HOW DOES THE AMERICAN DREAM FARE IN RECENT YEARS?

ECO311A: DEVELOPMENT ECONOMICS

SUBMITTED TO
DR. DEBAYAN PAKRASHI
SUBMITTED BY
ROLL NO NAME DEPT GROUP NO SIGN
150350 Kunal Pratap Singh ECO 11
150011 Abhigyan Rai ECO 11
150672 Shivam CHE 11

DATE OF SUBMISSION
31 March 2018s
PERCENTAGE OF PLAGIARISM
8.9%

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Introduction
“So distribution should undo excess, and each man has enough.”

- William Shakespeare

Social mobility, according to Wikipedia, is basically the movement of individuals, families from
one stratum of the society to other strata of the society. The social mobility can be intergenerational
or intra-generational, Horizontal or vertical etc. Now, there can also be upward or downward social
mobility. These mobilities can be measured by using different indicators including education,
income occupation, consumption etc. Now, here, in this report, we are more concerned about the
economic mobility as we are trying to find the relationship between the economic development
and mobility.

Now, there are some pre-existing theories that suggest that economic development increases with
social mobility. This was first suggested by Davis that the social mobility is a must condition for
the development of a society. He made this statement in terms of intergenerational mobility. He
also said that there is a “threshold” of social mobility beyond which the take-off takes place in the
economy. Another paper by Lipset and Zetterberg also suggested it be increasing with
development. So, social mobility is essential and is considered a key feature for developing and
developed societies.

Income inequality has been a topic of research for decades. The development of a country is
measured by not only its economic growth but also the distribution of resources. While income
inequality is necessary to ensure economic efficiency, income mobility is necessary for equal
distribution of opportunity. A case of high inequality and low-income mobility would result in the
same rich families getting richer and the children of poorer families staying poor.

Motivation

OECD’s 2012 reports states that the topmost 0.6 percent of world population held 39.3% of the
world wealth. On the other and hand, and quite grotesquely, the bottom 95% held 28% of the world
wealth. Such alarming figures call for action from governments around the world.

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Intergenerational distribution of income must be overseen to provide equality of opportunity to the
children of poorer families.

Progress is the most important thing that keeps us moving. We all want to progress in life, not only
in terms of income but also in terms of status. This is why social mobility is very essential. And
for economic development, it is a must thing. We all love to hear rags to riches story but it would
be impossible for a person to reach there without social mobility. Social mobility is there in a
society because of the reward that a person will get if he increases his status or income too. These
factors make it most important thing to study.

Though the higher degree of inequality in a society is undesirable, for social mobility, some degree
of inequality is desirable. Now, to understand how much inequality is essential for social mobility
in industrialized societies, we need to study the relationship between them for developing and
developed countries too. This will help us understand the relationship between development and
mobility properly.

Objective

With the increase in economic progress as well as income inequality, it is imperative that equality
of opportunity amongst the populace be kept in mind. The objective of this paper is to establish a
relationship between the economic growth and the income mobility as well as income inequality
and income mobility. Additionally, we aim to examine how the distribution of wealth has changed
during the years. We shall examine the wealth share of the top 1%, top 10%, middle 40% and the
bottom 50% of the population.

We wish to see if there can exist a scenario where income inequality can be optimally used to make
the economic progress efficient without foregoing the fairness of social mobility. Results of this
study may suggest the direction of future economic policies like that of Japan and the Scandinavian
countries.

Moreover, we will also analyze how increase in inequality (if indeed, it has increased) has affected
the economic progress in United States of America. All the while, assessing how the notion of the
“American Dream” has stayed alive during the years.

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Review of Literature

Andrea Tyree, Moshe Semyonov and Robert W. Hodge (1979) – Their paper titled “Gaps and
Glissandos: Inequality, Economic Development, and Social Mobility in 24 Countries” took into
consideration 24 countries viewing the mobility between white and blue collar segments of
respondents and their father’s status (chief wage earner). They worked on inter-generational
mobility as a sequence of two steps – from origins to start of career and then from career start to
social destination and found that the movement is somewhat related to reward structure. It is also
concluded that economic development had weaker effect on social mobility than the effect of
inequality. They interpret effect of inequality as that of a society with no class division (continuous
class). The study showed some evidence of reduced existence of coherent classes in low inequality.

