The Perception and Reality of Income Gap - Take a Long Term View

Discussing income inequality is often emotional. Whether one thinks income inequality by itself is a problem or not often depends on convictions, it is sometimes akin to discussing religion. Reasonable people sometimes become unreasonable - rhetoric and political positioning become more important than facts and good policies.

The Economist not too long ago had this rather interesting article "Snakes and Ladders" (27 May 2006).

[Start of excerpt] Europeans deplore the idea that people may remain mired in poverty, and they have large welfare programmes . . resent the sight of rich families staying at the top for generations . . impose high taxes to redistribute wealth and income . . [Research] confirms that if one compares the incomes of children with those of their parents . . . Nordic countries emerge as far more mobile than America . . Around three-quarters of sons born into the poorest fifth of the population in Nordic countries in the late 1950s had moved out of that category . . In contrast, only just over half of American men born at the bottom later moved up. . In other words, Nordic countries have almost completely snapped the link between the earnings of parents and children at and near the bottom. Britain is more like the Nordics than like America: some 70% of its poorest sons escaped from poverty within a generation. That is not at all true of America. Redistributive fiscal policies cannot be all there is to it. The other part of the explanation seems to be their superior education systems. Education has long been recognised as the most important single trigger of social mobility and all four Nordic countries do unusually well in the school-appraisal system developed by the OECD. That in turn may explain why the bigger continental European countries, notably France, Germany, Italy, are not as mobile as Nordic ones. [End of excerpt].

The interesting point is that US is perceived to be a highly mobile society, when it is actually not. Furthermore, a 2006 Pew Research Centre study polled that 84% of Americans were either "very happy" (34%) or "pretty happy" (50%). Clearly, there is no right or wrong when it comes to discussing whether income gap is by itself a problem. It is only one attribute out of many that affects happiness and welfare of citizens.

Moreover, how significant it is as a factor depends on how obsessed one is with it - is the glass half full of half empty? A remarkable 84% of Americans are pretty happy with life, what income divide? Perception alters reality. The same study concluded that Britain actually did better than the US in terms providing social mobility but obsession with class was still very much a British trait. Continental Europe, despite its generous welfare, is not quite as socially mobile. Without good education system, welfare traps people into social stratas.

Let me finish this blog by recalling a conversation with a British friend. When he visited me a couple of years ago, he was affronted by the sight of domestic maids doing menial work for Singaporeans. I had to explain to him that even though the maids earned lowly wages compared to Singaporeans, it meant a lot to them back home and could actually provide their families a decent way out of poverty. Social justice needs a time dimension. Focusing on the present income gap ignores the time dimension to social justice. So what if the Gini coefficient looks bad? It says nothing about how socially mobile a family is over a period of time. It can take more than a decade before the effects of policies (like education) can be felt. To answer any question about social mobility, one needs good longtitudinal data, not cross sectional income differences.

Income gap is not itself a problem, but the lack of social mobility or social stratification is. Good people become trapped by the circumstances of their parents. This is the real market failure. Moreover, creating the perception of social mobility is equally important. Therefore, providing good education opportunities - particularly for children of the poorest quintile - is key to fostering real and perceived social mobility in Singapore.

Take a long term view when it comes to social justice. Worry less about the income gap, but build a consensus on how to make Singapore society more socially mobile. Let's make sure the cream can rise to the top.