Sunday, November 1, 2009

No American Dream without Social Mobility

The American Dream

Income disparities in America have been growing for years as the very rich got richer and the rest of society stagnated economically. But the American Dream is till alive, isn't it? You can still advance based on your abilities and not your family background, can't you?

It's All Based on Social Mobility

We like to think of America as a land of opportunity, where anyone can succeed no matter how rich or poor he or she starts out in life. Unfortunately, America does not compare well to other advanced countries when it comes to the basic precondition for the American Dream, social mobility. There are many advanced countries where the social rank of a child's family means a lot less than it does in America for that child's educational achievement and chances of future economic advancement.

New Data from the OECD

Now comes a report from the Organization for Economic Cooperation and Development examining social mobility in the advanced economies. Orsetta Causa and Asa Johansson, the authors of Intergenerational Social Mobility, find that there are many advanced countries where the economic conditions of a child's family mean a lot less than they do in America for that child's future educational achievement and economic advancement in life.

What They Found

The influence of parental background on individual earnings varies widely across OECD countries, but low mobility across generations, as measured by a close link between parent’s and children’s earnings, is particularly pronounced in the United Kingdom, Italy, the United States and France. Mobility is higher in the Nordic countries, Australia and Canada.

The influence of parental socio-economic status on students’ achievement in secondary education is particularly strong in the United States, France and Belgium, while it is weaker in some Nordic countries, as well as Korea and Canada.

Inequalities in secondary cognitive skills are likely to translate into inequalities in post-secondary educational achievement and subsequent wage inequality in the labour market.

The Role of Social Policy

According to the report, any measure that reduces inequality will make it easier for individuals to break free of the constraints of their backgrounds. More progressive income taxation and higher short-term unemployment benefits were found to be helpful. Both were associated with a looser link between parental background and outcomes for children's cognitive skills and wages. If children are to succeed based on their own merits, they need equal access to the means of self-help.

Good for Economic Growth

Not only is social mobility fair, but it can be good for all of society. The report points out "the ability of an economy to continuously allocate human resources to their best use can have important effects on economic performance". The better the opportunity to succeed on your own merits, the better your skills will be employed in the economy. By understanding how economic growth and equal opportunity are mutually supporting, we can design policies to encourage both.

Worrying Trends in Income Inequality

With the gap between rich and poor growing so rapidly, it is no surprise ifthe American Dream is fading. A 2008 OECD report found that this trend is persistent and getting worse rapidly. (See Growing Unequal? Income Distribution and Poverty in OECD Countries, Country Note: United States.) The trend goes back to the 1970s, but since 2000, income inequality has increased rapidly.

Rich households in America have been leaving both middle and poorer income groups behind. This has happened in many countries, but nowhere has this trend been so stark as in the United States.

The distribution of earnings widened by 20% since the mid-1980s which is more than in most other OECD countries. This is the main reason for widening inequality in America.

As a result, the United States is the country with the highest inequality level and poverty rate in the OECD, with the exception of Mexico and Turkey. Just consider the data: "The average income of the richest 10% is US$93,000 US$ in purchasing power parities, the highest level in the OECD. However, the poorest 10% of the US citizens have an income of US$5,800 US$ per year – about 20% lower than the average for OECD countries."

We Need to Overhaul Social and Economic Policy

No one wants his or her children at a disadvantage in life merely because they lack the advantages available to the rich. However, as the 2008 OECD report notes: "Redistribution of income by government plays a relatively minor role in the United States." Unless we design policies to increase social mobility, we will continue to underuse our society's human resources and suffer sub-par growth. Meanwhile, other nations are growing quickly, and their people are reaping the benefits.

We aren't a third world country -- not yet -- but we can do better. After all, we still see outselves as a world leader, and maybe we can act like a leader. Social stratification is growing in America, and we must act to reverse the trend if we are to preserve the American Dream.