John H. Goldthorpe (1985) – His paper titled “On Economic Development and Social Mobility”
argued that the proposition increase in social mobility with economic growth can be put forward
in a number of ways testing them empirically. He argued that different versions of the proposition
may not be consistent and possibly the consistent ones may be given different sorts of
interpretations. He said that economic development is not the only cause and social mobility is
affected by many other structures. He proposed an approach that focuses on categorically recoding
national mobility data for comparisons so as to identify the constancies and commonalities that the
mobility rates display.

Richard Breen (1997) – His paper titled “Inequality, Economic Growth and Social Mobility”
attempted to find the link between social mobility, inequality and economic growth. He worked
on modelling social mobility and economic efficiency using as position, ability, rewards and
resources to find what kind of relation exist between them. The paper concludes on the note that
very generic model shows boost of economic efficiency when inequality increases. However, if
there the economy is at a particular stage of inequality then further increasing it would not certainly
enhance efficiency but may hamper it. Incorporating trans-generational transfer of advantage lead
to indeterminacy – range of social mobility is consistent with given level of efficiency.

Nelson N. Foote and Paul K. Hatt (1953) – In the paper titled “Social mobility and economic
advancement” they said equalizing consumption after an extent may contribute in the increase of
general level of consumption and could lead to an inverse relation between economic

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development and social mobility. An example is presented from United States where the net
movement in jobs have been towards the ones associated to higher prestige. It is also argued that
there is a shift in behavior of industries and it is directed towards professionalization. They also
presented forward the idea that most secure way to help the future generation is by endowing
them with education rather than cash.

Methodology and Data

We used the data from three sources. US annual GDP data from 1960-2011 and US GINI index
data from 1960-2011 that was made available by the world bank portal. The income distribution
between the top 1%, top 10%, middle 40% and the bottom 50% that was made available by the
World Inequality Database. Lastly, we use the absolute mobility estimates prepared by Chetty,
Grusky, Hell, Hendren, Manduca, and Narang (2016).

As already stated, that the growth of a country should depend on the income inequality as it will
ensure that the most difficult jobs are occupied by the most capable people. So, we analyze the
relation of the GDP growth with the GINI index over the years.

Figure 1. Annual GDP of USA plotted against Annual GINI Co-efficient

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The graph clearly shows that, in the past 50 years, increase in inequality has had a positive effect
on the economic growth of the country. The result is consistent with the existent literature. But,
the question arises that how the income mobility has been affected by this progress. Firstly, we see
how the shares of different population proportions have changed over the years.

Figure 2. Trends in (a) income share of top 1% population (b) income share of top 10% population
(c) income share of middle 40% population (d) income share of bottom 50% population

The trends in income distribution clearly show the increasing inequality. The share of the top 1%
increased from 12.5% to 19.6% reaching a maximum of 21.1%. On the opposing side, the share
of the bottom 50% decreased from an already meagre 19.5% to mere 12.7%. The interesting
statistic appears in the middle 40% of the population’s share. With a consistent increase in the
inequality (as seen in the GINI coefficient trend), the share of the middle 40% first rises to a
maximum of 46.2% and then falls to 40.4%. This may indicate that the income mobility increased
with a certain increase in inequality but then fell. The share of the middle 40% when plotted against
the GINI coefficient presents a similar picture.

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 Figure 3. The share of middle 40% population plotted against the Gini Co-efficient

A strict correlation between this increase and inequality may be hard to establish. It may very well
have been the result of some market phenomenon or socialist measures being taken by the
government.

