This article was originally published on Medium.
At the recent Davos meeting there was a lot of focus on the ongoing back and forth between President Trump and young activist Greta Thunberg. However, what didn’t garner many headlines from this meeting that should have was the release of a new index on global social mobility from the World Economic Forum (WEF). Social mobility is a key issue of our time, and understanding it better is an essential prerequisite in increasing human flourishing, but this new index is not up to the task. There is an urgent need to build a consensus in identifying the main factors of social mobility. But despite the report claiming that its methodology “applies the latest theory and evidence about the factors currently influencing future social mobility across economies and societies” currently there is no consensus in academia or among public policy scholars on what these factors are and the ones suggested by the index fall far outside of any expert consensus.
One of the main issues with the index is that many of the pillars that comprise it lack a proper causal analysis, let alone reasonable link, to improved social mobility. Many of the factors used, like health outcomes, could be a result of increased income and a more advanced stage of development in some countries rather than a causal explanatory variable. The index has ten pillars, which at first seems like logical indicators to use. However, after taking a deep dive into these indicators, there are some key omissions. Although there is a bibliography containing some justifications for the factors used, many of the pillars and factors used do not have the sound academic backing that is common among similar indices, such as the World Bank’s Doing Business Index. Developed by Simeon Djankov many years ago, it has well established academic papers justifying every aspect of its evaluations.
More broadly, a major flaw of the report is the continuation of an unfortunate pattern that has emerged recently in public policy debates regarding economic mobility. Unfortunately, it is now routine to casually intertwine the concepts of economic mobility, poverty, and income or wealth inequality. These issues are distinct from one another, and the policy responses to address them can vary widely. Conflating these concepts is not only misleading but can even create negative long-term unintended consequences that undermine efforts to boost social mobility and poverty alleviation. As Richard Reeves of the Brookings Institution has discussed, it is very difficult to ascertain causality in this debate and these issues are actually different phenomena.
There is a persistent trend throughout the WEF report to highlight inequalities within countries and have sub indicators that include some sort of inequality variable. However, even though an inequality with regard to some indicator might show a problem, this could just be a result of a different problem or set of barriers, meaning it should be considered more of an endogenous variable. So, in this sense, the choice of sub indicator should at least highlight barriers that are likely exacerbating those inequalities and might even prevent more social mobility. Including sub indicators that show inequalities as exogenous variables in and of themselves when they are indeed more endogenous in nature seems like an unjustified leap intended to further a particular narrative rather than offering a neutral evaluation.
One of the reasons the common intertwining of mobility and inequality happens is the focus on so-called “Great Gatsby Curve,” a widely publicized finding of economist Miles Corak, named by the late economist, Alan Krueger, chief economic adviser to the Obama White House. The curve shows that on a national level, there is a statistical relationship between inequality and mobility. However, researchers still don’t know much about the extent to which that association reflects a causal relationship of any kind. Other social mobility experts, such as Scott Winship, currently the Director of the Social Capital Project with the Joint Economic Committee, have suggested and shown that besides not establishing a causal relationship, there is barely even a correlation between the two factors. Additionally, despite assertions around this relationship and international comparisons in the WEF report, there is not much difference in the levels of relative mobility among developed countries such as Denmark, Sweden, Canada, and the United States. This was one of many findings in a major report published recently discussing international comparisons among countries. The report conducts a vast literature review on international comparisons, including some of the papers mentioned in the social mobility index. That the WEF social mobility report overstates these claims reflects that the issue has not been given its due literature review.
Of course, researchers should allow for the possibility of a causal relationship between social mobility and inequality, but they should also consider a scenario in which both of these variables are endogenous with respect to potentially the same set of other variables. In other words, rather than interpreting the relationship between income inequality and economic mobility as a causal one, these two issues could simultaneously both be influenced by differences among countries related to structural and more fundamental variables.
Before delving deeper into the indicators chosen by the report’s authors, it is first worth repeating the uncontroversial observation that, despite the many ways of looking at this issue, the best (if not only) sustainable way in which to climb the income ladder is through a job of some kind. The main source of income for the vast majority of people all around the world is through a job. So whenever one discusses the issue of social mobility, job creation, entrepreneurship, and the labor market should take center stage — something that does not happen in this index. There are key aspects of business dynamism, flexibility of labor markets, and the climate for entrepreneurship that should form the central components of any social mobility discussion. Work opportunities are just one of the many pillars to focus on and could include sub indicators such as the regulatory environment, or what it takes to open and operate a business. Many of these kind of sub indicators are available from the Doing Business Index produced by the World Bank. Furthermore, many such indicators can be found in the WEF’s more reputable and established index, the Global Competitiveness Index (GCI). Indicators from the Doing Business Index and the Global Competitiveness Index could have been used to highlight the role that entrepreneurship and job creation has on economic mobility. Unfortunately, the choice of indicators for this social mobility index did not include these issues, which should have taken center stage.
