Monday, October 14, 2013

OECD report confirms that inequality does not incentivize upward mobility

Image: OECD member nations (blue). (source)

Defenses of inequality always invoke the same claim: high inequality makes for a strong economy. With (in theory) no ceiling and a very low floor, the rewards for success are extremely high, and the punishment for failure is extreme. This makes Americans hungry for success, and hard working citizens makes for a strong economy. We work harder than the Japanese, put in more hours than the Italians, study harder than the French, and sacrifice more than the Finns because our incentives encourage workers to do so. Nothing motivates like huge rewards for success--and a free fall into abject poverty if you fail. Incentives rule. People respond to incentives, and our incentives align to maximize economic growth. Another way of saying this is that we should value equality of opportunity and inequality of outcomes.
A recent OECD study shakes this logic to its very foundations. Researchers tested a sample of workers in each participating country in literacy, math, and problem solving with information technology. The United States performed abysmally:

Though we possess average literacy skills, we are far below the top performers. Twenty-two percent of Japanese adults scored in the top two of six rungs on the literacy test. Fewer than 12 percent of Americans did. We are also about average in terms of problem-solving with computers. Paradoxically, our biggest deficits are in math, the most highly valued skill in the work force. Only Italians and Spaniards performed worse.
While everyone loves coming in first, in principle, there's nothing wrong if your country has very bad results. For example, low skill work pays well in Austria. Thus, a large portion of Austrians have no incentive to develop these skills, since they can earn a decent living without them. In other words, incentives rule. If low skill work pays well, workers don't have the incentives to develop cognitive skills, and they might not. But that's ok, because low skilled work pays well enough.

Eduardo Porter notes of the United States:
The highly skilled in the United States earn a much larger wage premium over unskilled workers than in most, if not all, other advanced nations, where regulations, unions and taxes tend to temper inequality. So if the rewards for skills are so high, why is the supply of skilled workers so sluggish?

“The human capital base in the United States is quite thin,” said Andreas Schleicher, the O.E.C.D, deputy director for education and skills. “The American economy rewards skill very well, but the supply hasn’t responded.”
In other words, the opposite seems to be true in the United States. In countries where low skilled work pays well, one might expect worse skills, since there is less incentive to develop them. But in the United States, every incentive exists to develop those skills--yet workers are not developing those skills. In other words, workers are not responding to incentives. Whether they can't or won't is up for debate; what's not is the fact that the very assumption upon which our social and economic policies are built is wrong. Every policy is designed with the assumption that people will clearly understand incentives, will be able to respond, and will respond. But this does not seem to be true.

Of course, this is a single study. Nevertheless, it is consistent with a growing body of research (starting with "Second, there is no evidence...) arguing that we don't just have inequality of outcomes--we have inequality of opportunity. If this OECD research really is true, it calls into question the very basis of our social and economic policy. If people don't respond to incentives, then every policy we've implemented since Medicare is fundamentally wrong.

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