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Inequality and Occupy Wall Street 4: daddy put you in the top 1% !

November 11, 2011

rupert-and-james-murdoch

It was almost a sad sight to see Rupert Murdoch’s son sitting beside the famed newspaper publisher in the televised committee hearings conducted by the British parliament last July.

James seems so out of depth.

Superstar salary he certainly has, but superstar talent?

If the members of the top 1% are there because of connections or political power—rather than by the force of their talent, energy, and motivation—then we should be rightly critical about claims that they merit their fortunes, and question the contribution they make to economic productivity.

Daddy likely got James his first job, daddy likely promoted him, and daddy likely hopes he will be on the top of the Murdoch empire well after he’s gone.

But in a sense the James Murdochs of the world are more common than we might think. In fact the most popular way to find a job is through family and friends. That holds true for all of us, but it is immensely more likely for the kids of the very rich. Look at this picture from a research paper that Patrizio Piraino and I published in the Journal of Labor Economics (available here if you really want all the details).

The bottom line is that about 40% of us have at some point worked for exactly the same firm that at some point also employed our fathers. But if dad’s earnings put him in the top 25% these chances are above average, they start taking off if dad was in the top 5%, and reach the stratosphere for top earners. Almost 7 out of 10 sons of top earning dads had a job with his employer.

All parents want to help their children in whatever way they can. But top earners can do it more than others, and with more consequence: virtually guaranteeing, if not a lifetime of high earnings, at least a great start in life.

Connections matter. And for the top earners this might even be nepotism. This is not a bad thing if parents pass on real skills to their children, skills that might even be specific to particular occupations, industries, or even firms. If this is the case then it makes economic sense to follow in your father’s footsteps.

Wayne Gretzky often talked about the role his father played in developing his skating and stick handling skills. He spent hours and hours with Walter on the backyard rink. But not all top earners got to where they are because of this sort of good nepotism. I somehow doubt that James Murdoch is the Wayne Gretzky of the publishing world.

Bad nepotism promotes people above their abilities by virtue of connections, and it erodes rather than enhances economic productivity.

But there is even a larger cost. If the rich leverage economic power to gain political power they can also skew broader public policy choices—from the tax system to the education system—to the benefit of their offspring. This will surely start eroding the belief that labour markets are fair, and that anyone can aspire to the top.

This is the stuff of another posting in the coming days.

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43 Comments
  1. Man that’s a great graph.. came here via the WCI plug- looks like it passes muster, subscribed!

    • Miles Corak permalink

      Thanks for the comment. Yes, I was certainly surprised when the data popped out this way. One caution … the graph refers to a job ever held. If we focus just on the “career job”, the rates are much lower — an average of 6 percent have as their main employer the same firm as their father did some 15 to 20 years earlier. But the spike is still there at the top — fully 16 %.

      best, m.

  2. Great post, Miles. A quick thought about your concluding paragraph. It seems reasonable to suppose that the rich leverage economic power to gain political power. But in terms of skewing the tax system, what do you have in mind exactly? The income rich, as a group, are net contributors of tax revenue; the poor, net recipients.

    • Thumb permalink

      But in terms of skewing the tax system, what do you have in mind exactly? The income rich, as a group, are net contributors of tax revenue; the poor, net recipients.

      I think the Pharaohs, and the kings and czars that followed them, made the same argument. It misses a much larger point.

  3. Interesting post, the ideal of meritocracy is a little oversold in itself…Since the late 19th century merit has become a cult fraught with contradictions. Notably, it serves to justify inequalities and at the same time it condones them. The only solution I can think of is to move to a hybrid philosophical posture where you want merit based positions, but also less distance between positions. Not only in an effort to build a more level playing field, but because a continuous level playing field is impossible. This means looking at the root assumptions of economic theories that hold meritocratic inequality as the ultimate tool for promoting productivity.(i.e. Tournament model).

  4. *Notably, it serves to justify inequalities and at the same time it “condemns” them. (sorry, I am french)

  5. Niki permalink

    This is precisely why its so important for each of is to geyboff our butts and get it done everyday. It isn’t just your livelihood that’s at stake, your children and your children’s children will reap the benefits or pay the price for what you do today. This isn’t a new concept. PROVERBS 33:12 says blessed is the man who provides for his heirs. Thousands of years ago, this was true.

    • Devin permalink

      I’m not going to go through the trouble of looking up the verse, but that same book of wisdom also advises that stubbornly disobedient children should be put to death. Times change (thankfully). If we can create a world where disobedient children aren’t beaten to death, and success in life doesn’t depend largely on a birth lottery, then I think that’s a world worth creating.

