Social mobility and inequality in the UK and the US: How to slide down the Great Gatsby Curve

In a speech given this morning to announce an update on the government’s Strategy for Social Mobility, Nick Clegg, the Deputy Prime Minster of the United Kingdom, said that “We need an open society where people choose their place”; he said that “The effect of social class and class attitudes on Social Mobility are the ghost in the machine.”; and, in summary, he said that “We are a long distance from being a classless society”.

Yet in the same breath, he also said that it is a myth to suggest that reducing inequality will promote social mobility.

This is surely an inappropriate representation of the role of inequality in determining opportunity.

Consider this.

Among the ten jobs for new graduates that did not exist in the United States ten years ago, as compiled by an intrepid journalist at Forbes, there are a few we would have all guessed: app developer, market data research data miner, and social media manager. But the magazine also listed something called “Educational or Admissions Consultant.”

Affluent parents will apparently go to great lengths to get their toddlers into the right pre-school or kindergarten, to say nothing of high school and college. An Admissions Consultant can be paid thousands for help in navigating the testing and interviewing process, particularly if their skills include the right connections with school administrators.

Surprising?

Not really in a society with ballooning earnings for those at the top.

A recent study found that parents are increasingly going the extra mile to give their kids all the extras it takes to get into the Ivy League: so-called “enrichment expenditures” on everything from books, computers, high-quality child-care, to summer camps and private schools have increased in the US from an average of about $3,500 a year in the 1970s to close to $9,000 for those in the top 20% of incomes, amounts that are now almost seven times as great as parents in the bottom 20%.

That parents should be doing everything they can to foster the future prospects of their children is neither surprising nor something to be worried about. However, that both the incentives and opportunities to do so have dramatically increased, and that this has begun to erode basic institutions and policies that in an era of greater equality promoted equality of opportunity, should.

Alan Krueger, the Princeton Economist who is the current Chair of President Obama’s Council of Economic Advisors, has christened the relationship between inequality and the degree to which family background determines the earnings prospects of the next generation as the Great Gatsby Curve.

More inequality means more of it will get passed on to the next generation, with children from advantaged families more likely to be relatively advantaged as adults, and their poorer counterparts also more likely to stay poor.

There is in fact a stronger association between father and son earnings in more unequal countries like the United States and the United Kingdom than in Denmark and Finland, or even more appropriately Canada and Australia where a shared set of values and institutions would have suggested otherwise.

To dismiss this relationship as purely a statistical artifact, or myth, with there being no casual impact between inequality and opportunity, would be a mistake.

The United Kingdom and the United States sit at the upper end of the curve depicted in last February’s Economic Report of the President, where parents making twice the average income can expect to pass as much as half of their advantage on to their children, is uncomfortable when viewed in the light of the fact that Canadians and Australians cannot expect to pass on more than about a fifth or a quarter.

Uncomfortable might be one thing, but it is fair to say that the case this should be a matter for public policy still needs to be made.

It would be a big mistake to try to erase the impact of family background on the prospects of children.

Parents influence their children in all sorts of ways: to some degree genetic traits like height and beauty are passed on, and if the labour market continues–for whatever reason–to value these traits through time we would expect incomes to be related across generations.

Most would agree that this should not be a concern for government bureaucrats, or if it is the problem involves how the labour market determines pay and employment in ways not associated with productivity.

On the other hand, when family background extends to the point of determining access to investments in human capital—like health care, like education, like access to jobs—central to allowing children to be all that they can be, then most of us might agree that the American Dream is being challenged.

At one extreme nepotism in the allocation of jobs is hard to reconcile with equality of opportunity. Family and friends have always been the most common way to find a job, but research published by the Russell Sage Foundation shows that, even in the most generationally mobile countries like Canada and Denmark, up to 40% of young men have worked for an employer that their fathers have also worked for.

In fact, this is the case for close to 70% sons raised by fathers in the top 1%. The sons of the richest are not likely to be the rich of the next generation if they are not working at the same employer as their father.

What distinguishes the United States and the United Kingdom from other countries is not outright nepotism in the allocation of jobs, but the degree of inequality in the labour market that stems from a very high return to university education.

In the United States a recent college graduate can expect to be making 70% more than a high school graduate, far and away greater than in Canada or Australia where the premium is 20 to 30%.

In the United Kingdom what drives the strong transmission of earnings across the generations is the equally strong degree to which education is transmitted between parents and children, two and three times stronger than in more mobile countries.

A labour market in which college graduates earn so much more than others is not only resulting in greater inequality, it is also sending a signal to the rich that their extra resources should be invested strongly in the education of the next generation. Admissions consultants are in demand because of both greater opportunities, and greater incentives.

At first look, the Great Gatsby Curve offers a seductive recipe for public policy. Raising taxes on the rich and making the tax system more progressive hits two targets with one arrow, it not only reduces inequality in the here and now but in leveling outcomes in the current generation it also diminishes disparities in the next.

This might be the perspective that Nick Clegg is trying to push to the side.

And it is true that it offers a partial solution at best.

Americans and the British can’t slide down the Great Gatsby Curve without also recognizing and changing the fundamental barriers determining access to higher education, and this has to do with how families function, for better and for worse, and with leveling the playing field so that enrichment expenditures are something all children have access to regardless of their parents’ place in the income hierarchy, and certainly whether or not they have connections to a school’s admission committee.

But this is harder to do in a class society, in a society in which public policy discourse is polarized by large differences in economic standing, in other words, harder to do in a more unequal society.