Income inequality has been a divisive issue the past few years. It has been a goal of the Obama administration to lessen this inequality due to its perceived effect on labor market outcomes, where the rich at a distinct advantage over the poor. A post on Greg Mankiw’s blog about a piece of research seems to shed some light on this issue. The research indicates that since the 1970’s, social mobility in the United States has remained at worst the same and could actually be easier.
Mankiw’s back of the envelope calculations show that the income one earns as an adult may be minimally effected by your parent’s income. He calculates that roughly 2% of the variation in income can be accounted for by parental wealth. The research is more comprehensive and seeks to address not the variation in wages, but whether parental wealth has an affect. By tracking 3.7 million parents and children born between 1980 and 1993 for income and things like college attendance, Chetty et al determined that social mobility has increased. While there is a perception of increased inequality, the paper points to this is due to the top 1% moving away from the center, skewing the distribution as it goes. The authors note that how far away the top 1% is from the rest has nothing to do with social mobility, and compares the effect with the a ladder:
“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).”
This is strong evidence that the extra money spent by rich parents is not having an outcome altering effect. While there is increased income inequality, the distance isn’t becoming harder to cover, only the disparity in outcomes between those that chose to put in the work and those that do not.
While there may be a correlation between having rich parents and going on to earn a similar (or larger) amount of money, money itself is probably not the cause. Traits like talent, motivation, and genes are hard to include in a regression. The question that society must answer is that if wealth isn’t affecting the outcomes of the next generation, is the redistribution of wealth really necessary? A strong case could be made for redistribution if the current distribution was binding in some way, making it more difficult to improve ones standing standing. However if it just making up for bad decisions, then the rationale is not nearly as strong. What is clear is that the American dream is alive and well if you know how to go about getting it. The tragedy is that so many don’t.