Social mobility lower than thought, says new research

By David Donaldson

November 27, 2015

Australia likes to think of itself as the land of the fair go, but new research suggests it’s not as easy to get ahead for those from poorer backgrounds as was once thought.

The finding means parents’ incomes are a greater determinant of what their children earn, with wealthier parents passing on their advantages to their children at higher levels than those in New Zealand, Japan, Germany and Sweden, all of which it was previously believed had lower mobility.

“Australia is not particularly mobile in an international context”, conclude Silvia Mendolia and Peter Siminski of the University of Wollongong in a paper on Australians’ intergenerational mobility. The revised number still ranks Australia as better than France, Italy, United States and United Kingdom, however.

Shadow assistant treasurer Andrew Leigh, who calculated the old number when he was a professor at the Australian National University in 2007, said it was concerning that Australia has lower intergenerational mobility than was thought.

“Their estimate of Australian mobility should be regarded as the benchmark today, and it’s deeply troubling that they find a result which suggests that we’re less mobile than had previously been estimated,” he told The Mandarin.

The study brings in more data than previous estimates to find that Australia’s intergenerational earnings “elasticity” is 0.35, rather than 0.25. This means that if a father’s income rises by 10%, his son’s eventual income will be 3.5% higher on average. The previous benchmark, created by Leigh, estimated a 10% higher income for a father would lead to only around a 2.5% bump for his son.

The equivalent number in the United States, which has lower mobility, is 4-6%. In Denmark, which has the highest level of intergenerational mobility, an extra 10% on a father’s income contributes only around 1.5% to his son’s.

“The difference between an elasticity of 0.25 and 0.35 is large, and means that it’s even harder than one might have thought to move from rags to riches over a generation,” said Leigh.

The incomes of fathers and sons are used to measure intergenerational inequality because historically many women did not work.

Rising unemployment, the abolition of federal inheritance taxes, increasing concentration of unemployment in certain areas and rising inequality are all factors that could act as a drag on intergenerational mobility, Leigh suggested in his 2007 paper.

The new findings place Australia much closer to where the ‘Great Gatsby curve’ theory would predict, given its level of income inequality. The theory says higher income inequality leads to lower levels of intergenerational mobility.

Although the data should not be read as providing a comparison between intergenerational mobility levels in 2007 and 2015 — the data sets partly overlap — the finding will no doubt concern policy makers. The higher the level of income inequality, the less likely it is Australians will have the ability to move between economic classes, suggesting talented individuals from poorer families will find it harder to rise to the top.

This could help explain why inequality tends to be associated with lower growth — the rise of income inequality between 1985 and 2005 has been estimated to have reduced economic growth of the OECD area by almost 5 percentage points. Australia’s level of income inequality sits around the middle of the developed countries.

The average income of the top 10% of Australian income earners is almost nine times higher than that of the bottom 10%, up from a ratio of eight to one in the mid-1990s.

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