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.


Scott Winship

I pointed out to Justin in an email exchange yesterday and this morning that he's just wrong when he claims that my criticisms point to an even stronger relationship between mobility and inequality. But then again, I am less reknowned than he and Miles, so there's that.

Mike B

What does it matter if it is true? High performing people have high performing kids...DUH. Fast racehorses sire fast foals, it's how life works. High inter-generational mobility would imply that there is no effect of parenting or those same parent's genes to produce superior offspring. Instead of being afraid to admit that nature and nurture don't play any role in determining one's outcome in life you should embrace it. If a child from the top quintile drops out of the top quintile that means that child's potential was wasted. The United States wastes the natural talents of its top children LESS than every other industrialized country.

Michael Peters

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?

Michael

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.

Michael Peters

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.

Shane L

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.

Glenn W

From what I recall, the recent data shows us dead last in the OECD regarding income mobility.

David

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.

Read more...

Richard

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".

Recent Penn Grad

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."

Read more...

Jeff Schnitzer

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?

Travis

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.

Norm

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.

Scott A.

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

Patrick

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.

David

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.

TallDave

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.

Eric M. Jones.

I am shocked, shocked to see that anyone is surprised by this. The top 2% of the population has 50% of the wealth. The bottom 50% of the population has been totally crushed and now has 2% of the wealth.

The very rich are not like you and me....and we have been totally f**ked.

Religion is the only thing that keeps the poor from eating the rich....so far.

Consumer

"Religion is the only thing that keeps the poor from eating the rich….so far."

True that! There was a good blog post in NY Times about that a couple of days ago:
http://campaignstops.blogs.nytimes.com/2012/01/17/for-god-so-loved-the-1-percent/

Mike B

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.

Read more...

Ben

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.

Read more...

Pat

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

Some Random Economist

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

TMcG

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.

Patrick

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.

Patrick

@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.

James

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.

Read more...

Milton Recht

College educated parents are more likely to have college educated children and the US ranks number 1 among OECD countries for having a college educated workforce. College educated workers earn more than non-college educated workers.

According to a 2011 OECD report, the rate of increase for college educated among new entrants into the workforce is growing faster in other OECD countries than in the US. Among new entrants to the workforce, the US drops to 15th versus number 1 for its entire workforce.

In the non-US OECD countries there is and has been greater growth of college educated workers, which means they will earn more than their parents, which makes the statistics appear that there is more upward mobility.

Once the growth rate of college educated workforce peaks in non-US OECD countries as it has in the US, the income mobility rates among all OECD countries including the US will equalize.

Source: Education at a Glance 2011, OECD Indicators
http://www.oecd.org/dataoecd/9/16/48678896.pdf

Read more...

Daniel

Seems like a pretty poor argument to me. If we accept Winship's claim that the data are a poor proxy, this certainly has a chance of masking the supposed 'very strong' link, but it also has a chance of making a trend appear when there isn't actually one there. Simply put, bad data can either weaken true relationships OR create fake ones. It's complete nonsense (not to mention bad statistics) to pretend otherwise.

That being said, it doesn't seem terribly surprising that there should be this kind of correlation when you think about access to education, inheritance, etc. so my guess is that the relationship is real.

MW

Bad data can only create fake relationships when the badness follows some relationship. To argue a correlation isn't real, you need to show some plausible mechanism why errors are correlated. Truly random badness/noise can only weaken a correlation.
Looking for plausible mechanisms why errors might be correlated is an important part of science. If such a mechanism is found, a new experiment should be conducted to test it.

artemis

No, when a "scientist" runs a chart with 10 data points it is not his opponents job to go do his research for him and create rest of the chart he left out.

The burden of proof is on the person making the claim of correlation.

James B.

Wow, somebody should do something about that! Maybe we should pass the "Equalization of Opportunity" bill ... that would surely make things more fair. Who is John Galt?
... what was that short-lived "sarcasm" punctuation mark?

Seriously folks, why are we looking at this country by country ... we need productive people in the U.S. and if they find a better opportunity to be productive they will leave the U.S. Productive people should reap the benefits of their productivity. That may sound greedy or harsh, but the fact is ... it is the productive capacity and economic might of the U.S. that gives us the luxury of taking care of unproductive people in a charitable fashion ... NOT equalization of opportunity for everyone. We seem to have lost sight of that.

Michael Samsel

It seems that this graph shows that if through social policies all adults make the same in a given country, that their children when they become adults will all make the same, as long as the children remain in that country. Is that profound? In such a situation, behavior is irrelevant to income. Only where behavior influences income, and disparity is possible, is the question of inter-generational mobility relevant. The behaviors rewarded may not be fair or rational always, but they of course run in families--nature, nurture, or direct instruction-- and so of course disparity co-varies transgenerational income inertia.

The real need is for a way for anyone with a reasonable set of behaviors to make at least a good wage, and not tamper with basic liberty