Social and Income Mobility

June 21st, 2013 at 10:00 am by David Farrar

We hear a lot about income inequality. I find this to be a fairly unsophisticated measure, as it assumes people stay at the same income level thoughout their life. Of course people at age 18 earn a lot less than someone at age 50 with 30 years experience.

What I think is much more important is that people born into a poor household, have the opportunity to earn more than their parents did, and that wealth is earnt not just inherited.

A CIS publication has this graph from Australia.

socialmobility

 

So only a quarter of those born to a father in the bottom quintile end up in that quintile themselves. 74% move into a higher quintile including 54% who move into the middle or top two quintiles. That’s a good thing. It is not a perfect distribution (which would be 20% in each quintile) but it is far far from static.

Also 17% of those born to the wealthiest quintile, end up in the bottom quintile. So wealthy parents do not guarantee that you are wealthy. In fact 72% end up outside the top quintile.

This is what policy makers should focus on. Social and and equality of opportunity. Not on insisting an 18 year old should be paid the same as a 50 year old, or that an intern should be paid comparable wages to a group general manager.

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17 Responses to “Social and Income Mobility”

  1. Albert_Ross (247 comments) says:

    Did it also provide a comparison between fathers and daughters?

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  2. SPC (5,392 comments) says:

    In the USA it is now being called the right of those born into the middle class to fall out the bottom …

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  3. PhilBest (5,117 comments) says:

    Thomas Sowell is an excellent author on this general subject.

    Generally, an economy in which the top 1% by income “churn” rapidly, and get there by honestly competing for customers for desired goods and services, is an economy in which all boats are being lifted.

    The bleeding heart socialist types generally haven’t got a clue about the difference between this and “rent seeking”, or becoming wealthy by getting zero sum transfers of wealth from everyone else, without actually creating any in the process.

    It is often “statist” policies that have the result of enriching “rent seekers” and strangling genuine wealth creation. Urban planning is a classic example. So are regulatory “protections” that favour incumbents and even monopolies.

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  4. SPC (5,392 comments) says:

    Phil, all very well, but most of the wealth gains amongst the 1% come from rising value of their invested capital in the ownership of property/stock unrelated to any market good or service provided by them. And most of their recent capital wealth gain is from

    1. easy money of the Fed c2002
    2. QE.

    as each inflated the stock market value of their savings.

    Funny how printing money is derided as destroying saving, when in the real world it inflates the value of the savings of the richest of all.

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  5. Weihana (4,496 comments) says:

    DPF,

    What I think is much more important is that people born into a poor household, have the opportunity to earn more than their parents did, and that wealth is earnt not just inherited.

    I think the simple answer to this issue is that poverty is a disadvantage, clearly, but there are opportunities for a “fair go”.

    However, given the median individual income for Australians over 15 is about 30k per annum I’m not sure being in quintile 2 or 3 actually means you are that much better off than your parents, although median household income is about 60k.

    Also, “earnings” does not equate to “wealth”. There is a world of difference between having a low income, whilst having a father who can dole out the cash when you need it, and having a low income and the rest of your family also has a low income. A 22 year old unemployed man living in his father’s million dollar home is somewhat different to a 22 year old unemployed man without that support.

    In any case, probably best for people to focus on the opportunities rather than feeling sorry for oneself. Positive people are probably more likely to be the ones moving up quintiles.

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  6. Weihana (4,496 comments) says:

    PhilBest (5,091) Says:
    June 21st, 2013 at 10:33 am

    Thomas Sowell is an excellent author on this general subject.

    Generally, an economy in which the top 1% by income “churn” rapidly, and get there by honestly competing for customers for desired goods and services, is an economy in which all boats are being lifted.

    I think I recall Sowell using a similar table like this for the United States which, I believe, showed pretty much the same thing.

    But the top quintile is not the top 1%. If you are in the top 1% there is little chance that you are going to wind up penniless. Not impossible of course, but as SPC points out, these people can live off their capital. In this table I see no evidence that this 1% is “churning rapidly” and retaining their status because of their appeal to customer demand. They retain their status because they have bucket-loads of capital. And that may be genuinely earned by the individual who possesses such, but it is less of a competition once you reach a certain point.

    The 1% are generally in a class of their own: modern day patricians. The realistic opportunity in society for most people is to advance to a position of upper middle class: own your own home with a comfortable income. To suggest that the 1% is turning over rapidly and that anyone has an opportunity to advance to that level is unrealistic in my view.

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  7. simonway (371 comments) says:

    I’d prefer to see a table with similar data on vigesiles, or at least deciles.

    I think it’s interesting that when you’re looking at children from the poorest families, there’s a very sharp drop in the number that make it to the richest quintile, when compared to the others.

    Here’s the information in graphical form.

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  8. Fentex (865 comments) says:

    I wonder what this table would look like if instead of measuring across fifths of slices of wealth it measured across fifths of slices of population distribution of wealth.

