The debate about inequality has recently been framed as the 99% against the reviled 1%. The premise of the debate seems to be that these groups are static. The ‘rich’ are a defined group who is perceived to prosper on the back of the exploited masses. You are either an exploiter or are being exploited. The facts are very different: most people move within income groups during their lifetime. While joining the hated 1%’ers may be beyond most people, social mobility is a fact. For example, most of the individuals who make up the bottom 20% at any time will be expected to leave this demographic. In fact, according to US research, 95% of the constituents of the bottom quintile has moved up the income rankings 16 years later. We all know it to be true that we expect our income to go up over our career, so it is actually hardly surprising. What is maybe surprising is that more than a quarter of the lowest quintile has made it all the way to the highest quintile. Today’s poor is tomorrow’s rich.
It should be generally accepted that this is good, in fact social mobility is a stated aim of politicians everywhere. Sadly, many of the policies they pursue have the opposite effects, none so more than welfare.
The aim of welfare is of course laudable, but it’s implementation in Western welfare states have condemned large groups to a life on the sidelines of society. This is the Welfare Trap, where social mobility is an unobtainable dream. Though their basic needs are looked after by the state, generations of the same families grow up with no prospect of getting off welfare and joining the ranks of the employed – in effect they are being paid for staying out of the labour market (and the unemployment statistics). The more generous the welfare system, the less incentive there is to try to escape. For many it hardly seems worth it getting up in the morning and going to work to incrementally creep up the income ladder. But by not being part of the labour market and acquiring valuable skills, an individual is cut off not just from that initial incremental, hardly-worth-the-effort income gain, but also from the opportunity of advancing further. Yes, social mobility is a fact, but not if you are trapped on welfare.
Means tested in-work benefits have the same effect: incentivizing earners to not progress in their careers, as the incremental income gain is off-set by the loss of benefits. Again, the real prize is not the incremental income gain but the chance of advancing further. Chance missed.
Obviously a minimum wage, by pricing the weakest out of the jobs market, has the same effect of restricting social mobility.
The welfare system is another monumental text-book example of unintended consequences. While the intellectual left may sleep well at night, it is unlikely that they would tell their own children to give up their dreams for the secure but miserable existence on welfare. By removing the incentives to be part of the labour force, that is exactly what the current welfare policy is achieving. But that’s fine – as long as it’s not our children…