Financial Inclusion

As Social Economic Mobility Declines, Investors Seek to Expand Opportunity

By some measures, social economic mobility in America is waning. When economists compared people born in 1940 with those born in 1984, they found that 92% of the former went on to earn more than their parents, but only 50% of the latter enjoyed the same success. Data on educational attainment paints a similar picture: someone born in the 1940s had a 70% chance of achieving a higher level of education than their parents, while for those born in the 1980s, it was less than 45%.

Some impact investors are concerned by the apparent trend toward lower mobility and are looking for ways to counteract it.

What Is Social Economic Mobility?

According to the Organisation for Economic Co-operation and Development (OECD), social economic mobility is the capacity for people to change their circumstances over the course of their lives—for children to experience different circumstances from their parents. Vertical social mobility encompasses changes that move a person up or down the social ladder: earning educational degrees, experiencing improved or worsened health, joining or leaving an occupation, or gaining or losing status within a community. The economic mobility component takes into account earnings, assets, and property; in a society with high economic mobility, it would not be unusual for someone to grow up in poverty and retire a wealthy person.

Low social economic mobility is a serious problem for people at the bottom of the income distribution, who face difficulty advancing socially and economically to reach a higher standard of living. Yet those in the middle class may find themselves in a precarious position thanks to mobility trends—OECD research finds that mobility is higher in the center of the income distribution, meaning that middle-income households have a better chance of rising to the top, but they also face higher risks of falling into poverty. Over a four-year period, one out of seven middle-income households dropped to the bottom 20% of households by income.

In addition to its effects on individuals’ lives, decreased mobility can pose a threat to society as a whole. The OECD finds that low mobility is associated with high levels of income inequality, and research from the World Bank suggests that across countries, higher mobility measured by educational outcomes corresponds to reduced poverty and higher economic growth. The research also found that higher mobility may contribute to perceptions of economic fairness and improved social stability.

Although many social scientists consider social economic mobility important, the concept also has its detractors. For example, some argue that examinations of mobility give undue attention to relative status and disregard absolute levels of well-being.

Low social economic mobility is a serious problem for people at the bottom of the income distribution, who face difficulty advancing socially and economically to reach a higher standard of living.

Investors Search for Solutions

In light of research highlighting the benefits of interventions with young children, some impact investors support early childhood initiatives that give disadvantaged children more equal footing as they begin school.

One example is Acelero Learning, a for-profit company that initially raised $4 million to contract with Head Start to operate preschools and has since expanded to offer training and services to other Head Start providers. In 2019, Acelero Learning was named a Head Start exemplar by Bellwether Education Partners in recognition of its positive student outcomes. In another example, WonderSchool helps people create licensed early childcare programs in their homes, with the goal of increasing access.

Another approach to fostering equal opportunity is to invest in opportunity zones, which are locations identified by the federal government as having fallen behind economically. Investors hope that by deploying capital to opportunity zones or other areas with people trapped in poverty, they can provide paths to economic advancement for those who live and work there. For example, Reinvestment Fund helps improve social services in underserved areas through its pay-for-success financing initiative, which allows public service providers to receive private financing and governments to scale up poverty-alleviation programs.

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