The Occupy Wall Street movement has gained traction globally under the banner of speaking up for the 99% in an era of growing income inequality. But while the protesters camp out in cities around the globe, low-income earners in the US, and many other developed nations, have been camped out themselves for the past two decades – in Struggle Street. Families are now occupying the bottom rungs of the income ladder over generations, as observed by declining trends in upward mobility.
Inequality in a dynamic capitalist economy is to be expected. If equality arises as a result of variation in work effort and entrepreneurial endeavour, then its impact on social cohesion is limited, as opportunities are available for lower income individuals and families to climb the ladder of success with a good dose of hard work, entrepreneurship, and luck.
However two specific trends have arisen in the past three decades that are undermining this idealist notion of inequality under dynamic capitalism.
- Inequality has increased beyond what appears reasonable from individual effort alone, and more importantly,
- upward mobility, or the chances that a descendent generation will improve their position on the income distribution, has declined. Poor people in 2011 are more likely to stay poor, while the rich are likely to stay rich, and indeed, get richer.
The chart below, from The Economist magazine, is a refined version of one of the classic symbols of the Occupy Wall Street movement – the income growth of the top 1% compared to the 99% the movement represents.
The modern welfare state evolved through a volatile history as a way to both promote and reward hard work and innovation (with private property and market pricing), and share productive gains amongst society (through redistribution policies). These fundamentally worthy goals appear to have become lost in the daily political grind, gradually becoming subverted by vested interests.
Had these worthy goals been pursued with more vigour, we would expect to see a set of undulating and almost overlapping set of lines in the above chart. Indeed, if the second goal, of sharing productive gains was pursued, the gains from the lowest quintile could be higher than the gains for the higher quintile, indicating a decline in inequality.
What is often overlooked in debates over income inequality is that capitalism is fundamentally about risk taking. It should be difficult for the rich to stay wealthy, as preserving their wealth would involve risky investment, and some of the wealthy would lose out, while others would win. Indeed, many innovators and entrepreneurs from lower socio-economic backgrounds, who also play the risk-taking game, should rise to fill the place of the previously wealthy whose risk were realised.
Various indicators of upward mobility can measure this dynamic shuffling of wealth. Back in 2004, The Economist ran a tremendous article highlighting the decline of the US meritocracy and upward mobility. To me it is signal of a decline of capitalist dynamism that the US is so well known for. The article noted the following:
A growing body of evidence suggests that the meritocratic ideal is in trouble in America. Income inequality is growing to levels not seen since the Gilded Age, around the 1880s. But social mobility is not increasing at anything like the same pace: would-be Horatio Algers are finding it no easier to climb from rags to riches, while the children of the privileged have a greater chance of staying at the top of the social heap. The United States risks calcifying into a European-style class-based society.
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Most Americans see nothing wrong with inequality of income so long as it comes with plenty of social mobility: it is simply the price paid for a dynamic economy. But the new rise in inequality does not seem to have come with a commensurate rise in mobility. There may even have been a fall.
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A classic social survey in 1978 found that 23% of adult men who had been born in the bottom fifth of the population (as ranked by social and economic status) had made it into the top fifth. Earl Wysong of Indiana University and two colleagues recently decided to update the study. They compared the incomes of 2,749 father-and-son pairs from 1979 to 1998 and found that few sons had moved up the class ladder. Nearly 70% of the sons in 1998 had remained either at the same level or were doing worse than their fathers in 1979. The biggest increase in mobility had been at the top of society, with affluent sons moving upwards more often than their fathers had. They found that only 10% of the adult men born in the bottom quarter had made it to the top quarter.
A body of academic research suggests that there is a strong inverse relationship between income inequality and upward mobility. This OECD report finds that:
…social mobility is lower in countries with high inequality, such as the Italy, the United Kingdom and the United States, and higher in the Nordic countries where income is distributed more evenly.
Australia currently sits in the middle of these extremes in terms of both income inequality and social mobility.
Importantly, the same 2008 OECD report finds a global trend towards increasing inequality over recent decades on OECD countries, and at the launch of the report, OECD Secretary General Angel Gurría warned of dangers from inequality, and the pressing need for governments to begin tackling it:
Growing inequality is divisive. It polarises societies, it divides regions within countries, and it carves up the world between rich and poor. Greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve. Ignoring increasing inequality is not an option.
The popularity of the Occupy protests, and the apparent spontaneity of the recent UK riots are testimony to the prescience of Gurría’s warning.
These trends are a concern, but they won’t be reversed quickly. Those occupying Struggle Street clearly need to make their voices heard, and I applaud the Occupy movement for making these issues headline political debates in a peaceful way. While Australia appears to be in a privileged position in terms of equality, ensuring that the trend does not take hold is far better than trying to cure a country plagued by class struggles.
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