      • Cam Phipps permalink

        Really Devin, where?

      • Deuteronomy 21:18-21:21

      • Bob permalink

        Wow, you completely didn’t read and understand the versus regarding the children. Those are adults. Not only do you take things out of context but then twist and turn things to suite. Sure, times have changed but keep your socialist world views in context here. Birth lottery… seriously? Little Devin isn’t a rich Murdoch? Poor thing. Go work hard, save, and make a difference. Many people didn’t have daddy or mommy leave them a fortune and made something of themselves or work hard and enjoy life. Stop the self pity.

        So what, daddy made a shit ton of money and a dude inherits it. That’s not the problem. The problem is how did daddy make that money. Was it through some cartelized, government, corporatist collusive trickery that robbed the taxpayer via central bank market manipulation or bribery or “enter crime here”. Okay, then we have a problem.

        Not everyone is equal. As long as we create an equal playing field, everyone has an equal opportunity to try.

  6. Simon Hallett permalink

    THe abstract of this paper says “about 40% of a cohort of young Canadian men has been employed with an employer for whom their father also worked”.
    I don’t think either of the Murdochs are Canadian. Is it good science to generalize in this way?

    • Thanks for the comment.

      It is certainly fair to suggest that we should always be careful to not take research out of context. I fully agree with that. In a post of a few hundred words I am trying not to do this, but to summarize the major findings of what I know about the literature in a way that is appealing to a broad readership.

      My point is that the Murdochs are more common than we might think, and I use them as a motivating example.

      This subject is a growing area of research that has a number of different angles. The US is a particularly important case given the topic. You can see some overall US based results by checking out Linda Datcher Loury’s paper at:
      http://econpapers.repec.org/article/ucpjlabec/v_3a24_3ay_3a2006_3ai_3a2_3ap_3a299-318.htm .

      She shows that a disproportionate number of jobs are found through “prior generation male relatives” , but the data available to her limit the extent to which she can look across the earnings distribution.

      For the upper end take a look at one of several studies that deal with family ties and the succession of CEOs — more akin to the Murdoch situation.The references to this work, and to similar research on Denmark, are listed in the bibliography to the research paper I offered a link to in the post, and also to an additional paper in my reply to Chad, below.

      Also my co-authors and I have done comparative work using exactly the same methods for Denmark, and the results are remarkably similar. See http://www.iza.org/en/webcontent/publications/papers/viewAbstract?dp_id=5593 .

      Other references in the literature exist for Sweden, Japan, South Africa. I don’t know of studies on the intergenerational transmission of employers for the UK. The important issue in that country concerns access to the professions, and the intergenerational transmission of occupations.

      At the same time it is also fair to suggest that mechanisms vary across countries. In the US education and access to particular educational institutions is important, not just access to particular employers. But in general “networks” and “contacts” matter.

      The bottom line is that parents help their children to succeed in whatever way they can, and regardless of place in the earnings distribution …. it is just that those in the top can give them a real boast and the intergenerational transmission of employers is the most graphic way of illustrating that.

      best mc.

      • Rastus permalink

        This seems to ignore the effect of markets, and the fact that many of the top one-percenters own their own businesses and therefore elect to hire their children, regardless of the costs or benefits of such a decision.

        My dad was in the lowest quartile of earners, but he had his own, air-conditioner repair business. I worked for him in high school and college. I am now a top one-percenter, and have employed my son at the law firm in which I am a partner. Because I (like my father) am self-employed, I had the ability to prefer my son to other applicants.

        If firms that hire based on family relationships prefer less qualified relatives to more qualified applicants, they will be penalized by the market; i.e., the firms that hire more qualified applicants will do better, thus tending to cause nepotism-practicing individuals to fall out of the top percentile, and enabling those that hire not based on nepotism but on merit to move upward. That seems like a good thing.

  7. Chad permalink

    Does this data include summer, part-time jobs we had as kids? In that case, I have worked for both the companies that currently employ both my mother and father. In the latter case, my employment was BEFORE his, not after or at the same time. However, no job I have had since finishing school has any relationship with my parents. If you are including these types of scenarios, one would think they would dominate the statistic.

    • Thanks for the comment.

      These are important concerns to raise because they inform the interpretation we give to the data. The research paper from which the graph is drawn explains the method exactly, which is careful about the timing of the jobs so only those employers after the father’s counted. In each year from the year the son was 15 onward we take a look at previous employers of the father.

