One can argue that high levels of income inequality aren’t much of a problem when social mobility is easy (social mobility being the degree at which people cross into higher or lower income levels than the ones they were born into). Inequality is then the result of skills and effort, the absence of skills and effort, or lifestyle choices. In other words, given easy mobility, inequality is what people deserve or want. If there are few or no obstacles to mobility, people basically choose their position in society: they choose to develop their skills and invest effort, or they don’t.
However, this whitewashing of inequality doesn’t work because the more unequal a society, the less social mobility there is:
(source, the “intergenerational earnings elasticity” is a measure of correlation between the income of grown children and their parents, or – in other words – how much a rise in your father’s income affects your expected income; higher values suggest less mobility, 0 means that the kids of rich people earn as much as the kids of the poor)
(source)
What is the mechanism here? In part, high levels of income inequality make social mobility more difficult: when income inequality is relatively high, people at the wrong end of inequality can offer comparatively less opportunities to their children than the people at the right end – less quality schooling, less quality healthcare etc. The children of wealthy parents have relatively more advantages compared to poor children then they would have in a less unequal society, and they are therefore more likely to end up in a high income group as adults. I assume that social mobility is a good thing and that people’s income should not be determined by the income of their parents.
Let’s assume a stylized economy called Mobilistan, consisting of just 2 families: the Jones family is “wealthy” while the Smith family is less wealthy. In a first scenario, income inequality in Mobilistan is a Gini value of 0.30 resulting from an income of $100,000 for the Jones’ and $25,000 for the Smith’s:
(I’ve used this handy Gini calculator here)
Assuming that the government of Mobilistan offers some education subsidies or public schooling facilities, we can also assume – given the specified levels of incomes - that the children of the Jones family and the Smith family can afford to attend the same schools. Hence, if some of the children of the Smith family work really hard and aren’t burdened with bad genes, and if some of the children of the Jones family drop out, then we may see that some adult children of the Smith family will belong to the same income class as the Jones family, and vice versa. In other words, we see social mobility. The effect of this mobility on income inequality can go either way: it can lead to lower or higher inequality or have no effect at all. It depends on the exact earnings of all the inhabitants of Mobilistan, including the adult offspring.
Now take a second scenario, and complicate things a tiny bit. There are now 4 families in Mobilistan: Smith, Daniels, Jones and Greggs. Both the Smith and Daniels families earn $25,000, and the Jones and Greggs families both earn $1,000,000. This results in a Gini of 0.46, an obviously higher inequality score:
This means that the Jones and Greggs families can afford better schooling for their children, which will make it much more difficult for the children of the Smith and Daniels families to compete for high paying jobs. This effect can be exarcerbated when the Jones and Greggs families start to outbid each other for the best education for their children, thereby making good education more expensive and even less accessible to the children of the Smith and Daniels families.
So instead of saying that inequality is not a problem because there is mobility, we should instead say that mobility is a problem because there is inequality.
More on social mobility here. More posts in this series are here.
