One argument you frequently hear in support of inequality is that it’s a price worth paying for ’social mobility’; the theory is that the greater inequality typically produced by the more ‘free-market’ varieties of capitalism reflects the disparate rewards of more open competition in which your position in society is determined by merit and achievement rather than inheritance. The rise in incomes at the top end represent entrepreneurs working their way up from the bottom through talent and hard work, that kind of thing.
The problem is that the evidence doesn’t support this theory. In fact, social mobility seems to be lower in countries with higher inequality. The two charts below compare social mobility with two measures of inequality for the six rich countries for which full data is available. The source is chapter 7 of the Economic Policy Institute’s ‘State of Working America 2004-05′, available here. The yellow bars represent the association between fathers’ and sons’ income in each country, a decent measure of social mobility.
It’s plausible that inequality is more the cause than the effect of the level of social mobility: in a very unequal society, the rich would be better placed to protect their positions and the poor may be unable to acquire a decent education. This idea seems to be supported by the fall in social mobility that accompanied the rise in inequality in America over the last few decades.