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Income Inequality: Where Denmark Falls Short

America has long been called the land of opportunity. But in recent years, there has been a lot of discussion about whether that still describes our nation, comparing us both to other countries and our own past. Two measures people often look at are income inequality and intergenerational income mobility. How much difference is there between rich and poor? And how closely related is a person’s economic standing compared to that of his or her parents?

Interestingly, I recently saw two different types of pieces written by prominent economists comparing the United States to Denmark. One was a Bloomberg article by Tyler Cowen, and the other was a working paper written by Rasmus Landerso and Nobel laureate James Heckman. The themes were very similar. While Denmark and other Scandinavian countries are often held up as examples of wealthy and egalitarian societies, the full picture is more complex, and each author espouses an almost identical view that elements of both Denmark and the United States have value in promoting better economic outcomes.

Landerso and Heckman find that while intergenerational income mobility is smaller in Denmark than in the United States, educational mobility – comparing one’s top academic degree to one’s parents — is about the same.  This is despite a smaller gap in school test scores between relatively advantaged and disadvantaged Danish children than the same comparison in the United States. One would think this fact should lead to more educational mobility, but it does not

They suggest this is due to higher education leading to smaller financial returns in the Danish labor market. Cowen’s article supports this argument by noting that, despite Denmark’s relatively high standard of living, Danish-Americans make over 50 percent more than Danes in Denmark. While it may be that Danes that came to America were particularly able or ambitious and passed on these traits to their descendants, this disparity is consistent with the idea of higher financial returns for highly educated and skilled Americans.

Landerso and Heckman therefore explain the similarity in educational mobility as a balance of two competing dissimilarities. Denmark appears to promote mobility by effectively educating disadvantaged youth, but the United States has stronger incentives for continued education. As the authors conclude, “Policies that combine the best features of each system would appear to have the greatest benefit for promoting intergenerational mobility in terms of both income and educational attainment.”

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