      This said, as the reply above to Adlai stresses, this includes all jobs — summer, part-time, as well as full-time and career — and you are absolutely right to say that the overall rate will be very different if the focus is just on the full time job in adulthood. In this case the overall average is about 6% and the rate is about 16% for top earners. You can see the details of his in another research paper at:
      http://www.iza.org/en/webcontent/publications/papers/viewAbstract?dp_id=4876

      If we want to focus a discussion on the broad investments that parents make in their children then the 40% figure might be interesting, but that is not to say a full picture shouldn’t include the other measure. The focus on career jobs is also important in understanding earnings dynamics. In fact, it plays a role in understanding which sons born to top percent fathers stay in the top. If you want the details take a look at this research paper:
      http://www.iza.org/en/webcontent/publications/papers/viewAbstract?dp_id=5593

      best mc.

  8. MMMM? The letters RCA quickly come to mind. Wonder why?
    Most of your readers will wonder; RCA what was that?

  9. Chris permalink

    Of course, if the son -or daughter- is not competent, the firm is punished for the nepotism. How many firms have gone downhill because of nepotism? Quite a few would be my guess.

    • James permalink

      I think the author makes the same point, “…and it erodes rather than enhances economic productivity.” However, you can not count on the market to crush big companies with incompetent leadership, if that’s the angle you’re working with your comment, Chris. See e.g. every major bank (retail or investment) and auto-maker in the U.S. over the past handful of years.

  10. ben permalink

    You mention the Wayne Gretzky parallel and perhaps it would be interesting to look at it from a sports perspective to try and tease out the difference between benefits gotten through having learned for a successful person and benefits gotten through nepotism. For example many sports stars have had sons (or daughters) that went on to also play sports (think the Bonds in baseball, the Mannings in football, and the Hulls in hockey) but it is a lot less than 70% (or the 16% cited above for full time career).

    • Hmmm … good idea for a paper. This could be related to the economics of superstars along the lines of the Sherwin Rosen paper I tried summarizing in an earlier post.

      best, mc

  11. par4 permalink

    Fascist neo-feudalism through corporate monopoly and nepotism instead of a landed aristocracy. What a bright future!

  12. It would also be interesting to see data about children entering into the same fields as their parents, albeit not for the same employer. (Much harder to measure.) Or children who were enabled to enter other fields, despite no apparent competence, by virtue of family connections. (Perhaps impossible to measure.)

    For example: The judge’s son after a lackluster performance at law school gets a job with a local firm, fails the bar once or twice but keeps his job, and underperforms for years. The lackluster son of a prominent government official glides through elite schools as a legacy and, despite mediocre grades and an unimpressive history of job performance, nonetheless enjoyed a series of tremendous job offers and business opportunities. The son of an auto company CEO who goes into the financial industry.

    Somebody had a bit of fun with James Murdoch at The Guardian:
    http://www.guardian.co.uk/commentisfree/2011/nov/13/gerry-mander-on-the-couch

  13. Very interesting data. It makes sense that the very rich have more power to help their families through nepotism, of course, but I’m surprised that it’s such a sharp spike, rather than a smooth increase.

  14. olderdog permalink

    The same-firm numbers get at pretty much precisely the “bad” kind of nepotism. It’s way more common for well-off people with contacts to place their kids in the firms of well-off friends and acquaintances, a practice that has the advantage of more-or-less objective evaluations once the kid has the job. But you only put a kid in your own firm if you’re a) working on a business dynasty or b) think it’s important that their supervisors know that their own jobs depend on your goodwill.

  15. It’s interesting how the standard conservative response to this is “you’re just a communist! You want everything for free!”

    All the article points out (with a couple of deviations) is that the idea of a meritocracy — the idea that the rich are rich because they’ve EARNED it all — is seriously suspect. When one of the primary predictive factors for how much money you have is who your parents are (which IS a birth lottery; if you’re lucky enough to draw the winning number and be Rupert Murdoch’s kid, you’re guaranteed riches, otherwise you get to work for it like the rest of us shmucks), it’s very very hard to claim that those rich 1%’ers EARNED all their piles of cash. Even if you ignore the corruption of the system that lets the plutocrats accumulate that much wealth, you can’t ignore the simple fact that being born to rich parents doesn’t in ANY way imply that you’ve EARNED your money.

