Income Inequality, Equality of Opportunity, and Intergenerational Mobility

The summer issue of the Journal of Economic Perspectives will feature a collection of articles on inequality and the top 1%, some of which are now being circulated by the authors.

The paper by Tony Atkinson and his coauthors, “The top 1 percent in international and historical perspective,” is available in this post, and “The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes,” by Josh Bivens and Lawerence Mishel, is available on the Economic Policy Institute website.

Greg Mankiw has also posted a copy of his paper, “Defending the One Percent“, on his blog.

My contribution to the collection is based on the notion that the inequality literature has paid little attention to the intergenerational consequences of increasing top income shares, and it can be read as a counterpoint to Mankiw’s piece, or at least to his claim that inequality of opportunity is not a reason to worry about the top 1%.

Here is the final draft: Income Inequality, Equality of Opportunity, and Intergenerational Mobility. But if you just want a quick read, an excerpt from the conclusion follows. Either way, feedback is—as always—welcomed.

[NOTE added December 10, 2013: the published version of this paper is available from the American Economics Association website for the Summer 2013 issue of the Journal of Economic Perspectives, as is the table of contents for the entire issue.]

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Relatively less upward mobility of the least advantaged is one reason why intergenerational mobility is lower in the United States than in other countries to which Americans are often compared. But it is not the only reason. Intergenerational mobility is also lower because children of top-earning parents are more likely to become top earners in their turn. An era of rising inequality is more likely to heighten these differences than to diminish them.

Inequality lowers mobility because it shapes opportunity. It heightens the income consequences of innate differences between individuals; it also changes opportunities, incentives, and institutions that form, develop, and transmit characteristics and skills valued in the labor market; and it shifts the balance of power so that some groups are in a position to structure policies or otherwise support their children’s achievement independent of talent.

Thus, those who are concerned about equality of opportunity should also care about inequality of outcomes.

The inequality literature has paid little attention to the intergenerational consequences of increasing top income shares that it has so carefully documented. Freeland (2012) graphically documents the degree to which the top 1 percent, by virtue of the magnitude of their income, are divorced from the rest of the population in their work arrangements, consumption behavior, and beliefs.

I have argued here that the top 1 percent are also different in the way advantages are passed on to the next generation, which certainly involves much higher-quality schooling and other investments of human capital from the early years onward, but may well also involve nepotism in the allocation of jobs.

This dynamic at the top, and its underlying drivers, are likely very different from the configuration of forces determining intergenerational mobility for those in the lower half of the income distribution. Even so some countries are likely to combine a good deal of intergenerational mobility with higher top shares because the balance in the lower parts of the income distribution between labor market inequalities, the health and vitality of the family as an institution, and broad, high-quality, and accessible public investments in human capital will not be (much) skewed by top earners.

A similar dynamic seems unlikely to unfold in the United States. While the imagined prospect of upward mobility for those in the lower part of the income distribution shares little in common with the generational dynamics of the top 1 percent, the latter may well continue to be an important touchstone for those in, say, the top fifth of the US income distribution.

After all, this group too has experienced significant growth in its relative standing, which partly reflects an increasing return to the graduate and other higher degrees for which they exerted considerable effort, but is also linked to a background of nurturing families and select colleges. This group has both the resources and incentives to turn more intensely to promoting the capacities of their children.

With effort and a bit of luck, it is not unreasonable for them to believe they may yet cross the threshold into the top 1 percent, and they can certainly imagine that their children stand just as good a chance, if not better. For them the “American Dream” lives on, and as a result they are likely not predisposed, with their considerable political and cultural influence, to support the recasting of American public policy to meet its most pressing need, the upward mobility of those at the bottom.