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April 23, 2013

Make Inequality History? What would change if we focussed on inequality rather than poverty?

April 23, 2013

Merit, Privilege or Slumdog Millionaires? Income Inequality and Social Mobility

April 23, 2013
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In memory of Sebastian Levine, who liked to read these posts.RFN mugshot

This post is written by Ricardo Fuentes-Nieva, Oxfam’s Head of Research (twitter @rivefuentes)

In Danny Boyle’s movie Slumdog Millionaire, the young character wins a large pot of money against all odds. The movie is a fantasy tale for all practical purposes. The hero knows the responses posed to him in a quiz show through a number of coincidences and lucky breaks. It was his only chance to become wealthy.

What type of societies give better, more just chances to everyone? What is the connection between opportunity and socio-economic disparities? There are, at the risk of being simplistic, two broad sources of inequality: inequality resulting from individual entrepreneurship and effort (I’ll call it merit inequality) and the inequality that reproduces privilege and elite capture (I’ll call it privilege inequality).

A simple way to discover whether inequality is actually a result of merit is to think how far effort and hard work can take us. I recently heard Kaushik Basu, the new Chief Economist at the World Bank, detail an anecdote about this during a meeting with civil society people in London.  When Basu visits his home city of Kolkata he goes for long walks and sometimes he wanders around a privileged district that stands in sharp contrast with the nearby slums. The close proximity of the two vastly different lifestyles ensures that slum dwellers also visit this district. Then Basu said, to the best of my recollection: “it is not fair to tell a kid in the slum that by working hard he will be able to achieve the wealth needed to live in that neighbourhood.”

It is a candid story that got the attention of all people present in the meeting. It makes a powerful point. What Basu was pointing at is that perfect social mobility does not exist. Basu focused on the immorality of a development narrative that promotes aspirations that cannot be attained – the slum kid that will not become a rich mogul. I want to focus on the existing rigid class structures and how they limit opportunity.

Equality of opportunity is a central tenet of modern societies, but it implies that family characteristics should not have a strong influence on the opportunities someone faces throughout life. Empirical evidence shows that is not the case. There is a strong correlation between children’s chances and their parents socio-economic status. A book aptly titled “Persistence, Privilege, and Parenting” put it like this: “The abundant evidence in the economic, demographic, and sociological literature of the association between parents’ and children’s social positions makes it very clear that children’s chances for a good life are highly dependent on their social origins or socioeconomic status

Social mobility is far from perfect – where you’re born will have some influence on where you end up. But what is the actual correlation between inequality and social mobility? It turns out it’s rather high. Several academic papers (look here, here and here) show this. Take, for instance, recent research by Miles Corak. In this graph, Corak plotted the Gini coefficient (a standard measure of inequality) against “intergenerational elasticity between fathers’ and sons’ earnings” (or how much someone’s income is determined by their parents’). In Denmark, for instance, a country with a low Gini, only 15 percent the a young adult’s income today is explained by their parents’; in Peru, where the Gini is amongst the highest in the world, two-thirds of what someone earns today is related to what their parents earned in the past. Alan Kruger, a former senior official in Obama’s administration and professor at Princeton, dubbed this relationship “The Great Gatsby Curve” (a movie with Leonardo Di Caprio is coming if you don’t feel like reading the book). The rich are different from you and me. And so their offspring are too.

Figure: Like father like son? Parents’ earnings influence income of offspring, and more so in countries with high inequality.

Ricardo inequality fig 1Note: Income inequality in the horizontal axis, persistence of income across generations in the vertical one.

Source: M Corak (2012) Inequality from generation to generation: the United States in Comparison.

A recent debate on The Economist site shed more light on the issue. In a blog post, Francisco Ferreira from the World Bank showed the relationship between opportunity and mobility. Here’s the graph.

You can only climb the social ladder if you have opportunities

Ricardo inequality fig 2

Note: persistence of income across generations in the horizontal axis, inequality of economic opportunity in the vertical one.

Source: Brunori, Paolo; Ferreira, Francisco H. G.; Peragine, Vito. (2013) Inequality of opportunity, income inequality and economic mobility : some international comparisons

Countries where economic opportunity is low also present low levels of mobility – Norway is a mobile society where there is low inequality of opportunity, while Brazil, for all its progress, still shows a rigid society with higher levels of inequality of opportunity. The indicator Ferreira and co-authors use in their research (inequality of economic opportunity index) is not without flaws but it’s a solid attempt to capture how much someone’s ability to participate in the economy is determined by circumstances outside their control – characteristics you cannot change easily (race, parent’s education, sex and the like). Ferreira and his co-authors conclude: “The evidence reviewed suggests that an important portion of income inequality observed in the world today cannot be attributed to differences in individual efforts or responsibility. On the contrary, it can be directly ascribed to exogenous factors such as family background, gender, race, place of birth, etc.” Their evidence indicates that privilege inequality trumps merit inequality.

Why? Because privilege persists across generations through difference in access to education, health and social and professional networks and it starts very early in life. This is the connection between income inequality, inequality of opportunity and social mobility. In countries with high income inequality, you only have opportunities if your parents had them too. Ferreira explains “as the rungs of the ladder grow further apart, it gets harder for people to climb up (or move down). Conversely, countries with institutions that promote a level playing field, and redistribute income or opportunity, may also promote mobility”.

The evidence that income inequality limits our control over our destiny is strong. We know something about the dynamics of the class divide. There are some examples of increased mobility throughout history in Britain and the US. As The Economist puts it “…in both America and Britain the effect of high (or low) incomes in one generation lasts for at least two more. Yet [Long and Ferrie’s] study also suggests it is possible to break patterns of immobility. Although American and British mobility rates had converged by the middle of the 20th century, America’s social order was considerably more fluid than Britain’s in the 19th century. The past has a tight grip on the present. But in the right circumstances, it can apparently be loosened. “. So it is possible  to change the level of mobility in society.

