Tuesday, 16 August 2016

Magic mobility bullets

There are (probably) no magic bullets, only trade-offs.

Landersø and Heckman look at intergenerational mobility in the US and Denmark. The former has far less income redistribution than the latter. One of the many welfare policy tradeoffs is that strongly progressive income tax regimes to fund large scale redistribution reduces the return to education because of the resulting after-tax salary compression. And so if part of your basic model of the world is that poor kids do not take up education because of family deprivation, then you have a tradeoff: the same policies that reduce that problem also reduce incentives to undertake education in the first place.

They find that there is a real causal negative link between generosity of public assistance and educational enrolment, using a policy change that affected welfare access by age, raising the minimum age of eligibility for full social insurance payments. The caveats:
The results presented here establish a negative relationship between educational enrollment and the level of public benefits, albeit with two caveats. First, it is beyond the scope of this paper to estimate the underlying behavioral parameters—we strongly encourage future research to explore this relationship further. Second, we neither have precise estimates of the potential gains from the greater equality in childhood investments and fewer pecuniary costs of education in Denmark than in the U.S., nor the disincentives for educational attainment that wage compression and public benefits constitute. Hence, we cannot determine whether the similarities in educational mobility in the two countries occur because the effects offset each other, though we find this to be a plausible explanation given the evidence at hand.
They also find that neighbourhood sorting remains rather important.

They provide an appropriate caution on noting the substantial gaps in cognitive, language and emotional skills among Danish kids from higher and lower income backgrouns:
While the Scandinavian welfare state invests heavily in children throughout childhood and redistributes income (consumption) during adulthood, it has not eradicated the strong influence of parents and early childhood conditions. As a consequence of the complementarity between skills and investments, later life universal schooling investments during childhood or adolescence may be ineffective in reducing gaps between advantaged and disadvantaged children. 
They conclude:
Despite Denmark’s far more generous welfare state, its extensive system of preschools, and its free college tuition, the family influence/child education relationship is very similar to that of the U.S. In both countries, much of the average association between parental resources and the educational attainment of children can be explained by factors set in place by age 15, including child skills. However, distributions of cognitive test scores of disadvantaged Danish children are much better than those of their counterparts in the U.S.

The failure to promote greater educational mobility in spite of providing generous social services is most likely rooted in the welfare state. Our findings point to wage compression and the higher levels of welfare benefits as being counterproductive in providing incentives to pursue education. The low returns to education observed in Denmark, in particular at the lower levels of education, help explain the disconnect between the egalitarian childhood policies in Denmark and the roughly equal levels of educational mobility in Denmark and the U.S. The sorting of families into neighborhoods and schools by levels of parental advantage is likely another contributing factor. While the Danish welfare state may mitigate some childhood inequalities, substantial skill gaps still remain. 
Perhaps better outcomes at the bottom in Denmark are due to the country's more extensive redistribution, or perhaps it's due to the advantage of having a country of Danes. But the resulting wage compression causes other problems.

Update: Jim Rose points me to this write-up on the study at The Atlantic.

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