Tuesday , March 26 2019

Growth & mobility

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Summary:
Everybody knows we live in an era of secular stagnation. Everybody also knows that social mobility has stalled not just in the UK but around the world. For example, a recent OECD report found that: Since the 1990s there is a general trend towards more persistence of income positions at the bottom and at the top of the distribution. This translates into both lower chances to move upward for those at the bottom, and into even lower risks to fall down from the top. I wonder, though: are these two facts related? It’s obvious that economic growth provides room at the top – more good jobs which can be filled by people from poor backgrounds. And it also makes us better off than our parents: even 2% growth per year compounds to an 80% gain over 30 years. I’m thinking, though, of another

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Everybody knows we live in an era of secular stagnation. Everybody also knows that social mobility has stalled not just in the UK but around the world. For example, a recent OECD report found that:

Since the 1990s there is a general trend towards more persistence of income positions at the bottom and at the top of the distribution. This translates into both lower chances to move upward for those at the bottom, and into even lower risks to fall down from the top.

I wonder, though: are these two facts related?

It’s obvious that economic growth provides room at the top – more good jobs which can be filled by people from poor backgrounds. And it also makes us better off than our parents: even 2% growth per year compounds to an 80% gain over 30 years. I’m thinking, though, of another mechanism – that slower growth causes hirers to become more risk averse. Riot-club2

A key insight here comes from Marko Tervio. He argues that what matters isn’t so much talent as proven talent. Many hirers would prefer the known quantity who is just above a threshold of competence to the unknown one who might be brilliant but might also be a duffer. In hiring a factory manager, you want someone who isn’t going to blow the place up. In hiring a journalist, you want someone who can be relied upon to file something literate and on time. And so on.

This explains a lot. It explains why there is a merry-go-round of football managers who keep getting sacked and rehired: club owners want bosses with some kind of track record – if not a management CV then at least a stellar playing career. It explains why Jeremy Corbyn and John McDonnell employ friends and family: when you have a siege mentality you look to those you can trust. And it explains why “Failing Grayling” keeps his job: May can at least trust him to toe the party line, and it’s only other people’s money he’s wasting.

What matters is just merit, but the expected variance around that merit. Hirers sometimes want to reduce this variance. When they do, trust trumps ability. And this is bad for social mobility. We trust people like ourselves and distrust outsiders – so posh white men trust other posh white men more than they do others.

And herein lies the link between slower growth and slower social mobility. It’s simply that slower growth makes us more risk averse. If you can look forward to big growth in revenues you can afford to make one or two risky hiring decisions. If you’re hiring dozens of graduate trainees you can take a risk on some potentially brilliant outsiders. If, however, your firms’ prospects are gloomier and you are hiring fewer, you’ll not take such risks.

It’s for this reason that industries that are growing rapidly tend to be meritocratic whilst those that are shrinking tend not to be. Compare, for example, finance in the 80s or IT in the 90s to journalism today.

I suspect that two other trends are exacerbating this. One is increased accountability. If you fear a bad hire will cause your boss to ask “why did you hire that twat?” you’ll not take a risk. Just as nobody got sacked for buying IBM so nobody got sacked for hiring the white male Oxford graduate. Another is the increased importance of soft skills. Yes, the distinction between the public school boy with his easy charm and the geeky state school boy is something of a cliché. But it has a grain of truth. It’s easier to win people over if they are like you than if they are not, which gives those from posh backgrounds an advantage in top jobs.

My point here is a variation on one that I’ve made before, following Ben Friedman. If you want an open, tolerant society in which people are treated on merit you need economic growth. And no UK politician to the right of John McDonnell seems to have any idea or interest in promoting this. Which makes any pretence they have to believe in meritocracy rather hypocritical.

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