Economic Mobility: The Macroeconomy Matters

How can the economic mobility prospects of workers affect the broader economy?

A publication edited by the Federal Reserve Bank of St. Louis and the Fed’s Board of Governors looked at this and other mobility-related questions.

In their introduction to Economic Mobility: Research & Ideas on Strengthening Families, Communities & the Economy, Ray Boshara, director of the St. Louis Center for Household Financial Stability, and David Buchholz, deputy associate director for the Federal Reserve Board, summarized contributing essayists’ thoughts on the complex relationship between individuals and the strength or weakness of the macroeconomy.

Mobility, Inequality and Macroeconomic Dynamics

Boshara and Buchholz said that a well-documented rise in income and wealth inequality over the past few decades has been matched by a constructive rise in attention from scholars, the media and the public.

However, they cited a lack of agreement on how problematic this income and wealth divide might be.

“Some argue that the ability to climb the economic ladder is more important than the actual inequality and that, in fact, relative inequality has long been a motivator to incentivize working hard to get ahead,” they wrote. “From this perspective, evidence that economic mobility could be stagnating might be even more concerning than similar evidence of inequality.”

The authors noted an essay from Economic Mobility contributor Scott Winship, who cautioned that growing inequality should not be conflated with declining mobility: “A country can have high (and rising) inequality without economic mobility being worse,” wrote Winship. “If American CEOs earn much more than fast-food workers, that does not necessarily mean that it is more difficult in the United States than in other countries for the daughter of a fast-food worker to become a CEO.” Winship, Scott. "The State of Economic Mobility and Why It Matters" (PDF). Paper in Economic Mobility: Research & Ideas on Strengthening Families, Communities & The Economy, Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System, 2016.

They said that the real mobility issue for Winship is not rising inequality, but rather changes in family structure.

Inequality of Opportunity and Effort

Economic Mobility also addressed the effect of inequality on the nation’s economic performance.

Boshara and Buchholz highlighted a finding from contributors Gustavo Marrero and Juan Gabriel Rodriguez. Marrero and Rodriguez found that the literature, overall, is ambigu­ous because total inequality includes two components of inequality which, working simultaneously, could have opposing effects on economic growth. Marrero, Gustavo A. and Rodríguez, Juan G. "Inequality … of Opportunity and Economic Performance" (PDF). Paper in Economic Mobility: Research & Ideas on Strengthening Families, Communities & The Economy, Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System, 2016.

The two components are:

• Inequality of opportunity—Due to factors beyond one’s control (such as one’s parents, race or time/place of birth)
• Inequality of effort—Relates to choices over which people do have control

Boshara and Buchholz stated that Marrero and Rodriguez take the view that the former is unfair and “always” harms economic growth, whereas the latter kind of inequality is fair. Marrero and Rodriguez also showed that inequality of effort has an ambiguous relationship to economic growth.

Human Capital Accumulation and Development

Boshara and Buchholz wrote that the accumulation of human capital is noted as an important component of one’s ability to get ahead.

They said that in the view of Economic Mobility contributors Eric Hanushek and Ludger Woessmann, human capital is an equally important contributor to the overall economy. Hanushek, Eric A. and Woessmann, Ludger. "Skills, Mobility, and Growth" (PDF). Paper in Economic Mobility: Research & Ideas on Strengthening Families, Communities & The Economy, Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System, 2016. Hanushek and Woessmann argued that if overall improvements in basic skills and other components of human capital were realized, the influence on overall economic health would be significant.

According to Boshara and Buchholz, “One implication is that, to the extent that schools and other contributors to skill development are lacking in certain areas or for certain portions of the population, the overall economy may not be as robust as it could otherwise be.”

Notes and References

¹ Winship, Scott. "The State of Economic Mobility and Why It Matters" (PDF). Paper in Economic Mobility: Research & Ideas on Strengthening Families, Communities & The Economy, Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System, 2016.

² Marrero, Gustavo A. and Rodríguez, Juan G. "Inequality … of Opportunity and Economic Performance" (PDF). Paper in Economic Mobility: Research & Ideas on Strengthening Families, Communities & The Economy, Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System, 2016.

³ Hanushek, Eric A. and Woessmann, Ludger. "Skills, Mobility, and Growth" (PDF). Paper in Economic Mobility: Research & Ideas on Strengthening Families, Communities & The Economy, Federal Reserve Bank of St. Louis and the Board of Governors of the Federal Reserve System, 2016.

Additional Resources

• Publication: Economic Mobility: Research & Ideas on Strengthening Families, Communities & the Economy