To further strengthen our inferences about income mobility, we shall use “Absolute Mobility
Estimates” coined by Chetty, Grusky, Hell, Hendren, Manduca, and Narang (2016). They define
absolute mobility as:

1 𝑘 𝑝
𝐴= ∑ 1[𝑦𝑖𝑐 ≥ 𝑦𝑖𝑐 ]
𝑁 𝑖

𝑘
Where A is the absolute mobility estimate, N is the total number of children, 𝑦𝑖𝑐 denotes the
𝑝
child’s income and 𝑦𝑖𝑐 denotes the parent’s income. The estimates of A were obtained for the
years 1960-1984 from their research. When plotted against the GINI coefficient and the GDP data,
the scatter-plots do not show any conclusive picture. So, the same two relationships, for lack of a
better model, were regressed linearly so see the effect of economic growth as well as increase in
inequality to the trends in income mobility.

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 Mobility vs GDP Mobility vs GINI
0.95 0.95
0.9 0.9
0.85 0.85
0.8 0.8
0.75 0.75
0 5E+12 0 10 20 30 40 50

Figure 4. Absolute mobility estimates mapped against a) GDP and b) GINI coefficient

Results

The three steps of our work show the following results:

 The first step, analyzing the effect of increase in inequality, over the years 1960-2011, on
the economic progress of the country unambiguously shows a positive correlation between
GDP growth and GINI coefficient. The hypothesis of income inequality leading to an
economically efficient labor force seems to hold.
 Secondly, the analysis of the income shares of the top 1%, top 10%, middle 40% and the
bottom 50% brings out certain insights. Clearly, the share of the top 1% has rocketed to an
unfair proportion and that of the bottom 50% dropped to a meagre low. The trends in the
share of middle 40% show a rise and then fall. This may the case of increased income
mobility or just more income in that segment of the population.
 This may show the possibility of an optimal where the income inequality keeps economic
efficiency maximized but the income mobility is not tempered with.
 The final step analyzed the absolute mobility estimates, with respect to the GINI
coefficients and the GDP growth over the years. The regression results are given in the
Table 1 and Table 2. The results show a negative correlation with the GDP growth and a
minimal positive correlation with the GINI coefficient. Although, the graphical
representation as shown in figure 4(b) shows that this may be a fault in the model as the
relationship is seen as first increasing and then decreasing.

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Conclusions

The capitalistic approach of the US government as well as the people have created heavy income
inequality in the US population, with the top 1% having accumulated almost twice the wealth of
the bottom 50%.

The need for income inequality is necessary for the economy to have steady and efficient growth
as seen in our analysis but so is the equal distribution of opportunity. Although, a strict correlation
could not be established, analysis of the potential GDP and the GDP gap in accordance with the
income mobility estimates could lead to conclusive results about the optimum nature of inequality
that is required.

The analysis of the income mobility estimates shows that, in the past years, mobility has steadily
declined with increase in GDP and its correlation with the GINI data show that mobility first
increased with increasing inequality and then decreased. Although, this correlation may have been
co-incidental but further research may show that there can be an optimal level of income inequality
that ensures fair mobility and equality of opportunity without having to sacrifice economic
efficiency.

USA may be one of the superpowers and economic giants of the world but lies far behind other
countries in Legatum Prosperity Index, Human Development index. Income mobility is much
better in Japan, Indonesia and most of the Scandinavian countries. Although, the neo-liberal laws
may not be the way to go but the capitalist-favoring government structure is sticking it to the little
guy. The not-filthy-rich pay for the needless fortunes accumulated by the few.

The times call for socialist agendas, even extreme measures like that of Japan (56% inheritance
tax) may be employed. But the concentration of the higher jobs in the hands of a few will lead to
scarcity in talent and ability. Thus, the economic efficiency would remain and fall to much lower
levels than what it could be in an equal society.

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Appendix

Source SS df MS Number of obs = 35

F( 2, 32) = 35.96
Model .030507878 2 .015253939 Prob > F = 0.0000
Residual .013572284 32 .000424134 R-squared = 0.6921
Adj R-squared = 0.6729
Total .044080163 34 .001296475 Root MSE = .02059

Table 1.
mob Coef. Std. Err. t P>t [95% Interval] mob
Conf.

GDP -2.82e-14 3.74e-15 -7.53 0.000 -3.58e-14 -2.06e-14 GDP

gini .0145687 .002888 5.04 0.000 .0086859 .0204514 gini

_cons .3824997 .0989245 3.87 0.001 .1809971 .5840024 _cons

Table 2

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