We need to understand better how to loosen those circumstances to make societies more fluid but we know that inequality hampers it.  The higher the inequality level in societies, the farther we are from that ideal that with hard work we can achieve what we set our minds. Then, like in Slumdog Millionaire, only an implausible array of coincidences allows people to move up the ladder. How can we support the narrative that says hard work and effort will really improve poor people’s relative position in society when we know that with growing inequalities it becomes much harder?

Tomorrow, I wonder what the aid biz might actually do differently as a result of all this renewed focus on inequality

18 comments

  1. Thanks for the post – all valid and helpful. But I don’t know what is new here. Paul Willis wrote ‘Learning to labour: Why working class kids get working class jobs’ in 1981.
    Ah well, at least we woke up to the issue of inequality eventually I suppose.

  2. Great piece, Ricardo! Fully agree. At first I wanted to say that correlation of income between children and parents is not only explained by the class system and influence by the parents, it is also explained by the genes that the children inherit (as the paper quoted in Freakonomics finds). That is, not only opportunities, but also abilities depend on your parents. But since that last link would be equally strong in all families, clearly the lower correlation in the Scandinavian counties reflects more equality of opportunity there.

    1. If the genetic link were so strong, class privilege would be redundant and would do nothing but stop the transgressive segregates from the lower classes from earning what they deserve.

      We have privilege class because the genetic cause for wealth is insufficient to guarantee familial dominance in society.

  3. There are a few interesting points in the blog, but I got lost in some of the graphs. Economic opportunity is only one dimension of inequality and quality of life. In fact the most happy persons I came across were short of material resources. The shortage, as we perceive in the West or at the World Bank for others.

  4. What’s wrong with describing it as good old-fashioned structural inequality? I think it’s dangerous to create a dichotomy between ‘merit’ and ‘privilege’as the basis of inequality – sounds a bit too much like we’re saying there’s ‘good inequality’ and ‘bad inequality’ whn of course all inequality is pants.

    1. So your saying that a person with a 100IQ who is lazy should be running an nuclear reactor, or are you saying that a person who washes toilettes deserves the same clout and wealth as the reactor operator?

      The question of “equality” out to be about attaining a hierarchy which actually reflects reality. The problem in the world now is that losers lord wealth over winners and force them into slavery for their profit.

  5. Ricardo, thanks for the post. I think that it’s really important to further our thinking about social mobility and inequality, so the more posts like this we would have the better. What strikes me, however, in the debate about social mobility and inequality is that we disregard one apparent facts that is visible on the first graph in your post. There are countries that, while having similar levels of inequality, have very different levels of social mobility. Studying those cases may not be helpful for advancing the ‘big theory of inequality’, but I think it is precisely through comparisons that we could understand how, as you put it, to ‘loosen those circumstances to make societies more fluid’.

    1. If wealthy individuals had the capacity to acquiesce to their superiors, then all it takes is handing the reigns to your superior

  6. Thanks. The post makes valid points, and clearly articulates a truth substantiated by research. My worry though is whether in pushing this line we are not inadvertently making the case for entrenchment of inequality across generations … taking it as a given, and rendering hopeless any efforts to move out of the cycle of poverty and want?

    1. Without generational/infinite property rights and wide spread vieing for status/wealth by any means, this would be difficult to accomplish.

  7. And the moral of the story is…

    “We need to understand better how to loosen…societies [to make them] more fluid…”

    [to be continued]

    It’s a cliff-hanger. Will tomorrow’s episode be about social laxatives?

  8. Great blog Ricardo!

    I think you’re highlighting a myth that really needs debunking; namely, that  we all have an equal chance of climbing to the heady heights of the top of the ladder – if only we worked hard enough. I don’t think extreme wealth inequality would be accepted if people were aware of the negative relationship between inequality and social mobility,

  9. great blog ricardo. love the distinction between merit and priviledge inequality.

    these myths of mobility are essential to the maintenance of elite power

    in america, a famous poll by pew showed that although the majority said they were in the 99%, 40% of these people said they thought they would be in the 1% in a year or two.

    what can the development industry do differently? start reintroducing class analysis into our work far more strongly, and realise that much of what we are calling for is zero sum power wise. and our analysis should start with ourselves- the development business is run by elites both north and south, with very little actual experience of poverty. we are often very diverse in terms of gender and ethnic background- just have lunch in the world bank canteen to witness that- but in terms of people getting to the top in development who came from humble origins the numbers are tiny, and that has a big impact on how our business operates.

    max

    1. This seems to demonstrate the low intellectual capacity of the average IQ than anything really.

      To think you would get to the “1%” before being struck by lightning multiple times is asinine.

  10. @Emily
    What is wrong with “merit inequality”? I honestly don’t see it. The alternative is “from each according to his ability, to each according to his need”. But communism is a utopia, and lives of millions have been wrecked by deformed societies trying to achieve it (Soviet Union, North Korea…) We need the basic incentive structure to reward education, work effort, innovation and risk taking (entrepreneurship) to generate growth and prosperity (for all). I don’t see other alternatives. Having said that, certain redistribution is needed to guarantee certain minimum life standards for all and obviously access to essential public goods (education, health) and clearly minimize the “structural” or “privilege” inequality, precisely to foster social mobility.

    If there is no “merit inequality”, no reward for effort and risk taking, then there is by definition no social mobility, so what are we talking about here?

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