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  9. Kimble (4,379 comments) says:

    Consider this table a measure of the annual change in wealth.

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  10. Ryan Sproull (7,028 comments) says:

    There’s a fairly compelling argument for using this kind of analysis as a measure of equality of opportunity across all factors in a society. Basically, you take all morally irrelevant conditions of birth and map them against outcomes like income, life expectancy, prison population, etc. The more even the spread, the more just the society.

    Another way of putting it is – the harder it is to predict someone’s success just by knowing the conditions of their birth, the more just the society.

    So in an unjust society, you can be pretty confident that someone born poor will end up poor, or someone born with a certain skin colour will die young, or someone born into a certain religion will end up in jail.

    In a just society (opportunity not affected by morally irrelevant conditions of birth), everyone’s just as likely (at birth) to succeed or fail, by whatever standards of “success” are being applied.

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  11. PhilBest (5,117 comments) says:

    SPC (3,087) Says:
    June 21st, 2013 at 10:40 am

    “Phil, all very well, but most of the wealth gains amongst the 1% come from rising value of their invested capital in the ownership of property/stock unrelated to any market good or service provided by them. And most of their recent capital wealth gain is from

    1. easy money of the Fed c2002
    2. QE.

    as each inflated the stock market value of their savings……”

    Quite so; I am condemning that unreservedly.

    My point is that most of the bleeding heart lefties look at the figures on wealth distribution, and go “right, let’s get these fat cat employers of workers”……. when the employers of workers are suffering from exactly the same problems – the rent seekers in “big finance” and “big property” gouging them.

    The share of total profits in the US economy was about 15% forty years ago and is now nearly half.

    But who is likely to tackle this? Is Wall St scared of Barack Obama? Or Clinton/Gore/Edwards?

    They are SHITE scared of Ron Paul and the Tea Party types generally. They are not in the least bit scared by the bleeding heart lefties – in fact those people rely on their campaign contributions.

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  12. PhilBest (5,117 comments) says:

    Weihana, what I am saying is the problem, is the same as what you are saying is the problem. The rent-seekers are helping to strangle to death, the honest wealth-creating employers of labour, who nevertheless seem to perpetually get most of the blame from the political representatives of labour.

    I say end the rent seeking, and stop going so hard on actual wealth creating business men, those who utilise resources (shock, horror) and employ labour.

    If you penalise the utilisation of resources and the employment of labour you are almost certain to get a rise in rent-seeking activity supplanting the honest “rich”.

    I would love to see an analysis on social mobility in “America’s Growth Corridors”.

    http://online.wsj.com/article/SB10001424127887323549204578315714070017932.html

    See also:

    http://www.newgeography.com/content/003777-as-north-rest-its-laurels-south-is-rising-fast

    I suggest that the economic growth occurring in the growth regions of the USA is of the honest type while New York and the “old cities” are infested with rent-seeking rackets. Low housing costs and a high level of opportunity for honest wealth creation, where it exists, will be doing wonders for social mobility as well as economic growth. The rent seeker wealth increases are cancerous – they are at the cost of the real economy and the real economy will be dying even as the rent seekers are getting richer and richer.

    I suggest that honest solid economic growth (especially as opposed to bubbles in asset values) implies an absence of rent seeking and a higher level of social mobility.

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  13. Richard29 (377 comments) says:

    Interesting analysis and it makes me feel very grateful to live in a reletively free developed economy like NZ. :)

    Although I would second Weihana’s point that this is measuring income not wealth. There is a world of difference between income before and after costs and inherited capital plays a role in that. Rent can make up 30-40% of spending for a low income family, debt payments on cars, appliances etc are often on top of that – a person from a richer family who lives in a freehold home with no debt could have the same taxable income but a dramatically different discretionary income after costs.

    This income/wealth distinction might also explain the 17.7% of sons of top income quintile fathers who are in the bottom income quintile. We shouldn’t assume that they are there because they are feckless screw ups who can’t find employment. A number of them may have chosen to take advantage of their wealthier background to dedicate their lives to social service, art, music, family, faith or some other area that is not going to provide a big income but may fulfil them more. “Follow your bliss” and all that…

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  14. PhilBest (5,117 comments) says:

    Victor Davis Hanson: ‘Oddball heaven’ works for America

    http://www.washingtontimes.com/news/2013/mar/25/oddball-heaven-works-for-america/

    “For all the Obama-era talk of decline, there is at least one reason why America probably won’t, at least not quite yet.

    “Peak oil” and our “oil addiction” were supposed to have ensured that we ran out of either gas or the money to buy it. Now, suddenly, we have more gas and oil than ever before. But the key question is: Why?

    The oil and gas renaissance was brought on by horizontal drilling and hydraulic fracturing, or “fracking,” that opened up vast, new reserves either previously unknown or considered unrecoverable. Both technological breakthroughs were American discoveries, largely brought on by entrepreneurial mavericks and engineers exploring on mostly private lands. Couldn’t the Saudi, Venezuelan or Nigerian oil industry have discovered these new methods of resource recovery, given their nations’ reliance on petroleum exportation?

