Weekly Economic Briefing

Moving down in the world

20 June 2017

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Following three decades of sluggish real wage gains for the average US worker, economists and sociologists have been taking greater interest in distributional trends and their consequences for the economy, personal wellbeing and the functionality of communities. The Equality of Opportunity Project (EOP) – a collaboration between some of the leading researchers in the field – has conducted some especially interesting studies on the topic of social mobility with a view to answering four main questions: whether individuals entering the workforce are more or less likely to rise through the income distribution than workforce entrants of previous generations; whether a greater or smaller proportion of individuals entering the workforce today can expect to earn more than their parents compared with entrants of previous generations; whether these trends in social mobility are dependent on which part of America a person was raised; and the causes of any changes in social mobility.

The results do not make for happy reading. Although the EOP’s research suggests that the proportion of children born to parents in the bottom quintile of their age cohort’s income distribution that migrate to the top quintile of their own age-cohort’s income distribution has been stable over recent decades, at 10% that proportion is low compared with most other advanced economies. Moreover, because overall income inequality has increased, the consequences of being born into a low-income family are now larger than they once were. Even more concerning, when EOP authors tracked the proportion of individuals aged 30 who were earning more than their parents at the age of 30 over time, they observed an enormous trend decline with only 50% children of the 1980s earning more than their parents at the same age, compared with nearly 80% of early ‘50s children (see Chart 2). Industrial decline appears to have played a central role in these trends as people born in the Midwest have seen the largest declines, with only 41% of children born in 1984 earning more than their parents compared with 95% in 1940 (see Chart 3). Little wonder that President Trump’s campaign messages were so well received in states like Michigan, Ohio and Pennsylvania.

Absolute social mobility in decline
Low social mobility concentrated

As for why absolute social mobility has decreased so much, OEP authors have found that while the slowdown in average annual economic growth accounts for some of the decline, the biggest explanator is the increase in income inequality over the period. As a result, the authors argue that even if current and future governments could find a way to lift average per capita growth rates from their current dismal level it would not be sufficient to meaningfully improve rates of social mobility. Instead, any improvements will need to come from targeted policies that improve the overall distribution of income. What might those policies be? While a full discussion will have to wait for our next article on this topic, another research piece by EOP authors drawing on the evaluation of a 1990s ‘natural experiment’ found that moving children from high poverty to low poverty areas before the age of 10 with the aid of housing vouchers substantially increased those children’s lifetime earnings. This should not be taken as evidence that improving social mobility is easy, but it does suggest that gains are possible if politicians and governments are prepared to learn the right lessons from the data, and from the past.

Jeremy Lawson, Chief Economist

 
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