Tag Archives: social mobility

Increase the minimum wage to preserve social mobility

Greg Mankiw’s post this past Thursday regarding the minimum wage begs for discussion.  Perhaps it is because the post is nothing more then two links.  The issue of raising the minimum wage however is not that simple. Those that support an increase point to all the people that it could help, and argue that it wouldn’t cause damage to the recovery and may even help it.  Those that oppose the increase marginalize the effect and worry about distortions of the labor market.  While there is research to support the case that no negative effects would come from the increase, I feel there is a stronger case to be made.  While many are troubled by income inequality, I feel that a certain amount of inequality is both good and necessary.  What is far more important is social mobility.  The Federal Government should increase the minimum wage in order to maintain the social mobility that is critical to the United States economy.

Increasing the minimum wage can increase social mobility directly.  There is a lot of research to support the claim that an increased minimum wage results in things like increased productivity, higher employee morale, and increases employee retention.  Happy employees that are more productive and work at a job longer don’t stay entry level for very long.  By increasing the minimum wage, you can increase the workers chance of gaining the skills they need to command a bigger wage.  More money also makes it easier for them to make the decisions needed to get out of poverty, as research shows that those living in poverty actually suffer cognitive impairment because of it.  A little bit more of a margin for error could be all someone needs to be able to consistently make the decisions necessary to improve their life.

The current federal minimum wage is at $7.25/hr.  $7.25/hr. is low, representing roughly $15,000 a year, which is barely more then the federal poverty level for an individual of $11,670, before taxes.  Increasing the minimum wage to the requested $10.10/hr. may prove to have too much opposition, as the Congressional Budget Office predicts that could cost up to a million jobs through 2016.  In order to expedite the process by removing such arguments against an increase, an increase to $9/hr. could be implemented.  As the CBO paper shows, this would result in far fewer predicted losses.  It would also raise the annual income to $18,720/year, which provides a little breathing room above the poverty level.  It should be noted that states would still be able to increase their minimum wage if they felt conditions warranted an increase.  For instance, San Francisco has a rate of $10.74 (and an unemployment rate of 4.8%, well below the national average).  This reflects both the higher cost of living in the city, as well as the lack of negative effects of increasing the minimum wage, despite serious income inequality.

The opponents of the increase are right about something though. Increasing the minimum wage will not fix is poverty.  But this shouldn’t be the revelation that the opposition makes it out to be.  If minimum wage laws fixed poverty, then why are we still dealing with it?  Poverty is a complex social issue that depends on more then just income.  Increased social mobility can aid in the fight against poverty, by making it easier to better oneself and rise out of poverty.

The minimum wage in 1960 was $1.60/hr.  Adjusted for inflation, today that is $10.56/hr.  Increasing the minimum wage, and the benefits that come with it like worker retention and increased productivity increase social mobility by creating paths out of poverty.  Even though you can’t make someone take such a path, it must be available to everyone.  To encourage this, the minimum wage should be increased to at least $9/hr. in order to preserve the social mobility that has been a hallmark of the United States since it was founded.

What Can Your Great-Great-…-Great-Grandparents Do For You?

The Economist has an interesting interview with Gregory Clark, an economic historian at UC Davis, who has recently published a book about social mobility. He claims that it is large, hugely persistent, can’t be influenced by policymakers, and is overall a really big deal.

This might surprise you, since a lot of people like to point out that income mobility in the US isn’t so bad, or at least hasn’t been declining over the last 30 years. Which really isn’t much of a statement, because that might still mean that it’s just been persistently terrible. Whatever you think about income mobility (it’s worth pointing out, for example, that certain regions provide much better chances to ‘move up’ in life), it’s worth noting that social mobility is actually much more than just how much money you make relative to your parents. And that’s at the core of Clark’s book.

Basically, he argues that there’s much more to social status (and the influence that comes with it) than just income. Think about education, for example, or holding public office. Depending on which metric you use, Bill Gates either descended in social status compared to his folks (he doesn’t have a college degree), or easily surpassed them (he’s the richest man in the world, after all).

So Clark developed an index of social status, or as he calls it, ‘social competence’, taking into account several dimensions of it, and tracks how parents’ and kids’ status are related over time. And when I say over time, I mean he goes back to the middle ages (at least wherever records permit). That’s another core part of his study: his time series data stretch back for centuries. I hadn’t thought about this too much, but it’s true that if you only have data on one or two generations of people, it’s quite possible that an increase (or decline) in status from one generation to the next is simply a ‘fluke’ in the data; someone just got lucky for once. So increasing the number of periods you look at is a sensible idea.

