Friday, March 19, 2010

Social mobility and the free market

In a previous post a few days ago I pointed out that Italy and the UK had both the worst inequality and worst social mobility in Europe. I then blamed this on Britain's excessively 'liberal' economic institutions. But I need to qualify that. Some of my recent research is about the existence of two different paths towards entrenched inequality: a liberal one, as in the UK, but a very illiberal one (in economic terms), as in Italy and most of the rest of Southern Europe.
Here's what it looks like:


The x axis is a factor score for various measures of economic liberalization. Inequality seems to be associated with very high, and very low measures of this score. The interesting point is that Denmark, Holland, Finland and Sweden score almost as highly as the UK, yet have low inequality. The obvious explanation is higher welfare spending and stronger trade unions.
The optimistic reading of this is the economic liberalization need not have inegalitarian effects, provided it is accompanied with strong institutions to counter-act the inequalities created by markets. A key part of the process of liberalization in the UK was the destruction of these institutions (particularly trade unions), and that is why the resulting inequality is so high.
And what about Italy?
That's another post...