The Economic Case for Social Mobility

Social mobility is flavor of the month in the politico-academic complex. President Obama passionately denounced the narrow opportunities for upward mobility from the bottom of the income scale as a “betrayal of the American idea.” While the President provided the rhetoric, a team of academics from Harvard and Berkeley produced the data: a ground-breaking academic study on rates of mobility in local economies around the U.S.

Defined as “everyone getting a chance to get ahead in life,” social mobility is a less controversial good than motherhood or apple pie. The controversies begin when it comes to explaining why some towns and nations – say, Salt Lake City and Denmark – have high rates of mobility and others – say, Atlanta and the UK – do not. Conservatives point to family breakdown; liberals to investments in education for poorer kids. (Both, of course, are right.)

Not just a social problem

But an overlooked aspect of the mobility debate is the connection to growth. Social mobility is not just a social problem, but an economic imperative too. And despite recent positive signs, sluggish economic growth is the single biggest problem facing the US, and indeed most advanced economies around the globe.

Economic growth matters for a whole host of reasons, of course, not least in terms of creating jobs and improving real incomes. Importantly, growth is the engine of absolute social mobility – in other words, ensuring that most people are better off than their parents.

But there may also be a link between growth and relative mobility, which is a measure of movement between rungs on the income ladder. Professor Raj Chetty and his team examined the link between economic growth and upward mobility in 741 “commuting zones” (CZ’s) across the United States. They found a strong link between growth and relative mobility, but concluded that variations in economic growth did not explain variations in mobility, once other factors had been taken into account.

The difficulty with this kind of analysis, as Chetty and his colleagues point out, is in teasing out causal relationships. So while economic growth in itself appeared to have little effect, it is growth that creates a stronger local tax base, allowing greater investments in schools. It is growth that cultivates the jobs necessary to help families make ends meet. It is growth that boosts spending on community activities.

Creating opportunity

Economic growth, then, may help to create the conditions for relative, as well as absolute mobility. But it may also be the case that mobility helps create the conditions for stronger growth. In 2010, the OECD warned that lack of social mobility could “curb economic growth.” It is certainly plausible that low mobility is a factor behind weaker growth in the areas of the US identified by Chetty. In metro areas like Des Moines, Salt Lake City, Santa Barbara, Wisconsin and Pittsburgh, the chances of someone born into the poorest fifth of the income distribution making it to the richest fifth is at least 10 per cent. In Indianapolis, Memphis, Charlotte and Atlanta, the equivalent odds are less than five per cent. It is unlikely that there are only half as many able people born into poor families in this latter group.

The mayor of every one of these low-mobility cities should be motivated to act on grounds of simple fairness – but also to help secure a better economic future for their town. Low rates of social mobility could hurt growth in three important ways.

First, the presence of a semi-permanent welfare class is a drain on public resources. Money going to income replacement programs, fuelled by multi-generational poverty, could otherwise go to pre-K education, infrastructure and job programs. The fact that 40% of the children born into the bottom fifth of households in the US remain there as adults is a strong signal means that a sizable chunk of welfare payments go to the children of welfare recipients. The inheritance of poverty is therefore a fiscal drag, as well as a moral stain.

Second, the lack of opportunities for upward movement could hurt the supply of labor. For one thing, folks who want to get ahead may simply hire a U-haul and move to a city with better prospects. This is probably good news in terms of national rates of social mobility, but it is bad news for the city they leave behind. More generally, there has been a rise in the number of people – especially men with low skills – who are not simply unemployed (in other words, looking for work), but are detached from the labor market altogether. The reasons for this rise in the “non-working” population are complex and hard to discern. But one clear possibility is that the retreat from work represents a loss of faith in the market’s capacity to provide upward movement.

Third, low rates of upward mobility from the bottom of the scale imply a loss of human capital. When smart, poor kids can’t escape their backgrounds, their skills are lost to the economy as a whole. An analysis by the Boston Consulting Group for the Sutton Trust in the UK estimated that closing the educational attainment gap could add 4% a year to Gross Domestic Product. Inevitably, these estimates must be taken with more than a pinch of salt. But in a world where human capital counts for more every year, the loss of talent represented by low upward mobility is likely to be more keenly felt.

Weak prospects of upward mobility and weak rates of economic growth are typically seen as separate policy challenges. This could turn out to be a dangerous error. We need economic growth to create opportunities – but we need to bolster opportunity in order to foster growth, too.