19-Jan-2020: Global Social Mobility Index 2020: why economies benefit from fixing inequality

The headline finding of the report is that most economies are failing to provide the conditions in which their citizens can thrive, often by a large margin. As a result, an individual’s opportunities in life remain tethered to their socio-economic status at birth, entrenching historical inequalities.

This is a major problem not only for the individual, but also society and the economy. Human capital is the driving force of economic growth. As a result, anything that undermines the best allocation of talent and impedes the accumulation of human capital may significantly hamper growth. Poor social mobility coupled with inequality of opportunity underpin these frictions, suggesting that if the level of social mobility were increased, it could act as a lever to economic growth.

The Global Social Mobility Index, which benchmarks 82 global economies, is designed to provide policy-makers with a means to identify areas for improving social mobility and promoting equally shared opportunities in their economies, regardless of their development.

Social mobility can be understood as the movement in personal circumstances either “upwards” or “downwards” of an individual in relation to those of their parents. In absolute terms, it is the ability of a child to experience a better life than their parents. On the other hand, relative social mobility is an assessment of the impact of socio-economic background on an individual’s outcomes in life.

It can be measured against a number of outcomes ranging from health to educational achievement and income.

Social mobility has become the pressing issue of modern life, and as the index highlights, while major improvements have been made in some areas, notably extreme poverty, in others, the situation is deteriorating. Globalization and technology are frequently blamed for this, but as the report highlights, there are a plethora of reasons – not least of which is poor policy-making – and it is the responsibility of a range of stakeholders to redress these.

The index considers what a country can do holistically to foster relative social mobility for all citizens, which is markedly different from other methodologies.

Historically, indices have analysed social mobility across generations by comparing earnings of children with those of their parents. Others have focused on outcomes, and as such, struggled to provide timely insights. The more academic tend to look at tracking income inequality. The problem with these approaches is that they capture the effect of measures that were taken 30-40 years ago.

The Global Social Mobility Index, however, focuses on drivers of relative social mobility instead of outcomes. It looks at policies, practices and institutions. This allows it to enable effective comparisons throughout regions and generations. It uses 10 pillars, which in turn are broken down into five determinants of social mobility – health, education, technology access, work opportunities, working conditions and fair wages and finally, social protection and inclusive institutions.

One of its key recommendations is the need for a new standard, which the report argues could be used to identify priority policy actions and business practices that would improve social mobility.

Key findings:

• The Global Social Mobility Index reveals that there are only a handful of nations with the right conditions to foster social mobility. Furthermore, most countries underperform in four areas: fair wages, social protection, working conditions and lifelong learning.
• The index also reveals that achieving higher levels of social mobility needs to be perceived as an important element of a wider move towards a stakeholder-based model of capitalism.
• Looking at all economies and average income levels, those children who are born into less affluent families typically experience greater barriers to success than their more affluently born counterparts. Furthermore, inequalities are rising even in countries that have experienced rapid growth.
• In most countries, individuals from certain groups have become historically disadvantaged and poor social mobility perpetuates and exacerbates such inequalities. In turn, these types of inequalities can undermine the cohesiveness of economies and societies.

Most economies need to bridge their social mobility gap. Overall however, the Nordic countries are the best performers. Denmark tops the rankings with a social mobility score of 85.2, closely followed by Finland (83.6), Norway (83.6), Sweden (83.5) and Iceland (82.7). These nations combine access, quality and equity in education, while also providing work opportunities and good working conditions, alongside quality social protection and inclusive institutions.

Among the G7 economies, Germany is the most socially mobile, ranking 11th with 78 points followed by France in 12th position. Canada ranks 14th followed by Japan (15th), the United Kingdom (21st), the United States (27th) and Italy (34th).

Among the world’s large emerging economies, the Russian Federation is the most socially mobile of the BRICS grouping, ranking 39th with a score of 64 points. Next is China, which ranks 45th, followed by Brazil (60th), India (76th) and South Africa (77th). India ranks 41st in lifelong learning and 53rd in working conditions. The Areas of improvement for India include social protection (76th) and fair wage distribution (79th).

The Fourth Industrial Revolution, globalization and technology: Globalization and the Fourth Industrial Revolution have generated significant benefits, but have also exacerbated inequalities. The Fourth Industrial Revolution, and with it, continuing and future disruption to labour markets, will likely compound differences in social mobility for those countries unprepared to take advantage of new opportunities.

Globally, the declining income share of labour relative to an increase in the income share of capital has significantly driven economic inequality and prompted a decline in equality of opportunity. This is reflected in huge wage disparities, which have grown exponentially since the 1970s. The report reveals that in the US, the top 1% of income earners in 2018 earned 158% more than in 1979, in comparison to just 24% for the bottom 90%.

The oft-cited causes of this polarization are globalization and technology. The index clearly shows that the former has increased inequalities within countries by transferring low-skilled jobs in high-productivity sectors in high-income economies to lower-income counterparts. This has effectively penalized workers in specific locations and types of job.

Concurrently, technology has polarized inequalities by reducing demand for low-skilled jobs while rewarding highly skilled jobs disproportionately. Exacerbating this has been the role of so-called “superstar” firms. These have high profits and a low share of labour, and as models of great productivity, have come to increasingly dominate markets.

The outlook remains mixed in the realm of technology. Analysis of the index reveals that in most countries, low social mobility is related to economic development issues that go beyond income. With this in mind, “digital leapfrogging” will not happen unless these issues are systemically addressed. More positively, technology has the potential to equalize the barriers to entry to knowledge, but only if the conditions are conducive.

Reversing the outlook is possible but requires concerted action, political will and time. The index suggests that governments must play the role of equalizer, levelling the playing field for all citizens, regardless of their socio-economic background. The report suggests:

• Creating a new financing model for social mobility: improving tax progressivity on personal income, policies that address wealth concentration and broadly re-balancing the sources of taxation can support the social mobility agenda. Most importantly though, the mix of public spending and policy incentives must change to put greater emphasis on the factors of social spending.
• More support for education and lifelong learning: targeted at improvements in the availability, quality and distribution of education programmes as well as a new agenda for promoting skills development throughout an individual’s working life. This includes a new approach to jointly financing such efforts between the public and private sector.
• Developing a new social protection contract: this would offer holistic protection to all workers irrespective of their employment status, particularly in a context of technological change and industry transitions, requiring greater support for job transitions in the coming decade.

Evidence suggests that companies that place purpose over profits perform better in the long term. Looking purely at a business case, companies increasingly realize that they face equal risks from system challenges, including inequality. By helping to make societies more equitable, consumer bases grow, operating environments become more stable and there is greater trust between customers and stakeholders. Furthermore, paying fair wages and eliminating the gender pay gap will also be crucial to boost social mobility.

Specifically, the report suggests that business:

• Takes the lead: primarily by promoting a culture of meritocracy in hiring, providing vocational education, reskilling and upskilling as well as by paying fair wages. This includes industry and sector-specific plans to address historic inequalities within and between sectors.
• Creates action plans specific to each industry: these are required to address shifts in inequality taking into account each industry's differing circumstances.

The bottom line is that companies can help improve social mobility, but business practices need to be updated.