How Today’s Income Inequality Kills Tomorrow’s Economic Mobility

Our guest blogger is Heather Boushey, senior economist at the Center for American Progress Action Fund.

America is supposedly a land of opportunity, but increasingly the data shows that we are a country where parents’ earnings are paramount in determining their children’s future earnings. This sort of class-stratified society is exactly what most of us think America is not (or at least should not be). Plus, this kind of class calcification is bad for economic growth.

The relationship between today’s inequality and tomorrow’s economic mobility was a key theme of a speech by Alan Krueger, Chair of the President’s Council of Economic Advisers, at the Center for American Progress last week. To show how class has become calcified in America, he showed this chart, which he called the “Great Gatsby Curve”:

In the chart, the Gini coefficient, one of the most-commonly used measures of income inequality, is on the x-axis. The higher the Gini, the more unequal a nation is. Notably, for 1985, the United States was more unequal than any of the other nine advanced economies shown. A measure of economic mobility is on the y-axis. This measure, the “intergeneration earnings elasticity” measures how important a parent’s earnings are to predicting their child’s future earnings (in this chart, only looking at fathers and sons).

Imagine two American fathers, Middle Class Dad and Rich Dad, standing together with their adult sons. Rich Dad earned 100 percent more than Middle Class Dad when the boys were young. This chart shows that Lil’ Richie will earn about 50 percent more than Lil’ Middle.

When a parent’s economic status has too big an impact on his children’s economic status, it has a pernicious impact on the economy. Today, somewhere in America, there’s a young toddler who may be the next Bill Gates or Steve Jobs (or just a really terrific manager who boosts productivity at her firm). But, if she’s not Rich Dad’s little girl, our economy may never benefit from her talents and that would be a loss for everyone.

As economists Flavio Cunha and James Heckman put it, “The best documented market failure in the life cycle of skill formation in contemporary American society is the inability of children to buy their parents or the lifetime resources that parents provide.” As they say, you can’t choose your parents.