Economic freedom and children’s prosperity

The United States has long been seen as the Land of Opportunity. While unfortunately some Americans were excluded from these opportunities, ambitious and hard-working people from across the world came here for freedom and helped build our prosperous economy.

Has our opportunity society decayed? Much of this concern stems from allegations of greater income inequality. Perhaps more relevant than inequality though is movement by individuals within the income distribution. It matters greatly if the same one percent are on top each year or if significant turnover occurs. Consequently, economists also examine the extent and determinants of income mobility.

Income mobility can be measured in two ways. Absolute mobility examines whether children earn more than their parents, adjusting for inflation. Relative mobility looks at whether children from the lowest income households ever move up the income distribution.

Harvard’s Raj Chetty has done some of the most important work on U.S. income mobility. His research on the “Fading American Dream” finds a substantial reduction in absolute mobility. Over 90 percent of Americans born in 1940 earned more than their parents at age 30 versus less than half of those born in 1980. A slower overall rate of economic growth and a concentration of income growth on the highest paying jobs in recent decades drive this outcome.

The reduction in the likelihood of children out-earning their parents is broad-based, but highest in industrial states like Michigan, Indiana and Illinois. Manufacturing paid high salaries for physically demanding, loud and dangerous jobs. Economic theory predicts that workers must be compensated with extra pay to offset undesirable working conditions. Workplace safety regulations have made businesses spend money to reduce workplace risks and hazards. Our remaining manufacturing and mining jobs are safer but consequently pay less; alternatively, 1960s salaries overstated workers’ well-being.

Work has also changed dramatically over the past 50 years. As Forbes’ John Tamny show in his The End of Work, many jobs no longer seem like work. People in sports analytics, for instance, get paid for analyzing statistics and decision-making for teams. Enjoyable work can pay less than demanding and dangerous work.

The best, hardest working people should succeed with economic freedom regardless of background. But what level of income mobility should we expect? For one, some children might choose not to make as much money as their parents.

Highly successful persons in business, law or medicine generally work extremely long hours. These long hours mean less time spent with children; CEOs likely missed many little league games. Their children might grow up valuing better work-family balance and accept lower earnings to achieve this. I am not judging these life choices, just point out consequences.

We can offer one prediction: there should be more mobility with economic freedom and competition than without. Government rules and regulations can protect favored businesses or groups of workers against competition, and these protected positions can often be gifted to others, creating a privileged elite.

New research from Canada’s Fraser Institute provides evidence on this prediction. Fraser compiles the Economic Freedom of the World and the Economic Freedom of North America indexes, which document how closely nations and states approach the ideal of a market economy. Reliable measures of economic freedom enable testing whether markets deliver the benefits some economists promise.

Vincent Geloso of George Mason and Jason Callais of Texas Tech examine two measures of generational mobility, one looking at elements of social and economic mobility and the other focusing specifically on intergenerational income mobility. They find that countries with more economic freedom also have more social and income mobility. The link is stronger for the indicators of social mobility because the income mobility data is only available for wealthy countries, which also generally have high levels of economic freedom.

Economic freedom provides people opportunities. We choose what to do with these opportunities. Income mobility provides important evidence on opportunity, but economists must remember that in a prosperous nation, not all will earn the most money they possibly can.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.