How do the rich get rich?
This week, Charles Kenny explains that the kind of family you’re born into contributes significantly to how well you do in life. It’s not a brand new theory, and has been discussed by many sociologists and economists in the past, but Kenny brings it up again in a time of high income inequality across the United States.
He says that to a certain extent, you can explain economic differences between you and a friend due to lifestyle choices and the amount of work you put into attaining wealth. But beyond that, things get arbitrary, based on factors people can’t control. This would explain why “the rich are rewarded for the same effort far more than are the poor,” Kenny says.
In the U.S., about 50 percent of variation of wealth and about 35 percent to 43 percent of variation in income of children can be explained by the relative wealth and income of their parents, suggest economists Samuel Bowles and Herbert Gintis. One reason for this tight relationship is that parents who were educated are far more likely to educate their own kids.
In addition, people who come from well-educated families, for example, are more likely to be born into a network that will help them get jobs and professional advice later on in life. Kenny cites economist Linda Loury who says that almost half of jobseekers in U.S. find their jobs through family or friend connections. Therefore, the reliance on a career network is incredibly important.
The location of your birth is also incredibly important:
At the international level, the relative impact of effort vs. luck is even more biased in favor of luck. A recent New York Times story pointed out that household incomes in Manhattan are as evenly distributed as in Sierra Leone—in both places, the wealthiest fifth make 40 times more than the lowest fifth. The difference, of course, is the average around which that income lies. The median household income in Manhattan is around $67,000…According to Branko Milanovic, about two thirds of total global inequality can be explained by geography. Put the two factors of locational and parental determinants together and about 80 percent of your income as an adult, compared to the global average, can be explained by where you were born and to whom you were born.
Kenny argues that a solution to this would be a more progressive tax code, and hiring practices that focus on talent and not connections. Those would be the ideal solutions, but how realistic are they, given our current economic climate?
So if you’re looking to be rich and well-connected and you weren’t already born into a well-to-do family, better luck next life.
(Image of couple via Shutterstock)