    The world now wakes up to iPhone communication, Amazon online buying, social networking on Facebook, Google Internet searches and writing and computing with Microsoft software. Why weren’t these innovations first developed in Japan, China or Germany — all wealthy industrial countries with large, well-educated and hard-working populations? Because in such nations, young oddballs like Jeff Bezos, Bill Gates or Steve Jobs more likely would have needed the proper parentage, age, family connections or government-insider sanction to be given a fair shake.

    Even in its third century, America is still the most meritocratic nation in the world. Unlike the caste system of India; the class considerations of Europe; the racial homogeneity of China, Japan or South Korea; the tribalism of Africa; or the religious orthodoxy of the Middle East, America is still a place where one can offer a new idea, invention or protocol that is judged on its merits, rather than on the background, accent, race, age, sex or religion of the person who offers it.

    Businesses evaluate proposals on the basis of what makes them lots of money. Publishers want writing that a lot of people will read. Popular culture is simply a reflection of what the majority seems to want. In the long run, that bottom line leads to national wealth and power.

    If history is a guide, the most savvy Chinese citizen of Japanese descent would not make it as a high official in Beijing’s Communist Party — no more so than a brilliant Japanese citizen of Chinese descent could run Toyota or Honda. A white Croatian of enormous talent could not end up as president of Sudan.

    Mexico has a word, “Raza,” that conflates race and nationality, in the way that the German word “Volk” used to suggest not just being German, but looking German as well. I doubt that either country would ever elect a black head of state.

    It would be virtually impossible for the most talented Christian or Jew to be allowed to head contemporary Egypt, or for a brilliant four-star Buddhist general to run the Iranian military. For the immediate future, don’t expect a female business-school valedictorian to manage Saudi Arabia’s national oil company. Note that in all these cases, such exclusions derive from criteria other than innate talent, character and industriousness, and can result in the lesser qualified being considered the only qualified.

    The mixture of consumer capitalism and constitutionally protected free speech — and all sorts of races, religions and ethnicities — sometimes means that America can be a wild place with a popular culture that appears crass and uncouth to those abroad. Our generation’s $17 trillion national debt, unfunded entitlements and nearly 50 million people on food stamps might convince the Founding Fathers that they had spawned license rather than guaranteed liberty.

    Yet the upside to the wild arena of America is that almost anyone is free to enter it. Oprah Winfrey, a black woman, reinvents the genre of daytime talk shows and builds a media empire. Warren Buffett outpaces New York’s Wall Street — from Nebraska. A one-time five-and-dime owner from Arkansas, Sam Walton, refashions the way an entire planet buys stuff. A Russian emigre, Sergey Brin, co-founds Google, perhaps the most indispensable site on the Internet.

    Just when we read obituaries about an unruly nation of excess, unlikely nobodies pop up to pioneer fracking, the Napa wine industry or Silicon Valley. Why? No other nation has a Constitution whose natural evolution would lead to a free, merit-based society that did not necessarily look like the privileged — and brilliant — landed white male aristocracy who invented it.

    The end of American exceptionalism will come not when we run out of gas, wheat or computers, but when we end the freedom of the individual, and, whether for evil or supposedly noble reasons, judge people not on their achievements, but on their name, class, race, sex or religion — in other words, when we become like most other places the world over.”

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  15. Kimble (4,379 comments) says:

    I think it’s interesting that when you’re looking at children from the poorest families, there’s a very sharp drop in the number that make it to the richest quintile, when compared to the others.

    Not as interesting as the fact that children from the lowest fifth are MORE likely to end up in the second highest fifth than anyone else. Even people who were born into that fifth!

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  16. Kimble (4,379 comments) says:

    Philbest, post the link, briefly describe its contents, and leave it at that.

    Copying and pasting the entire article just forces people to ignore your post, ignore the link, and ignore you.

    It is also poor internet etiquette. And that’s really saying something. The internet has 4chan!

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  17. Harriet (4,513 comments) says:

    SPC #
    “….Phil, all very well, but most of the wealth gains amongst the 1% come from rising value of their invested capital in the ownership of property/stock unrelated to any market good or service provided by them…”

    So what?

    Besides the fact that they don’t own ALL the stock – are you seriously saying that people, be they rich or poor, are not allowed to own stock outside of their related job?

    How the hell are the poor allowed to get rich in your ‘perfect world’ if they worked at a fish and chip shop? – leave and work at Maccas so that they can then invest in Maccas stock? That’s stupid!

    Small companies start up and need investment capital, and the 1% may sell some of their stock and invest it in those small companies – like seafood processors – who can then employ maccas staff on better wages!

    People like you on the left only look at the economy from a % point of view.

    You progs haven’t even got an understanding in very simple maths – like addition! :cool:

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