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July 09, 2018

Income inequality and social origins

Opinion image

Reducing income inequality within countries is of paramount importance among the challenges facing policymakers in the years to come. The UN has included the reduction of inequality among its Sustainable Development Goals, because promoting growth alone may not be enough to help the poor out of poverty when growth is unevenly distributed across households.

Promoting egalitarian income distribution seems desirable from an equity perspective, but opponents of redistributive policies often observe that income differences reflect individual efforts, and egalitarian policies could curb individual incentives. Still, understanding whether income inequality is a symptom of social injustice is essential for determining when income inequality becomes intolerable and how much redistribution is needed.

A way to get around this equity-efficiency trade-off is to think in terms of equal opportunities. In other words, what matters is not how equally distributed incomes are at a certain point in time, but rather if everyone in society is given the same opportunity to climb up the income ladder during their working lives. Put another way, the fact that—for example—graduates from top colleges end up earning high salaries per se is not a symptom of injustice. After all, throughout their student lives these graduates invest a considerable amount of effort having been accepted into top colleges, and their high levels of human capital may also benefit society at large. What matters is that everyone is given the chance to become a top lawyer or a leading scientist, no matter the social circumstances that he or she experiences early in life. In general, inequalities that reflect factors largely out of an individual’s control—such as local schools and communities—require attention to promote equal opportunities.

A popular way for social scientists to assess how equally opportunities are distributed is to look at the extent of intergenerational mobility, that is the degree of similarity of children’s incomes to their parents’. Nowadays, there is a wealth of statistical sources that enable this type of association to be calculated. The more children’s incomes resemble their parents’, the more unequally opportunities are being distributed. Of course, it is natural that parents invest their energies in promoting the welfare of their children and as such a certain degree of intergenerational resemblance is only to be expected: Wealthier and better-educated parents will devote more resources to their children. However, governments should invest resources (for example, in schools and youth communities) so that no one is left behind, limiting the parent–child transmission of income in the end.

Looking at the evidence, the data show that income inequality goes hand-in-hand with a lack of intergenerational mobility. This is worrying from a policy perspective, since it implies that income differentials indeed depend to a great extent on an individual’s social origins. Promoting intergenerational mobility may make societies not only more egalitarian but also more economically efficient. The expectation that people, whatever their social origins, can raise their standard of living is a powerful incentive to human capital accumulation and individual effort. Policies that counteract disparities in family background, such as educational interventions targeted at the children of the poor, are therefore very urgent if we want to reverse this tendency and achieve the goal of reducing inequality.

© Lorenzo Cappellari

Read Lorenzo Cappellari's article Income inequality and social origins

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