work.

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  4. Pat says:

    IQ is heritable and contributes to earnings inequality in countries that don’t take away everyone’s money? No way!

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  5. Some Random Economist says:

    Scoring that “fight” for Corak based on those four blog posts is hardly fair. He simply drops a number of points that Winship makes.

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  6. TMcG says:

    I believe this speaks to the perils of the welfare state. My brother specialized in very low ability students at an integrated H.S. in the south Chicago suburbs. When he asked one of his students what he wanted to do as a career, the answer was “I’ll just go on welfare, like my mother and my mother’s mother”. It’s not quite a function of security nets (look at Scandinavian countries and New Zealand, they have very good social programs but don’t have near the population and infrastructure to support, plus they tax earnings very high). I’d argue though that the countries in the middle to lower left keep income equality and therefore intergenerational mobility low due to the fact that the tax the bejesus out of higher earners.

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    • Patrick says:

      While that anecdote is very sad it doesn’t do anything to explain how welfare states (which as you hinted at are stronger in many of the countries with more mobility) could be the cause of the correlation.

      Nor does the anecdote demonstrate that even in the one particular case was about disincentives to aspiration, rather than realistic assessment of what will be the likely result of circumstances.

      The question is, if it’s true that this person will end up on the public dole instead of the labor force the question becomes, what would happen to them if they could not do so? Your premise suggests that those on welfare would obtain careers, and probably some would, but for at least some the result would be an even more economically marginal existence, and possibly a shorter life.

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    • James B. says:

      The U.S. thrived economically because regardless of equality of opportunity among citizens … each and every citizen desiring to be productive had better opportunities in the U.S. than in any other country. Now, in a misguided effort to ensure everyone has the same opportunity we are reducing everyone’s opportunity and run the real risk of making opportunities in other countries look more attractive.
      Quit worrying about the opportunities that someone else has and you don’t (isn’t that the webster’s definition of envy) worry instead about how to make the most of your own opportunities.

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  7. Patrick says:

    @eric M Jones–Religion has proved in the past just as effective as a source of galvanizing action as preventing it. Don’t rely on it to explain why people don’t act on this.

    I would refer instead primarily to the fact that the recent trend is that people perceive inequality to be lower and mobility to be higher than they are.

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  8. James says:

    Something that seems to have been overlooked in all this is the difference between the availability of opportunity for economic mobility, and whether people choose to take advantage of those opportunities.

    In this country we have a lot of opportunity. (I’ve seen this at first hand, because I’ve gone from being flat broke and homeless to probably 4th quintile of income and fifth quintile of wealth.) These opportunities are, however, mostly taken advantage of by immigrants – check for instance the percentage of foreign-born engineers & scientists earning $100K+ salaries. Mainstream American culture strongly motivates against education (especially in geek & nerd subjects, where good money is practically guaranteed). It pressures people into living above their means, buying on credit, not saving. For instance, check the savings rates and consumer debts of those countries with higher mobility: I believe you’ll find a strong correlation there.

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