Intergenerational Earnings Elasticity
There is a popular narrative in America. Anyone can get rich. It’s the land of opportunity. It’s all up to you. The “American dream” is within everyone’s reach.
Setting aside for the moment the question of whether getting “rich” is a worthwhile goal, what is the reality? Well, there is something called the intergenerational earnings elasticity. Essentially it measures how similar the average person in a society is to their parents in wealth. It stands to reason that if economic opportunity is good, there will be a small correlation between the wealth of parents and their children. Children from poor families will not tend to be poor themselves. If economic mobility is poor, your wealth situation will be more or less a reflection of that of your parents. This correlation is expressed as the intergenerational earnings elasticity – the IGE. The correlation can be 0, which means no correlation at all between parents and children, or it can be 1.0 – a perfect correlation between parents and children. Of course, most any group of people will fall somewhere in between. The higher the value, the lower the economic mobility.
It turns out that some countries do have low IGE’s, indicating good opportunity and strong mobility. Denmark for example. Denmark has an IGE of only 0.15. In other words, the economic situation of parents is a very poor predictor of the economic situations of their children. Countries like China are a very different story. China’s IGE is 0.6. Whatever your parents’ economic situation, you tend to be stuck with that. Economic mobility, unsurprisingly, is correlated with income inequality. China has high inequality and low mobility. Denmark has low inequality and high mobility.
America meanwhile, the “land of opportunity,” has an IGE of 0.47. Not nearly as bad as China’s, but nowhere near as good as Denmark’s. What’s more, this number has increased over time. In 1950, America’s IGE value was only about 0.3. Through the 1960’s and 1970’s, it remained fairly low. But since 1980 is has risen dramatically.
What has changed? The prevalence of good-paying jobs for people without college. In the mid 20th century, America was a manufacturing powerhouse. Unions were strong. There were lots of good-paying jobs for people without college. With automation and the evisceration of organized labor, such jobs are increasingly rare. The pay gap between those with college degrees and those without has gotten wider and wider.
This has not happened in the Scandinavian countries. The “college earnings premium” is much less pronounced there. It is still possible to get a good-paying job without a college degree. And accordingly, economic mobility remains high. There is a clear correlation between the income advantage for college graduates and the intergenerational earnings elasticity by country:
This is not, however, due to a distinction between a manufacturing economy and an information/service economy. America’s intergenerational earnings elasticity value is double that of Canada’s, and its college earnings premium is about 30% higher. Yet Canada is no more a manufacturing country than America is. 3 out of 4 Canadians work in the service industry.
Recently, an article was published in The Atlantic entitled, “The 9.9% is the new American aristocracy.” In it the author pointed out that the top 9.9% of Americans own most of the wealth in the country. Those in the top 9.9% (and he is one of them) “live in safer neighborhoods, go to better schools, have shorter commutes, receive higher-quality health care, and, when circumstances require, serve time in better prisons.” And “most important of all, we have learned how to pass all of these advantages down to our children.”
But in fact, it isn’t just the distinction between the top 9.9% and the bottom 90.1% that turns out to be critical – or even the distinction between the top half and the bottom half. The large group of people in the middle are actually pretty mobile, economically. It turns out that it’s the people near the top AND bottom of the income scale that explain why America is so different from Canada. In America, someone in the bottom 5th of the income distribution has a high probability of having a father in the same income bracket. Most of these are the working poor – the stockers at Wal-mart, the maids at the Holiday Inn, the waiters at Ruby Tuesday. The vast majority of them lack college. It is very difficult for Americans from working poor families, most of whom do not have college, to break out of their family’s economic situation. Far from breaking out, many of them find themselves in worse financial situations than their parents. Why?
America has virtually destroyed its labor unions, which ensured high wages and good worker benefits. It has shifted virtually all of the negotiating power to business, and left to its own devices, business does its best to deprive workers of income. In economic circles, this is often expressed euphemistically as the “transfer of wealth from labor to capital.” When was the last time you saw a roundtable discussion on television accompanied by the headline “the transfer of wealth from labor to capital”? The media would rather talk about royal weddings and culture wars. The subject of the working poor is constantly drowned out by more sensational headlines. This suits the purposes of profiteers and their enablers just fine.