So he has this huge data set; what does it tell him? Clark concludes that social mobility is extremely low, both across countries and over time. He also concludes that government policies have no influence on it whatsoever. I haven’t read the book, so I don’t know how valid this concern is, but it seems his analysis comes very close to saying this low mobility is basically justified. Those who are at the top are there because they’re simply ‘better’ than others in terms of their necessarily inherited social competence.

So what now? Despair in the face of a social mobility problem that we can’t overcome? Accept it, because those at the top somehow ‘deserve’ to be there? I want to be very clear here. I’m not spending this much time talking about the book because I agree with his conclusions. I don’t, especially not the last one. I also think that the idea of ‘deserving’ to inherit more social competence and hence power is nonsense, because that would imply that you somehow deserve your parents. I doubt that.

Plus, on a more technical note, there’s no good reason to believe that something that you can track from the middle ages up until today will stick around in the future. Societies have undergone changes over the last 100 years that were more dramatic than anything we’ve seen before. So this data set probably puts too much weight on observations from a time when the whole institutional backdrop of this debate was radically different. Way back when, you could literally inherit your mom’s or dad’s claim to the throne (hell, in some places you still can, unless your mom seems dedicated to outlive you). Because really, what we usually care about isn’t so much average social mobility over time – it’s marginal social mobility right now.

However, there are some really important points to draw from this. One is that quite often, we underestimate the limitations of our data. Looking at what happens from one generation to the next in one country at one point in time isn’t at all the same as saying, “generally, this is how parents’ and kids’ status are related”.

Another, and really the more important one (for me at least) is that when we talk about social mobility and inequality, we often talk about money. We go straight to income inequality and income mobility, as though the only thing that determines whether everybody has the same chance at a good life is determined by how much money they can make. It’s really much more than that (although having a ton of money helps). If we found that even today, quality of life is highly correlated between parents and their children, and perhaps even found that there’s a causal relation there, that should be a big part of our debate.

Proposed US VAT tax has potential to hurt more then help

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New research from the University of Michigan Law School conclude that to address the growing income inequality in the United States, the federal government should institute a Value added (VAT) tax.  It is argued that such a tax would decrease income inequality by providing more funding for social safety nets like food stamps and social security and Medicare.  These programs are vital to a healthy American economy, however current economic realities would make this policy a disaster. By instituting what is effectively a national sales tax, the only thing the government would decrease would be demand and employment.

A national sales tax is not an affective means to reduce income inequality and will only cause massive damage to the economy.  By adding on yet another tax, many things in the economy become more expensive.  This decreases demand, which is precisely what the United States needs to be increasing right now.  Decreased demand and increased costs also cause unemployment, when a decent job is the only real way out of poverty.  If you want to fix income inequality in current economic conditions, raising taxes isn’t the answer.  Consider this article in Forbes.  The article itself keeps the situation too simplistic to give it a proper treatment, but their second point does provide some insightful information (and a subscription req. link).  According to their research, “In 2006, a whopping 81.4 percent of families in the top income quintile had two or more people working, and only 2.2 percent had no one working. By contrast, only 12.6 percent of families in the bottom quintile had two or more people working; 39.2 percent had no one working.”  While they write this off as obvious, it speaks to the heart of the problem.  If mobility is the same as ever (an assumption that will be addressed shortly), but inequality is growing, and the top 20% work over 3 times as many paid hours then the bottom 20%, what the country needs is jobs.

There is also a more subtle reason to believe this policy will fail.  This is because the problem it tries to solve is not a national problem.  Research shows that social mobility, and even income inequality are explained better by geography then time.  To quote the researchers, “The U.S. is better described as a collection of societies, …some of which are ‘lands of opportunity’ with high rates of mobility across generations, and others in which few children escape poverty.” A policy that effectively closes the gab in San Francisco most likely is not what is needed in New York, or Alabama for that matter.  While income inequality has increased, whether the situation as a whole has gotten worse is unclear, as the researchers note “A useful visual analogy is to envision the income distribution as a ladder, with each percentile representing a different rung. The rungs of the ladder have grown further apart (inequality has increased), but children’s chances of climbing from lower to higher rungs have not changed (rank-based mobility has remained stable).”  So while yes, people do make more money, it’s just as ever to do it.  This casts some doubt on the importance of the relatively small increase in inequality.  What is clear however is that a national program that is trying to address local problems isn’t going to do anything but waste resources.

Instituting a VAT tax in the US doesn’t make sense.  It is not the correct time or the correct place for such a tax, and the federal government may not even be the entity capable of fixing the problem.  Funding social safety nets is an important priority, but we shouldn’t risk so much to do so.  As the United States recovers and adds jobs, social mobility will shrink the income inequality, and more people will be paying taxes to fund these programs.  In order to decrease income inequality, the government should be worry less about its own income, and more about the missing income of millions of Americans.