Public policies for equality and social mobility

“Inequality matters. It matters because it has the potential to shape opportunity.”

This is how I begin the conclusion to a just finished paper that will serve as a background document for an event called “Equality of Opportunity—a Canadian Dream?” that will take place Tuesday evening, February 26th.

The event is organized by Canada2020, an Ottawa based think tank, and will take the form of a panel discussion moderated by Diana Carney and include as panelists  Carolyn Acker (founder of Pathways to Education), Zanny Minton Beddoes (the economics editor at The Economist), Ron Haskins (senior fellow at The Brookings Institution), and me.

The conclusion to my paper, “Public policies for equality and social mobility”, continues:

In the first part of this paper I have tried to describe [the relationship between inequality and opportunity], as it is summarized in the Great Gatsby Curve, pointing out that Canada had a moderate level of inequality about a generation ago, and that children raised during that period displayed a relatively high degree of generational mobility. Cross-country comparisons on these metrics are descriptive, and it is important to understand the underlying causes in order to draw appropriate inferences for public policy.

Overall income inequality reflects deeper inequalities that form the capacities and talents of children: inequalities in family structure and family resources, both monetary and non-monetary; inequalities in the structure of labour markets with which families must interact; and inequalities in the provision of public and community sources of support, income, and insurance. These three broad forces interact to determine the adult success of children. They are configured in different ways in different societies, and lead to different degrees of generational mobility.

This discussion raises a pair of related questions: has inequality increased? And, where it has, is there now a higher risk of lower mobility? In particular, has inequality increased in Canada, and does Canada risk sliding up the Great Gatsby Curve?

The second part of this essay documents the fact that inequality has indeed increased in Canada. Technology, free trade, and changing labour market institutions have all played a part, leading to a more polarized, unequal distribution of earnings and incomes. This means lower wages in the lower half of the distribution, higher wages in the upper half – including very high wages at the very top – and not much change at all for the typical household.

Does more inequality imply less opportunity for the next generation of children who will reach adulthood in the coming years and decades? I suggest that this will depend in part upon the public policy choices made in this era of higher inequality, and how effective they are: in fostering a higher-wage labour market, particularly among those in the lower half of the earnings distribution; in offering sufficient income support and income insurance through the tax-transfer system; and in fostering strong families and meeting their diverse set of needs in raising their children.

The final part of this paper discusses policy changes in these three domains – (i) labour markets and human capital development, (ii) taxes and transfers, and (iii) family – outlining how policy makers might be called to accept certain realities, advance new initiatives, and retreat from counterproductive policies.

An overall goal for policy makers should be to engender a high-wage labour market because of the simple reality that active labour market engagement is the main source of family income. If inequalities in the lower half of the earnings distribution are not too great, then lower income families will have reasonable levels of income allowing them and their children to participate normally in society. More money implies more mobility.

Tax and transfer policy has, in the past, played an important role in buffering and supporting families, and in muting the overall level of inequality. In an era of higher inequality it needs to continue to do this, but increasingly in a way that fosters labour market engagement. The policy changes I suggest are intended to offer income support but also income insurance. More money implies more mobility, but more uncertainty in monetary resources may imply less mobility.

Finally, if parents are required to be increasingly engaged in the labour market, then family policy must strive to help them balance family and work so that children continue to receive the time and attention – the whole host of non-monetary resources – needed for their full development. More money implies more mobility, but money is not everything: poverty of attention, experience and expectation are equally important determinants of adult success.

It is a very open question as to whether higher inequality will lead to less opportunity and mobility in Canada. The promotion of upward mobility from the bottom will require both effective and progressive public policies: effective in the sense of having causal impacts on the determinants of mobility, and progressive in the sense of being of relatively more benefit to the relatively disadvantaged. The effectiveness of policy can only be determined in a spirit of experimentation and evaluation, and certainly policy makers should strive to do no harm. But how progressive it can be is also an open question, higher inequality also influencing social choices by giving more voice to some groups than to others.

[ If you have an interest, the complete paper can be downloaded from the Canada2020 website, where I believe you can also get free tickets to attend the event if you are in Ottawa, or watch the live stream beginning at 17:00 Eastern on February 26th. ]