The United States has long been considered the land of opportunity. While sadly some Americans have been excluded from these opportunities, ambitious and hardworking people from around the world have come here for freedom and helped build our thriving economy.
Has our opportunity society broken down? Much of this concern stems from allegations of greater income inequality. However, perhaps more relevant than inequality is the movement of individuals within the income distribution. It is very important that the same percentage is the same each year or if there is a significant turnover. Consequently, economists also examine the magnitude and determinants of income mobility.
Income mobility can be measured in two ways. Absolute mobility examines whether children earn more than their parents, taking inflation into account. Relative mobility examines whether children from the lowest income households move up the income distribution.
Raj Chetty of Harvard has done some of the most important work on income mobility in the United States. His research on the “Fading American Dream” finds a substantial reduction in absolute mobility. More than 90% of Americans born in 1940 earned more than their parents by age 30, compared with less than half of those born in 1980. A slower overall economic growth rate and a concentration of income growth on the best jobs remunerated during the last decades are at the origin of this result. .
The reduction in the likelihood of children earning more than their parents is widespread, but highest in industrial states like Michigan, Indiana and Illinois. The manufacturing industry paid high wages for physically demanding, noisy and dangerous jobs. Economic theory predicts that workers should be compensated with extra pay to compensate for undesirable working conditions. Occupational safety regulations have forced companies to spend money to reduce risks and dangers in the workplace. Our remaining jobs in manufacturing and mining are more secure, but therefore pay less; alternatively, 1960s wages exaggerated worker welfare.
Work has also changed a great deal over the past fifty years. As John Tamny of Forbes shows in his The end of work, many jobs no longer feel like work. People working in sports analysis, for example, are paid to analyze statistics and make decisions for teams. Pleasant work can pay less than demanding and dangerous work.
The best and hardest workers should succeed with economic freedom, no matter where they come from. But what level of income mobility should we expect? On the one hand, some children might choose not to earn as much money as their parents.
Successful people in business, law, or medicine usually work very long hours. Those long hours mean less time spent with the kids; The CEOs have probably missed many little league games. Their children might grow up valuing a better work-family balance and accept lower incomes to achieve it. I’m not judging these life choices, I’m just pointing out the consequences.
We can make a prediction: there should be more mobility with economic freedom and competition than without. Government rules and regulations can protect favored companies or groups of workers from competition, and these protected positions can often be offered to others, creating a privileged elite.
New research from Canada’s Fraser Institute provides evidence for this prediction. Fraser compiles the Economic Freedom of the World and Economic Freedom of North America indices, which document how close nations and states are to the ideal of a market economy. Reliable measures of economic freedom can test whether markets deliver the benefits promised by some economists.
Vincent Geloso of George Mason and Jason Callais of Texas Tech examine two measures of generational mobility, one examining elements of social and economic mobility and the other focusing specifically on intergenerational income mobility. They find that countries with more economic freedom also have more social and income mobility. The link is stronger for social mobility indicators because data on income mobility is only available for wealthy countries, which also typically have high levels of economic freedom.
Economic freedom provides opportunities for people. We choose what to do with these opportunities. Income mobility provides important evidence about opportunity, but economists must remember that in a prosperous nation, not everyone will earn the most money.
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