Other factors included in the GCI include respect for property rights, indicators discussing the rule of law, and the strength of institutions. The social mobility index could have benefited by including indicators from the Rule of Law Index as well, in order to highlight the importance of the cost of accessing the justice system.
The Social Mobility Index does have at least some indicators related to the job creation environment, and in terms of taxes, the report focuses their conclusion and recommendations on a wide array of issues including the impact of corporate taxes. However, corporate taxes are not evaluated through the lens of how they might affect job creation or employment, but rather how they should be raised to increase government revenue for the purpose of funding more programs. Ironically, many of the Scandinavian countries the report highlights as among the best performers in terms of social mobility have a welcoming environment for entrepreneurship and low corporate taxes. Furthermore, the Organization for Economic Cooperation and Development (OECD) published a wide-ranging 2008 paper that found that taxes on income tend to hamper economic growth significantly more than other tax instruments. Decades ago, Brookings Institution Scholar Arthur Okun showed how workers have the greatest opportunity to realize wage gains when the economy approached full employment. Investment and economic growth are by far the best mechanisms to boost employment, and in turn, opportunities for workers to gain new skills, experience, and move up the income ladder. These are direct tradeoffs that must be addressed by those advocating for increased corporate income taxation to combat income inequality.
Another issue related to job creation is innovation, which is only mentioned in the Social Mobility Index in the context of the usual alarmism surrounding the future of work. However, innovation is a major source of job creation and market expansion. In their recent book The Prosperity Paradox, the recently departed innovation guru Clay Christensen, along with co-authors Efosa Ojomo and Karen Dillon, highlight the impact of market creating innovations on social mobility. Documenting case studies of businesses and market creating innovators from all around the world, the authors show the impact that innovation has on poverty reduction, increasing social mobility, and enhancing human flourishing. There is even a Global innovation Index that includes many in depth sub indicators that the Social Mobility Index could have used to document the vastly more important and positive aspects of innovation for development and social mobility.
Other major factors glaringly omitted by the Social Mobility Index that have been well established as important in the social mobility literature, are the roles of family structure and parental engagement in human capital development. Such work is discussed at length by Nobel Laureate James Heckman in his own work, and some of the latest mobility research in the United States, published by Raj Chetty and his coauthors at Opportunity Insights (which the WEF report cites), also shows that one of the biggest, if not the biggest, variable that affects income mobility across the United States is the two parent household — both by themselves and also at the neighborhood level. The research is clear that people living in neighborhoods with more intact families fare better in terms of income mobility, even if their own family does not have two parents.
Another factor that are not considered in the Social Mobility Index is the role of soft skills in social mobility. Character traits such as grit, highlighted in the work of psychologist Angela Duckworth, and the role of social capital are completely omitted in the analysis. Surprisingly, social capital makes an appearance in the Global Competitiveness Index also published by the WEF but not in its social mobility index. On this point, the Social Capital Project of the Joint Economic Committee in the United States has a wealth of resources and data on the impact of social capital on social mobility. The impact of cronyism on social mobility, as discussed by the economist Luigi Zingales, and the phenomenon of “opportunity hoarding,” as discussed by social mobility expert Richard Reeves in his book Dream Hoarders, are complementary issues that represent barriers to mobility that also should have made it into the index in some way.
There are many other factors that could be included or broadly discussed as barriers to or determinants of social mobility. But despite the critical review, the Social Mobility Index is a welcome addition to the discussion. One of the most important contributions of this new index is simply that it highlights the importance of this topic and makes the case that the issue should have a more central role in our public policy debates. However, expanding opportunities to climb the income ladder, particularly for those at the bottom, should be the main focus of the inequality/mobility debate. Efforts to eliminate inequalities that do not address the source of these problems are little more than politically popular red herrings. In that sense, the report has focused too much on inequality of outcomes instead of inequality of opportunity properly understood.
Gonzalo Schwarz is President and CEO of the Archbridge Institute.