World Economic Forum
Climbing the Income Ladder Takes Generations, Depending on Where You Live
Since the 1990s, social mobility in the world's most developed countries has stalled. The low-income trap is restraining people's opportunity to well-being. How should countries make economic growth more inclusive?
Climbing the Income Ladder Takes Generations, Depending on Where You LiveBy Alex Gray
Most of us, especially in developed nations, expect to grow up to earn more than our parents. But as a new in-depth report by the OECD shows, this is becoming less likely. In fact, things have been trending this way for decades.
As a consequence, social mobility across nations, and generations, has stalled.
The Low-Income Trap
Families and communities in many countries are increasingly trapped on the bottom rungs of the social ladder, says the report.
Children born into low-income families have less chance of moving up in the world and improving their professional status.
Meanwhile, those at the top of the income ladder are holding on to their wealth.
One way of trying to understand the lack of income mobility is to look at how long it would take someone from a poor family to earn the average income in their home country.
The answer varies dramatically depending on where that person lives.
At the current rate of income mobility in Colombia, for example, it would take 11 generations for someone born into a low-income family to earn an average wage.
But in Denmark it would only take two generations, while the average across OECD countries is 4.5 generations.
When the OECD looked at earning patterns for fathers and sons, it found that those born to low-income fathers are likely to remain poor, and those born to high-income fathers are likely to hang on to that wealth.
The gap was most pronounced in the US: less than 10% of sons with low-earning fathers made it into the richest 25% of the population, while almost 50% of those with top-earning fathers grew up to become high earners themselves.
The gap was narrowest in Spain, where just under 20% of sons with low-earning fathers broke into the richest 25%, and less than 35% of those born to top-earning fathers remained in that bracket.
Overall, one in three children with a low-earning father will stay trapped on a low income, while most of the remaining two-thirds will only move one rung up the income scale during their lifetime.
The rich are also getting richer.
The average disposable income of the richest 10% of the population is now around nine and a half times that of the poorest 10% across the OECD, up from seven times 25 years ago.
Why is Social Mobility Important?
Everyone wants a chance to do well in life. The lack of social mobility can test the resilience of a society – people can feel trapped in their low income status and worry about the lack of opportunities for their children to progress. This has an impact on social cohesion, as well as on economics and politics.
For instance, nationalist sentiment is on the rise in many countries as people increasingly feel left out of the riches that capitalist economies create.
But that’s not all. If people are unable to progress in their career or improve their lifestyle, much potential talent is lost or remains underdeveloped. In addition, even knowing that you have the opportunity to improve the lot of your family compared to previous generations has a positive influence on life satisfaction and well-being.
The fact that some countries – the Nordic nations, for instance – do much better than others on inclusive development suggests that there is plenty that can be done to improve income mobility.
The OECD report recommends measures including family-friendly labour policies, tax and benefit systems that reduce inequality, and policies that protect individuals from life shocks such as divorce, unemployment or childbirth.
“What matters is not only the overall public resources devoted to education and health but also their quality, their effective use and targeting to disadvantaged groups. The policy response is therefore not confined to spending more overall but rather to target spending on effective programmes and ensuring their quality and equal access,” explains the report.
Inclusive growth is becoming an important measure of national economic success. At the 2018 Annual Meeting in Davos, the World Economic Forum unveiled the Inclusive Development Index (IDI).
The IDI takes into account standards of living instead of looking at countries’ performance from a purely economic standpoint. This includes measuring income, employment opportunity, economic security and quality of life.
Northern European countries are at the top of the index, with Norway, Iceland, Luxembourg, Switzerland and Denmark taking the first five places.
Edited by Shawn Chou
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