Argy on Social Mobility

Fred Argy has a new Australia Institute discussion paper out on inequality and social mobility. The Australia Institute only have the first 10 pages on their website, but you can get the gist from reading his oped in today’s Age:

The economic case is often misunderstood. To address unequal starting opportunities is to correct a fundamental form of market failure, thereby enabling society to make fuller use of its citizens’ human potential. And it would, in the long term, reduce welfare reliance. True, higher taxes may have some secondary efficiency costs but these could be minimised in three ways – by choosing revenue instruments that do not distort economic choices and incentives; by making greater use of income-contingent loans such as HECS, in lieu of outright grants; and by funding some new social programs – those that are expected to enhance the stock and quality of human capital in the long term – out of government borrowing rather than current revenue.

The full discussion paper is, ironically enough, only available to those with a spare $21.

Update: More from Andrew Norton.

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15 Responses to Argy on Social Mobility

  1. Matt Canavan says:

    Haven’t paid for the entire article but FA’s arguments that mobility is worse now don’t seem convincing. He argues that people now are handicapped by unhelpful parental environments, poorer access to education (including life-long education), digital technologies and health care, location and public transport problems, high cost of housing, discrimination and structural imbalances in the labour market.

    I’d have to read the entire article most of these points seem to me to have been moving in the opposite direction to FA’s argument or at least not getting worse. Surely people now have more access to digital technology and I’m not sure what he means by ‘structural imbalances’ but the labour market hasn’t been this tight for sometime.

    And I’m not sure how unequal opportunities is a ‘market failure’. FA’s just contributing to the gross misuse and hence growing irrelenvance of this term.

  2. Patrick says:

    That article really sounds like a waste of time – Clive Hamilton with pretensions to scholarly writing!

    If Matt’s summary is half-right, that is just plain ridiculous – either Mr Argy is younger than I think he is or he was too privileged as a child!

  3. Andrew Leigh says:

    Matt, my research on intergenerational inequality suggests that there’s been no change over the past 40 years. We can spin this as glass half empty or full, but it surprised me that Australia wasn’t becoming more socially mobile. As to the market failure element, unless we have very well-functioning credit markets, bright kids in poor families will typically get less educational inputs than is socially optimal, assuming we’re aiming to maximise total output (and conversely, dumb kids in rich families will get more educational inputs than is socially optimal).

  4. Andrew Carr says:

    As a side point, how common is it that institutes and think tanks charge for their papers ?

    Seems rather odd if your aim is to convince people of a particular point of view (as TAI seems to do) to then restrict your work so significantly. I know these groups need to raise funds to continue their work, but especially for a small group like TAI, instituting cost recovery with the release of papers doesnt sound wise.

    Is this the new academic trend ? Everything published is to be purchased ?

  5. Patrick says:

    Really, the contrary – CIS papers are always free! And SSRN has put more free research papers within the public domain than was ever the case, even if they lean to the working paper side. NBER as well, as long as you are in a University or know someone who is. And eg Oxford Journals have abstracts on line, so you can at least know if you want to read the paper, and Austlii now has a couple of dozen journals.

    Kim Weatherall has just commented on a new book published online – wondering if the exact opposite is the new trend!

  6. Matt – I think it is perfectly plausible that social mobility from the bottom groups has gone into reverse over the last 25 years, since the stepping stones of good socialisation through family and low-skill entry level jobs are harder to come by. If you have been well brought up and have average or better IQ there has been plenty of opportunity – huge numbers of professional jobs, for example. But as the large numbers of able or near-able people on welfare suggest, many others have gone backwards.

  7. Matt Canavan says:

    To both the Andrew’s:

    1. Agree with the credit market failure point but Fred did not mention that in the article.

    2. I don’t have any idea whether mobility is getting better or worse. I just don’t think the reasons that Fred give are very convincing.

  8. Fred Argy says:

    Matt and Patrick are sounding off (quite rudely) about my 100-page discussion paper, which they have not read. That paper acknowledges that mobility has shown no clear trend.

    They rely instead on my 800-word opinion piece in The AGE. But alas they have misread even that! In the article, I never say that mobility is “worse now”. I merely say mobility is fairly high relative to US, UK and Germany but that the “the future is much less clear”. I am simply warning that many of the barriers to mobility are getting worse . It is THE FUTURE I am focusing on.

    As for my “market failure” argument, which causes Matt and Patrick so much anguish, it is all spelt out in the discussion paper. Even the most liberal economy, with an open and competitive market system, does not necessarily produce a genuine meritocracy. The earnings inequalities it spawns do not simply reflect legitimate differences in personal capacities, skills, attitudes to risk, motivation etc.; they also reflect efficiency distortions. This is most self-evident when market outcomes are affected by overt or covert discrimination but this is becoming a diminishing problem in Australia. My paper highlights more the other barriers to mobility, especially in credit markets (asymmetrical information and uneven ability to borrow for education), which Andrew also mentions, and labour markets (imperfect job and geographical mobility). Many of these barriers are growing. Economics textbooks also highlight the tendency for free markets to under-spend on ‘merit goods’ such as health, education, specific training, housing and public transport. The under-spending problem increases in an environment where education and health inequalities are tending to widen, where public infrastructure is declining relative to private investment and where opportunities for low skill workers in the job market are diminishing. I note with interest that Andrew Norton also shares my pessimism about the future.

