Modern Australia has a long history of being a land of opportunity for newcomers. Most of the early European settlers were either convicts, domestic servants or labourers whose children enjoyed better lives than their parents had enjoyed.
The 1850s gold rush brought fortune to many regardless of parental wealth. Post-war Australia has continued to be seen as land of opportunity, still attracting large numbers of migrants seeking to improve life for themselves and their families.
The foundations of modern Australia have been built on the concept of social mobility, being able to move up the social ladder, regardless of your parents’ socioeconomic status. But with major economies, including Australia, all experiencing rising inequality over the last 35 years, there has been a sharp refocus on how to ensure the fruits of prosperity are better shared by all.
A central concern has been entrenched disadvantage, where families and people seem to be locked into inter-generational poverty, an area of policy referred to as social mobility.
What is intergenerational or social mobility?
Social or intergenerational mobility refers to the likelihood that children born to parents from a certain income, wealth, or social group change their status once they become adults. More precisely, most of the discussions on social mobility refer to the probability that a young cohort jumps from a relatively low to a higher socio-economic group.
For instance, in a scenario with full intergenerational mobility in which parents’ wealth does not play a role in adult success, we would expect that one in every five children born to the 20% poorest households could work his way up to the top 20% of his cohort.
An alternative measure of social mobility is intergenerational earnings “stickiness”. That is, the higher the correlation between children’s and parents’ income or earnings, the less social mobility.
Picking the right intervention
It is important for policy makers to distinguish between social mobility and inequality. The former measures the chances that young individuals make a leap in the income distribution relative to their predecessors, while inequality refers to contemporary differences in income (or wealth) relative to the proportion of individuals belonging to each of such income groups. Thus, the more unequal an economy is, the higher the proportion of the wealth of the economy owned by the richest 20%.
At first glance, inequality and intergenerational mobility seem similar measures of the extent to which a society provides their citizens with equal and fair chances in life regardless of their background. The difference between both concepts is subtle, but targeting one or the other can yield significantly different policy recommendations and outcomes for taxpayers. For example, if the goal is to reduce income inequality, then redistributive transfers from the rich to the poor financed by a very progressive tax system carried in the same generation will reduce inequality in the short-run.
But to the extent this might potentially penalise productive individuals who might see their incentives to generate high economic growth reduced, it is unclear whether the transfers will necessarily yield a compensating increase in productivity by its recipients. Therefore, the cautionary tale is that a naïve target of inequality per se, could potentially harm the economy as a whole.
If instead, the primary goal is to increase income mobility, then policies aimed at enabling disadvantaged children to maximise their potential human capital are far more likely to improve their incomes in adulthood relative to their parents.
Indeed, there is overwhelming evidence that the single most important determinant of adult wages is educational attainment and that early childhood interventions are the most effective thanks to children’s malleability. Adequately timed and targeted investments in disadvantaged children allow them to escape a poverty trap and save taxpayers’ money in the form of lower future welfare payments, health expenses, costs of crime, and higher income tax revenues (Heckman, 2012).
This finding was reinforced by a recent Sydney University study by Professor Deborah Cobb-Clark and co-authors that used high frequency big administrative data to conclude that children of parents who are welfare-dependent, are 1.8 times more likely to need continued social assistance in the future.
The Great Gatsby Curve
With the caution that narrowly targeting inequality can lead to perverse results, it is true that inequality and social mobility are related in a statistical sense. This is because in highly unequal societies with large income differences between the poorest and the richest, it will also be harder for children born to poor families to jump from the bottom to the top once they become adults. In other words, where the gap between rich and poor is larger, it is simply harder for someone to work their way to the top groups.
Social mobility will be systematically lower in more unequal societies. This negative relationship between inequality and social mobility was first described by economist Alan Kruger in his role as a US presidential adviser and coined as “Great Gatsby Curve” in graph below:
We can see that, on average, the higher is the level of inequality of a country, the stronger is the relationship between children and parental income or intergenerational earnings stickiness.
Social mobility and inequality trends around the world
Over the last 30 years, there has been a significant increase in inequality among a range of developed countries, including Australia, as this recent graph from a study by Rampino demonstrates.
While we do not have available long international historical trends in intergenerational mobility data yet, the graph below shows a snapshot of cross-country differences in the level of earnings correlation between parents and children (the smaller the correlation, the higher the level of mobility). In a society in which children’s earnings were unrelated to their parents’, the intergenerational earnings elasticity would be zero.
The graph shows large variations in the level of earnings mobility between parents and children across the world. Emerging economies such as Peru and China have very low levels of mobility, while Scandinavian countries have longed enjoyed economies in which parental earnings are not such a key determinant of their children’s earnings.
Mobility and inequality in Australia
While the graph seems to indicate that the level of mobility in Australia was relatively high in 2012, according to a more recent and very careful study by Mendolia and Siminski (2016), Australia’s most recent estimate of intergenerational mobility is 0.35. This implies that, on average, an increase of 10% in parental income implies an increase in 3.5% of children’s income by 3.5%. This study re-ranks Australia behind Spain and just above Japan.
This comes as a 2014 survey about the estimated and desired levels of wealth distribution Norton et al. (2014) found high levels of misunderstanding about how we see ourselves. The survey found Australians overestimate the wealth of the poorest by a factor of more than seven — and underestimate the richest quintiles by a factor of five. We think that the richest quintile owns around 45% of Australia’s wealth while the actual figure is 60%.
The survey found we would prefer the wealthiest 20% in society to own just over a third of the nation’s wealth. The top 20% actually own just over 60 % of Australia’s wealth.
The report found strong cross-cultural support for more equal distribution, suggesting broad community support for more redistributive policies.
For policy makers pursuing a social mobility agenda, there is the challenge that by definition the outcomes will only come to be realised over a generation. This also presents an evaluation issue — how can we really know if the interventions we put in place today make a real difference?
Given the multi-faceted approach that is necessary, this makes it problematic to understand which interventions are going to be most effective.
Similarly many of these interventions are going to be delivered locally, aligning these programs with an effective local delivery strategy will be critical.
Donaldson, David (2015) Social Mobility lower than thought, says new research. The Mandarin, 27/11/2015. https://www.themandarin.com.au/57142-australia-less-equal-thought-says-new-research/. [last accessed 1st November, 2017].
Cobb-Clark D., Dahmann S., Salamanca N., and Zhu A. (2017). Intergenerational Disadvantage: Learning about Equal Opportunity from Social Assistance Receipt. LCC Working Paper Series: 2017-17.
Corak, James (2012). “The Economics of the Great Gatsby Curve: a Picture is Worth a Thousand Words.” https://milescorak.com/2012/01/18/the-economics-of-the-great-gatsby-curve-a-picture-is-worth-a-thousand-words/ [last accessed 30th October, 2017].
Heckman, James (December 7th 2012). “Invest in Early Childhood Development: Reduce Deficits, Strengthen the Economy.” The Heckman Equation.
Norton, M.I., Neal D.T, Govan C.L., Ariely D. and Holland E. (2014). The Not-So-Common-Wealth of Australia: Evidence for a Cross-Cultural Desire for a More Equal Distribution of Wealth. Analysis of Social Issues and Public Policy 14(1), 339-351.