Weekly Economic Briefing

The lottery of birth

20 June 2017

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How much does the socioeconomic status of your parents matter for your earnings? Measures of economic mobility attempt to answer this question by looking at the extent to which individuals move up (or down) the income ladder relative to their parents. When looking across countries there are a number of trends that quickly emerge. First, in practically all countries for which evidence is available, there is a clear link between what your parents earned and your own earnings prospects. Second, the strength of this link varies substantially from country to country. Most studies find persistence to be particularly high in the UK, Italy, US and France. Indeed, in these economies more than 40% of the relative difference in parental earnings is transmitted to their children. The Scandinavian economies, Germany and Canada show less persistence, although there is still a relationship between parents’ and children’s earnings. Third, countries with lower income mobility tend to have higher levels of inequality, illustrated by the so-called ‘Gatsby curve’ below. This represents a double blow for the more disadvantaged, with the gap between rich and poor large, persistent and growing over time in many countries.

Low levels of economic and social mobility raise concerns on equity grounds, with entrenched outcomes dependent on socioeconomic background clearly unfair. However, there are also economic challenges arising from low mobility. Indeed, less mobile societies are more likely to waste or poorly allocate human skills. Moreover, a lack of equal opportunity may dampen the motivation and productivity of the disadvantaged. Finally, low mobility seems to be associated with higher levels of inequality, which has also found to be detrimental for growth according to cross-country studies. Addressing low mobility is challenging. There is no global silver bullet, with each country facing issues in its own unique institutional and policy environment. Additionally, some of the environmental factors which have an effect on mobility are only loosely related to policy, such as social networks, social norms and attitude toward risk. Typically education is thought of as one of the most productive avenues to address low mobility, with spending on early age intervention and systems that do not group students by ability seen as more effective.

The Great Gatsby Curve
 
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