    So, Matt and Patrick, please read the full discussion paper before entering the debate so aggressively.

    By the way Patrick, although I am not a spokesperson for the Australia Institute (they were good enough to publish may paper but otherwise I have no affiliation with them) but am puzzled by your comments about CIS papers being free. I pay good money for my CIS review “Policy”. No one told me it was “free”. Similarly being old, retired and working from home, I have to pay in order to access many journals.

  9. Patrick says:

    I was rude – I should be ashamed of myself 🙂

    I didn’t say anything about market failure, however, nor indeed much at all about the substance of your paper! Not that that puts me in a better light, by any means.

    I confess ignorance again – I’ve frequently downloaded CIS papers, and never had to pay for them. But I’ve only downloaded specific papers.

    SSRN is mostly free content, and if you want an NBER paper you could just ask Andrew to get it for, for example. Austlii is also free but mainly legal and very limited range – but they do have the eJournal of Tax Research.

    And you can always browse university libraries for free, and in many cases access their million-dollar online databases as well.

    But even though I regard pessimism as a sin, I promise to read your next (hopefully shorter) paper before ‘sounding off’!

  10. Matt Canavan says:

    Fred I don’t know how my comments can be classified as rude. I qualified twice that I hadn’t read your full article and I won’t be paying the $21.

    All I claimed was that I wasn’t convinced by the reasons you gave in the op-ed piece. Note that I have no view on whether mobility is going up or down.

    I did misinterpret some of your views. You claimed that barriers to upward mobility are increasing, I leapt to conclude that this meant you thought there has been a fall in mobility. I apologise for my misinterpretation but I don’t think it is a sign of rudeness.

    As for the market failure point, I don’t see how discrimination is a market failure. There is nothing inefficient about someone refusing to trade due to someone else’s characteristics. Indeed, if trading with that person would cause them a loss in utility (over and above any other net benefits that would be had by the trade) then it would be inefficient to force them to act despite their prejudice. Also not convinced by the merit goods argument (who’s judging the merit?) but admit that I haven’t looked at this much.

    As I stated earlier, I agree that information asymmetry in credit markets is a market failure but that wasn’t mentioned in your op-ed piece.

  11. Fred Argy says:

    No worries Matt. I agree you were not really rude. I was too sensitive.

    I am not sure about your point on discrimination. Perhaps I should be calling it something else than “market failure” but I argue is that competition is conducive to meritocratic outcomes only so long as there are no major barriers to income mobility. Systemic and widespread discrimination against a particular social group in the job market is one type of barrier. It excludes that group from participation and prevents achievement of a true meritocracy and good GDP outcomes.

  12. Christine says:

    Discrimination may not be inefficient in the static sense you suggest, Matt, but it would almost certainly be inefficient in a dynamic sense, I think. If you know you’re never going to get a good job because of race/gender/religion/whatever, then there’s little need to invest in skill formation in order to get the good job. And this means it’s going to transmit down the generations (for a while) even if discrimination lessens some time. And it may also make discrimination more palatable – ie no wonder those blacks never get any jobs, they don’t even care enough to go to shool, so why should we bother about them?

    Plus, depends what you mean by ‘efficient’ – if we mean w = MRP (required to get technical efficiency and prove the fundamental theorems of welfare economics, unless I forget something important) then it’s definitely inefficient, and will mean the economy as a whole is underproducing. I think it’s OK in an efficiency sense only if the discrimanatee is working directly for the final consumer, which seems to fit with the example you gave, but which is in no way the only case one can imagine.

  13. Matt Canavan says:

    That is a good point Christine but I don’t think it’s quite right. As you say the condition is w=MRP. The wage the employer pays is not just the explicit money payments but also would the include costs of having to work or employ people the employer didn’t like. Therefore, if there was widespread discrimination the costs of employing people of a particular type would be higher and this lower level of employment would be efficient.

    I’m not arguing that discrimination is a good thing, just saying that I don’t think you can explain why by appealing to efficiency. The simple fact is economics does not ask what preferences should be, it takes them as given. Accordingly, it can’t deal with some ethical questions.

  14. Christine says:

    Matt, didn’t think you were arguing discrimination is a good thing. And your point is right that if you think of it as raising the cost of working with someone then it’s a cost of doing business and could be included in the ‘w’ side of the equation.

    So: I concede on static, but I hold my ground on dynamic, at least for now 🙂

    (And I will point out that for this type of discrimination to affect overall wages, it has to be a large portion of the population who are discriminatory, not just a couple of bad apples.)

  15. derrida derider says:

    Matt, you’ve outlined Becker’s “distaste” theory of discrimination, but Akerlof’s “statistical discrimination” approach is much more persuasive. This relies on asymmetric information.

    Imagine you’re an employer hiring people in a country where left-handed people are less educated on average than right handed people and where education is hard (costly) for you to assess. You are going to prefer right handers as that is cheaper for you than fully assessing each applicants’ education. Of course that sets up a dynamic – the return to education for left handers will be less, so they will have less incentive to become educated, so your discrimination becomes (rationally) more intense. Each individual is behaving rationally, but the outcome is definitely socially sub-optimal. Worse, it is a separating equilibrium – a vicious circle can be set off by quite small initial differences.

    This sort of model is what provides formal theoretical backing for affirmative action policies aimed at creating a virtuous circle.

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