    That’s the point of this article; it’s rather funny to see this fairly bland and hard-to-contest point throwing conservative respondents into a tailspin. I guess that when you slaughter sacred cattle — the idea of a meritocracy in America, in this case — people get riled up.

  16. kthomas permalink

    Scary, and confirms what I’ve seen with my own eyes. Thanks, Professor.

  17. Daniel permalink

    This conclusion of nepotism assumes that the propensity for a son to follow in their father’s footsteps is independent of industry.

    Aside from being an assumption that shouldn’t be made, it can’t possibly be true.

    The industry of the top 1% and the skill sets required are completely different from those of the other 99%.

    • Thanks for your comment and insights.

      In actual fact the more detailed research upon which the post is based accounts for the role of industry, and also for whether the father is self-employed. You can check out the details using the link provided in the original post.

      Indeed, we control for a good many things, not just father’s industry and self-employment status, but most importantly also region at a very detailed level, as well as rough indicators of profession and some demographics … the bottom line is that the relationship between the chances of working at the father’s employer and the father’s earnings is still there. That is why I was confident in just posting the descriptive results.

      Also it is not the case that the “industry of the top 1% and the skill sets required are completely different from the other 99%.” I would have thought so as well. But in looking at the data the incidence of the transfer of jobs across the generations, for the population as a whole and for the 1%ers, is not dominated by high skilled industries. Just the opposite: air conditioning companies, construction and tile, auto sales etc.

      My point in making reference to “good” and “bad” nepotism was to refer to the fact that if a skills story is behind the intergenerational transfer of employers, then it must have to do with firm-specific skills. The father is passing on something to the son that raises his productivity in a particular firm. Otherwise, it has to do with control — either direct or indirect — in the hiring process. The former is “good”, the latter “bad”: the use of these words referring to the impact on equality of opportunity and overall economic productivity.

      You might also have an interest in the book by Adam Bellow, the son of Saul Bellow, called “In praise of Nepotism”. He uses these terms and offers a historical perspective on the role of family in determining child outcomes. Here is a link to a book review. http://nymag.com/nymetro/arts/books/reviews/n_9020/ .

      best mc.

  18. Does this analysis include the military as an employer? If you ran this analysis with the US, I would expect that excluding the DoD would make the results even more dramatic. Or would excluding the DoD not have a large enough impact? On a related note, I wonder how your data compares to intergenerational transmission of rank in the military (officers as children of officers).

    • You raise an important point that we had to address when we were constructing the data. The military, and for that matter all federal/provincial government employees are included, but when we observe fathers and sons to be both working for the government we consider them to not be working for the same employer.

      The reason for this is that there are so many different occupations in so many different regions available in the government so that even if sons and fathers were in entirely different fields of work they would both appear as having the same employer.

      This means that our results understate the extent to which employers are transmitted across the generation. It also means, however, that the military is caught up in this way of dealing with the data. It would be interesting to study this further, particularly in a US context. I don’t know what data would be available, but if there was access to administrative data from the military it might be particularly revealing and interesting because I would suspect that there would be measures of ability or other tests.

      best mc

  19. Mel T permalink

    These results are very neat indeed. That said, I’m curious if I missed something. The generalizations are about “parents” and “children” but there appear to be no data demonstrating comparable links between fathers and daughters, or showing if comparable effects are found for high-earning mothers. Have similar empirical patterns been found beyond fathers and sons?

    • As far as I know there have not been specific results on the intergenerational transmission of employers reported in the literature for daughters. This research is part of a wider literature on the transmission of earnings across generations, which started out focusing on father-sons, but has increasingly also provided information on women. Doing this is more complicated than it might appear because of the very important changes in female labour force participation over the last generation or two. So relating child outcomes to mothers labour market experiences two or three decades ago is not going to be that revealing if mothers were not working. This said, the literature also looks at the role of the marriage market, assortative mating, and even the relationship between fathers and son-in-laws. Bottom line … more work is needed, particularly on the transmission of employers, where part of the difference in male – female outcomes might be related to the degree to which women benefited from family connections in the same way as men. best mc

  20. I think everything published was actually very logical. However,
    what about this? suppose you were to create a killer post title?
    I am not suggesting your content isn’t good., however suppose you added something that grabbed people’s attention?
    I mean Inequality and Occupy Wall Street 4: daddy put you in the top 1% ! | Economics for public policy is a little plain. You ought to look at Yahoo’s home page and watch how they create post titles to grab people to open the links. You might add a related video or a related pic or two to get people interested about what you’ve written. In my opinion, it would bring your blog a little livelier.

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