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Inequality and Occupy Wall Street 5: decline of the American Dream

November 17, 2011

There is nothing wrong with inequality … until it starts limiting opportunity.

Well that might be a bit too strongly put, but it is certainly one thing to live in an unequal society where the chances of changing places with the rich, of seeing your children move on and upward, are high. Indeed, if this is the case we may even want a certain degree of inequality: people would have both the incentive and the possibility to better their situation.

But it is another thing altogether to live in an unequal society where there is little chance of moving on, where there are barriers preventing our talents and energies from being rewarded, where the accident of birth determines a child’s life chances.

This type of inequality should worry Occupiers and the 99% because it cuts sharply against what we commonly understand to be the American Dream.

In fact, the United States is among the most unequal of the rich countries, and also among the least mobile.

In 1992 the American Economic Review published two path-breaking articles, one by Gary Solon and another by David Zimmerman. Their results illustrate a disconnect between the way Americans see themselves, and the way the economy and society actually function. The playing field is a good deal stickier than many believe.

Subsequent research has brought this disconnect into particular relief by placing the United States in an international context.

Now, no one statistic can characterize or describe the American Dream, but this literature has drawn our attention to one particular number that describes the fraction of a parent’s income advantage that gets passed on to the children. This is a good indicator of generational mobility: the higher the fraction, the stronger the tie between parent-child earnings, the more family background matters.

Consider this picture from a paper I have just finished for a book edited by Robert Rycroft . It shows the relationship between inequality and its persistence across generations. Across the bottom from left to right, we are moving from low inequality to high inequality; from bottom to top we are moving from high mobility to low mobility: Latin American countries are the most unequal and the least mobile societies; Denmark sits at the other extreme.

In general, the more unequal a society, the lower generational mobility: in other words, the more likely the members of the next generation will occupy the same position in the earnings distribution as their parents. (This particular graph refers to fathers and sons.)

But the other thing to notice is that the United States is among the most unequal and the least mobile of the rich countries, with about 50% of a father’s earnings advantage (or for that matter disadvantage) being passed on to the son.

In Canada this is about 20%, less than half the US figure. The Canada – US comparison is probably the most apt, and I discuss the details in a research paper published by the Economic Mobility Project of the PEW Charitable Trusts. The reason for the difference: in the United States children of the very rich are more likely to grow up to be rich, and children of the poor are more likely to stay poor.

These facts are finally starting to percolate into the American consciousness. Joseph Schumpeter, the Harvard University economist who taught during the 1930s, is often cited as saying that recessions are like cold showers: they clear the economy of inefficiencies, make the existing structures more apparent, and set the conditions for change.

But recessions have social as well as economic consequences. The current recession has shaken some people awake, and Occupiers signal the decline of the American Dream in our consciousness, a manifestation of underlying realities, and the demand for a change in the way of doing business.

(If you want more information about generational earnings mobility, and the use of other indicators, check out the post by Scott Winship of the Brookings Institution. He summarizes the major themes of the PEW research  project, which he seems to suggest has focused on policies to promote movement from the bottom without paying much attention to the implications of the rich staying rich across the generations. I will take this up in the next post.)

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9 Comments
  1. The sum of your conception of inequality and social mobility was articulated or at least taken up by Durkheim in his “De la division du travail social” (1893) where he addresses the problem of “exterior constraints” on occupying à position in society. The idea is that “natural” inequalities should be expressed in the social inequalities and that artificial constraints should not intervene. The division of labour should therefore be “spontaneous”. Yet he objects that the goal is to remove regulations on competition. On the contrary for him maintaining a level playing field requires intervention and is in that sense the very opposite of the competition in a “state of nature”.

    He mentions the inevitability of unequal chances, but he holds that they have to be reduced as much as possible in order to maintain social cohesion, in a world where ideology and collective memory no longer suffices to explain inequalities and hold the group together.

    Durkheim’s position is almost common sense today, but I still wonder how long can we hold the theory that the distribution of inequalities is indeed the expression of natural aptitudes? Apart from the conditions of the race, to what extent are the upper classes, as Bourdieu put it, shaping the nature of the race itself to maintain their advantage? Furthermore, I feel that the language of merit is politically dangerous and a double-edged sword. It is used to criticize, but also justify inequalities. In fact both the left and the right use it with great fervour. You yourself use the language of merit in your post and at same time as you are putting into question its reality.