The degree to which organized labor is powerful is almost exactly the degree to which workers without college manage to pull in good incomes. The Scandinavian countries are the epitome of this, with Denmark being perhaps the ultimate example. The Center for Global Workers’ Rights at Pennsylvania State University rates countries around the world on worker rights. If we plot their country by country scores against per capita GDP, we get this:
The 5 yellow dots are the Scandinavian countries. The green dots are the other European countries. And the red dot is America. On worker rights Denmark is ranked as one of the top countries in the world. Labor unions are powerful. 68% of Danish workers belong to a union. Denmark has no minimum wage – they don’t need one! Labor unions keep employers from paying crappy wages. Denmark has a long tradition of scientific and technological development and innovation, including wind energy and life science technology – but Denmark also has McDonald’s. They just don’t pay the equivalent of $7.25/hour.
As you can see above, America ranks behind virtually all of Europe on worker rights. Only Turkey is worse. America ranks behind Mexico, Rwanda, and Jordan. It ranks behind Argentina, Jamaica, and Namibia. It ranks behind Nicaragua, Liberia, and Mongolia. Among 138 countries, America ranks 106th on worker rights. With such a disgraceful position on worker rights, it is hardly surprising that we suffer from poor economic mobility and high inequality.
Of course, Denmark, like other Scandinavian countries, places a lot of emphasis on education. But lacking a college education in Denmark does not mean you get thrown under the bus economically. In America, it increasingly is. The result has been skyrocketing household debt and low economic mobility, particularly for those near the bottom of the wage scale. Adjusted for inflation, those without college in America have actually seen their income decline over the last 40 years.
From 1938 to 1968, the federal minimum wage in America, adjusted for inflation, increased 160%. This is a testament to the power of organized labor in the mid 20th century. From 1968 to 1988 it declined about 40% and has never recovered. Politicians of course like to point to low unemployment rates. That’s great! Almost everyone’s employed! Never mind that 150 BILLION DOLLARS of taxpayer money goes to provide public assistance to the EMPLOYED, because they do not make enough to live on. Never mind that HALF of all fast food workers are on public assistance. Never mind that 48% of home health care workers, and 46% of child care workers, are on public assistance. Never mind that large numbers of these employed are in debt up to their eyeballs, just to get by.
Household debt in America now averages more than 100% of disposable income. It is becoming reminiscent of the “company town” days of 100 years ago, when whole towns were owned by a single company. Employees had to buy all of their necessities from the very company they worked for, and since they weren’t paid enough to cover all of it, they were perpetually in debt to the company. Is this so very different from having a permanent underclass of working poor who are forced to go to predatory loan companies for basic necessities, and are thus pushed still farther into debt?
Of course, this trend can’t continue. There is only so much debt one can accumulate. There is also the aging of the American population. There simply won’t be enough young people to provide the human labor to support the old, so the story goes. But this in itself assumes that human labor is the main contributor to the physical work of production. And therein lies the problem.
The narrative that permeates and underlies American economic policy is this: Some Americans are hard-working. They are the backbone of the economy. They, along with ambitious, hard-driving business people, make our economic system work. Others are lazy and just want handouts. The less they are able to parasitize the hard-working, the more productive the economy is. This fantasy is of course heavily promoted by profiteers and their political enablers. The reality is that machines do the vast majority of the physical work of production, and have for many decades. Productivity is a function of the REPLACEMENT of human labor by machine labor. As I have explained in a previous post, the most productive countries in the OECD, such as Luxembourg and Norway, have the shortest work weeks. Mexico has the longest work week of any OECD country, and the lowest productivity. Personal wealth has nothing to do with physical hard work. Many of the hardest-working people in America are at or near the minimum wage. It is all about how much machine labor you have working on your behalf.
As the American population ages, and automation accelerates, it will become apparent that the illusion of human labor supporting human well-being is just that. The result will be a revolutionizing of our economic system. Machines will be called upon to do MUCH more in our society. There is no technological reason why many of our factories and stores cannot be heavily automated today – but this would also make obvious the illusory nature of the “hard work” narrative. Even so, the writing is on the wall – automated warehouses, on-line ordering, automated delivery, automated transportation.
Of course, human labor will still be required for many years, in the form of the personal touch – flight attendants and legal advisors probably have good job security. But low-skilled service jobs requiring few people skills will disappear – as well as some “high-skilled” jobs that merely involve number-crunching and prediction. The whole concept of the value of work will change – SERVICE to others will be valued over physical labor and analytical ability per se. This is certain to change our attitudes about the social contract.
Meanwhile, America will continue to wallow in its inequality, pushing back the inevitable as long as possible. I doubt it will be able to sustain this for another 10 years. Certainly not 20. If you are reading these words in 2038, you must wonder that we were able to keep our heads in the sand as long as we did.