Authors: Miles Corak
Institution: The Center for American Progress
Date: December 2012
While it is now more than a year since the Occupy Wall Street movement began to draw attention to the wide and growing gulf in America between the 1 percent and the 99 percent of income earners, many have been quick to dismiss its staying power. After all, from the very beginning critics said that Occupy really did not have much to offer in terms of concrete policy proposals or solutions. Asked by the Wall Street Journal in October 2011 about his views on the Occupy movement, Martin Feldstein, the prominent Harvard University economist, could only say, “I can’t figure out what that’s all about—I haven’t seen what they’re asking for.”
But the vagueness of its policy proposals is hardly a basis for dismissing the movement’s significance. It gave voice to, and made more broadly known, some basic facts about labor markets. While growing income inequality—and in particular the sharp and growing division between the 1 percent and the 99 percent—is something that has been documented by labor economists for more than a decade, it is now headline news and the subject of serious policy discussion in a way that it was not before the movement began on September 17, 2011. In important ways, the social conversation has begun to move toward a clearer understanding of the underlying causes of inequality, why it is something we should care about, and what concretely can be done about it.
There have been many healthy contributions to this debate. Among the most thorough and detailed is the report, “Divided We Stand: Why Inequality Keeps Rising,” published by the Paris-based think tank, the Organisation for Economic Co-operation and Development. The report offers a careful and solid reading of the facts; reviews and evaluates the underlying explanations that have been offered; and highlights not only why inequality should be a concern but also the trade-offs involved in implementing—and not implementing—policies to address it.
“Rising income inequality creates economic, social and political challenges,” says the Organisation for Economic Co-operation and Development report. It “can stifle upward social mobility, making it harder for talented and hard-working people to get the rewards they deserve. Intergenerational earnings mobility is low in countries with high inequality such as Italy, the United Kingdom, and the United States, and much higher in the Nordic countries, where income is distributed more evenly.” The study goes on to imply that this should be a concern for us all, saying that, “The resulting inequality of opportunity will inevitably impact economic performance as a whole, even if the relationship is not straightforward.”
This paper focuses on one claim that has particular resonance in the United States: the suggestion that inequality erodes opportunity. Indeed, there is a growing body of research that examines whether inequality harms growth, discussed and reviewed in part by Columbia economist Joseph Stiglitz and University of Chicago economist Raghuram Rajan.3 If one of the consequences of higher inequality is less economic mobility, then this may have real consequences for economic growth, as many talented individuals will be excluded from reaching their potential.
In order to understand whether the economy as a whole can be affected by economic mobility, however, we need to first describe the relationship between inequality and mobility and the likely causes of this relationship.