Merit, Privilege or Slumdog Millionaires? Income Inequality and Social Mobility

April 23, 2013

     By Duncan Green     

In memory of Sebastian Levine, who liked to read these posts.RFN mugshot

This post is written by Ricardo Fuentes-Nieva, Oxfam’s Head of Research (twitter @rivefuentes)

In Danny Boyle’s movie Slumdog Millionaire, the young character wins a large pot of money against all odds. The movie is a fantasy tale for all practical purposes. The hero knows the responses posed to him in a quiz show through a number of coincidences and lucky breaks. It was his only chance to become wealthy.

What type of societies give better, more just chances to everyone? What is the connection between opportunity and socio-economic disparities? There are, at the risk of being simplistic, two broad sources of inequality: inequality resulting from individual entrepreneurship and effort (I’ll call it merit inequality) and the inequality that reproduces privilege and elite capture (I’ll call it privilege inequality).

A simple way to discover whether inequality is actually a result of merit is to think how far effort and hard work can take us. I recently heard Kaushik Basu, the new Chief Economist at the World Bank, detail an anecdote about this during a meeting with civil society people in London.  When Basu visits his home city of Kolkata he goes for long walks and sometimes he wanders around a privileged district that stands in sharp contrast with the nearby slums. The close proximity of the two vastly different lifestyles ensures that slum dwellers also visit this district. Then Basu said, to the best of my recollection: “it is not fair to tell a kid in the slum that by working hard he will be able to achieve the wealth needed to live in that neighbourhood.”

It is a candid story that got the attention of all people present in the meeting. It makes a powerful point. What Basu was pointing at is that perfect social mobility does not exist. Basu focused on the immorality of a development narrative that promotes aspirations that cannot be attained – the slum kid that will not become a rich mogul. I want to focus on the existing rigid class structures and how they limit opportunity.

Equality of opportunity is a central tenet of modern societies, but it implies that family characteristics should not have a strong influence on the opportunities someone faces throughout life. Empirical evidence shows that is not the case. There is a strong correlation between children’s chances and their parents socio-economic status. A book aptly titled “Persistence, Privilege, and Parenting” put it like this: “The abundant evidence in the economic, demographic, and sociological literature of the association between parents’ and children’s social positions makes it very clear that children’s chances for a good life are highly dependent on their social origins or socioeconomic status

Social mobility is far from perfect – where you’re born will have some influence on where you end up. But what is the actual correlation between inequality and social mobility? It turns out it’s rather high. Several academic papers (look here, here and here) show this. Take, for instance, recent research by Miles Corak. In this graph, Corak plotted the Gini coefficient (a standard measure of inequality) against “intergenerational elasticity between fathers’ and sons’ earnings” (or how much someone’s income is determined by their parents’). In Denmark, for instance, a country with a low Gini, only 15 percent the a young adult’s income today is explained by their parents’; in Peru, where the Gini is amongst the highest in the world, two-thirds of what someone earns today is related to what their parents earned in the past. Alan Kruger, a former senior official in Obama’s administration and professor at Princeton, dubbed this relationship “The Great Gatsby Curve” (a movie with Leonardo Di Caprio is coming if you don’t feel like reading the book). The rich are different from you and me. And so their offspring are too.

Figure: Like father like son? Parents’ earnings influence income of offspring, and more so in countries with high inequality.

Ricardo inequality fig 1Note: Income inequality in the horizontal axis, persistence of income across generations in the vertical one.

Source: M Corak (2012) Inequality from generation to generation: the United States in Comparison.

A recent debate on The Economist site shed more light on the issue. In a blog post, Francisco Ferreira from the World Bank showed the relationship between opportunity and mobility. Here’s the graph.

You can only climb the social ladder if you have opportunities

Ricardo inequality fig 2

Note: persistence of income across generations in the horizontal axis, inequality of economic opportunity in the vertical one.

Source: Brunori, Paolo; Ferreira, Francisco H. G.; Peragine, Vito. (2013) Inequality of opportunity, income inequality and economic mobility : some international comparisons

Countries where economic opportunity is low also present low levels of mobility – Norway is a mobile society where there is low inequality of opportunity, while Brazil, for all its progress, still shows a rigid society with higher levels of inequality of opportunity. The indicator Ferreira and co-authors use in their research (inequality of economic opportunity index) is not without flaws but it’s a solid attempt to capture how much someone’s ability to participate in the economy is determined by circumstances outside their control – characteristics you cannot change easily (race, parent’s education, sex and the like). Ferreira and his co-authors conclude: “The evidence reviewed suggests that an important portion of income inequality observed in the world today cannot be attributed to differences in individual efforts or responsibility. On the contrary, it can be directly ascribed to exogenous factors such as family background, gender, race, place of birth, etc.” Their evidence indicates that privilege inequality trumps merit inequality.

Why? Because privilege persists across generations through difference in access to education, health and social and professional networks and it starts very early in life. This is the connection between income inequality, inequality of opportunity and social mobility. In countries with high income inequality, you only have opportunities if your parents had them too. Ferreira explains “as the rungs of the ladder grow further apart, it gets harder for people to climb up (or move down). Conversely, countries with institutions that promote a level playing field, and redistribute income or opportunity, may also promote mobility”.

The evidence that income inequality limits our control over our destiny is strong. We know something about the dynamics of the class divide. There are some examples of increased mobility throughout history in Britain and the US. As The Economist puts it “…in both America and Britain the effect of high (or low) incomes in one generation lasts for at least two more. Yet [Long and Ferrie’s] study also suggests it is possible to break patterns of immobility. Although American and British mobility rates had converged by the middle of the 20th century, America’s social order was considerably more fluid than Britain’s in the 19th century. The past has a tight grip on the present. But in the right circumstances, it can apparently be loosened. “. So it is possible  to change the level of mobility in society.

We need to understand better how to loosen those circumstances to make societies more fluid but we know that inequality hampers it.  The higher the inequality level in societies, the farther we are from that ideal that with hard work we can achieve what we set our minds. Then, like in Slumdog Millionaire, only an implausible array of coincidences allows people to move up the ladder. How can we support the narrative that says hard work and effort will really improve poor people’s relative position in society when we know that with growing inequalities it becomes much harder?

Tomorrow, I wonder what the aid biz might actually do differently as a result of all this renewed focus on inequality