    I understand the value of incentives, but another question lingers in my mind, what is the nature of these incentives, what kind of values are we constructing with this language? This begs the question (for which perhaps you have an answer), is success based on demand more than supply? And if so can we still attribute success to personal merit when some “talents” or life goals are undermined for economic and cultural reasons?

    I admit this may not interest you. Since the schism between economics and political economy, these kinds of questions have slipped away from the preoccupations of economists. But to what extent are they really gaining in objectivity by doing this if their neutrality is expressed through the conventionality of their normative preoccupations?

  2. Took Labor Economics and Econometrics from Gary Solon as a Michigan undergrad. Someone mentioned your blog on Facebook so I came to take a look. Interesting stuff, thanks for making this accessible to non-economists (I’m a lawyer at the U.S. Securities & Exchange Commission).

    • Well thank you for visiting, and I am glad that you found it helpful … this is very much the objective of my blog: to make some of the major findings and principles in economics and labour economics available to others.

      You were lucky to have Solon as a teacher for these courses. He seems like he would be both very demanding but also very generous.

      best mc

  3. Annie McEwen permalink

    Very glad to stumble upon your blog and see your efforts to bring academic research to a wider audience. Intergenerational mobility has been sorely neglected outside of academia (and inside it too, with your own research as an exception). It gives a really interesting read on the fundamental differences between the US and Canada and how our societies and states shape social inequality and equality of opportunity. As you point out, ironically, Canada does to be a lot closer to the American dream than than America itself.

    While the measure of intergenerational mobility has been has been overlooked, my concern is also making too much of this fascinating figure. Intergenerational earnings elasticity doesn’t fully operationalize or capture what most of us would mean by “opportunity”. So that it doesn’t give us leverage to say “there is nothing wrong with inequality … until it starts limiting opportunity.” Probably not.

    What exactly are we measuring? Is it fair to extrapolate that to equality of opportunity?

    Four (non-exhaustive) limitations that give pause include:

    – Sons and fathers: much of this body of research doesn’t include women (like me) and their economic trajectories or cross-gender influences. While sons and fathers may have been a reasonable measure up until the 1970s, today it seems out of step with the reality that women work, but they still have very different economic lives then men. Women are also much more often the head of single-parent households, and thus son-mother relationships may be increasingly important.

    – Mobility over generations: intergenerational mobility is just that, intergenerational. If we focus on it as a measure of skill or merit, we may neglect the for mobility within a lifetime. Your Pew study found “71 of Americans and 68 percent of Canadians said that it was more important to ensure that everyone has a fair chance of improving their economic standing” was this their economic standing as compared to their childhood, or at any point in their lives? Intergenerational elasticity doesn’t cover whether people are able to move out of spells of poverty during the lifecourse, which I think matters to Canadians and Americans. If you fall into poverty how easy is it to climb out? Does bad luck and a bad economy at age 25 doom you to a life of poverty?

    – Decomposition of the measure: Do all social groups have the same elasticity? Or are different subgroups suppressing differential elasticity? I’m thinking here of whether high upward mobility of immigrants may be suppressing a high correlation of incomes between non-immigrant rural fathers and sons, or other subgroups. What if there is a lot of flex around the middle (where most people lie) but very little at the extremes of very-low income and very-high income.
    If we were to include women in the measure, there would also have to be some measure of pairing in household units (e.g. if I choose not to work because my partner has high income, my income may look uncorrelated with my mother’s high income, when in fact my quality of life, and substantive income may in fact be very similar).

    – Can it capture merit and work?: I question how much of correlation between a son and father’s earnings measures merit or hard work. There are a whole host of variables that are unaccounted for, reading employment figures on the front pages, one can’t help but feel many of the factors are out of the control of individuals.

    I think there is a real risk of putting to much into this headline indicator and using it to allow for complacency with the embedded inequalities in our society that it can’t capture. Strategic use of indicators and statistics abounds in today’s “evidence-based policy”, and this a powerful one that can be used for very different ends. Equality of opportunity is a finicky concept that everyone seems to love, but can mask some very different beliefs about the society we want and how we want our state to help us get there (as the comment above on Durkheim hints at).

    Thank you for initiating some reflection and debate. Look forward to following your posts!

  4. Joe permalink

    Hi, thank you for this information. I am printing a copy of this article for my high school economics class for the purpose of debate.

Trackbacks & Pingbacks

  1. Asymptosis » More on American Inequality and (Lack of) Opportunity
  2. How rich countries lift up the poor « Consider the Evidence
  3. Here is the source for the “Great Gatsby Curve” in the Alan Krueger speech at the Center for American Progress « Economics for public policy

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