Iceland has been the world’s whipping boy for the last few years.  The collapse of its banking system uncovered huge international systemic failures leading to the economic crisis.  The snowy nation has had a rough time of it.  But as we begin 2011, I ask the question, are they really still in that much trouble?  Figures released by the International Monetary Fund in December 2010 showed that Iceland’s GDP grew by 1.2% in the third quarter, ending the recession caused by the actions of those in its banking sector.  What about those European countries still in economic strife?

In direct contrast to the actions taken by almost all other western countries and most significantly Ireland, Iceland let its banks fail.  It was able to do so because the international risk of contagion is comparably lower than many of the European countries currently receiving bail-outs.  This forced foreign creditors and the banks themselves to foot the bill of failure, rather than the taxpayer.  Essentially, Iceland stuck to free market principles.  Those institutions that operated in an economically viable manner were able to survive; those that chose to take on too many liabilities in foreign currency must face the consequences.  In a system such as banking where when times are good, the mechanisms of capitalism and free market economics define the actions of agents in market, why should those mechanisms not also define what happens when it goes wrong?  In addition to the economic reasoning, there is also the moral issue of the taxpayer having to pay for the mistakes of a small elite.  The actions of many other governments in bailing out the banks served as an attempt to prop up an already unsustainable bubble.  These actions have exacerbated existing public finance problems further, the implications of which are to be felt by those who have not caused the problem.

During the recession Iceland’s economy shrank 11 – 15% depending on your source, but it did so with inflation peaking at 18%, which devalued its debt.  The soaring inflation was furthermore caused by the Icelandic central bank’s decision to halve the value of its currency, the Kroner.  The difference in terms of inflation between Iceland and those euro-zone countries thought to be in the worst economics position, the PIGS (Portugal, Ireland, Greece and Spain), is quite stark.  Iceland’s inflation soared whilst Ireland, for example, is still going through through a sustained period of deflation

Iceland’s inflation is now down to a respectable 3%, hence interest rates are now at 4.5% from an 18% peak.  These inflation rates are, however, higher than the PIGS.  Iceland’s debt situation is also looking up.  Forecasts for 2011 predict a deficit of 6.3% which will soon turn to surplus approaching the mid-point of the decade.  The IMF said Iceland has turned a corner and that its economic performance “compares favourably against other countries hard hit by the crisis”.

Iceland’s current account balance suffered greatly at the beginning of the crisis with the nation running a 26% of GDP trade deficit with the rest of the world, which is much greater than any of the PIGS.  However, due to the high inflation rates and devaluation of its currency, the trade deficit in 2010 fell to just 0.9% of GDP, with a surplus forecasted in 2011.  Comparably, the PIGS are still running significant deficits approaching and exceeding 10% of GDP.  The long-term effects of these deficits are yet to be seen.  One thing is clear, the PIGS do not have the monetary sovereignty of Iceland and hence cannot devalue their debt, they must in effect, toe the economic line of the European Monetary Union and European Central Bank.

Many have portrayed the path chosen by Iceland and subsequent recovery as a model for other beleaguered economies, such as the PIGS group in the EU.  However, such comparisons must be contextualised.  Iceland’s economy is comparably tiny and would have little chance of bringing the entire world economy down if it walked away from its liabilities compared to the aforementioned PIGS.  Defaulting in one of those economies would risk contagion throughout the euro zone and possibly beyond.

Iceland’s monetary independence from the European Monetary Union has been sighted by many as a possible reason for its recent good performance.  Having experienced the worst financial crisis in memory, the country has emerged ahead of many of its contemporaries having endured less punishment than many EU member states.  Greece and Ireland have already been forced to accept bail-outs, and it appears Portugal will soon follow with an €80bn rescue package mooted.

But how sustainable is this recovery?  Iceland’s public debt has reached in excess of 115% of GDP, over four times what it was in 2007.  Furthermore, Government bonds issued in foreign currency are becoming more and more expensive to repay due to the devaluation of the kroner.  Domestic austerity was aided by this devaluation and the subsequent increase in inflation; however, many commentators have indicated this had little to do with the recent return to positive growth.  The turnaround is attributed to the return to current account surplus from deficit.  Moreover, the aforementioned debt burden is not only applicable to government finance; house prices have plummeted in the crisis leaving many homeowners in negative equity.  By no means is Iceland out of the woods, its current account turnaround from deficit to surplus has been accredited to falling imports rather than a surge in exports.  More tough times are ahead.

The implications of bail-outs on the PIGS are also uncertain.  What is obvious is the political motivation behind their economic choices; the European Union needs the single currency.  It is those with vested interests in the Union that have the most to lose; there is an unnerving air of inevitability in what is happening.  Interest rates are remaining low, aimed at a sluggish Germany, whilst those euro-zone countries experiencing increasing inflation desperately need interest rates to rise.  Where the European project falls down is, in throwing hugely different nation economies under a single monetary policy, it lacked the complete supranational economic governance and social mobility required.

On balance, Iceland has taken a radical path of devaluation which saw violent shifts in economic measures, which all looked terrible whilst it was happening.  It may however appear preferable to the long-term damage that may be seen in those countries which have chosen austerity, debt deflation and bail-outs, but like driving a car using only the rear-view mirror, we will not know until it has happened.

About the author: Harry is a fist year undergraduate studying Politics and Economics (BA) at the University of Leicester.

Recently, the Centre for Economic Performance (CEP) celebrated its 21^st Birthday by holding a series of lectures at the London School of Economics and Political Science (LSE). The chief economist at the International Monetary Fund, Olivier Blanchard, gave the first lecture on the state of the world economy. Last Tuesday, the second lecture of the series was given by Professor John Van Reenen on the topic of restoring economic growth.

The Economics Network received an invitation to attend both lectures, and as a new guy on the job, I was appointed to go. However, being a second year student with a very busy schedule means I could only attend one of the lectures. Since I was doing economic growth as part of my macro course, I decided to go to the latter lecture.

I arrived in London quite late, but managed to quickly find my way to the lecture theatre in the LSE’s Old Building where the talk was held. The CEP has reserved a front row seat for me, so not only did I have the best view; I also managed to take many photos. There was a brief introduction of John Van Reenen by Stuart Corbridge before the lecture started.

John divided the lecture into three sections: the problems we currently face, the sources of growth and the policies we need. He started by saying the beginning of the current recession was a lot worse than the Great Depression; however, the government has not made the same mistakes it did in the 20s. Bank capitalisation, loose monetary policy and stimulus packages instead of spending cuts and tax raises have resulted in a much faster recovery for the UK. He also stressed that accelerated budget cuts proposed by the current coalition government will harm the economy in both short and long terms.

The three main sources of growth identified by John in his lecture were: technological innovation, management practices and microeconomic structural reforms. The main accent was made on the link between productivity and management. John argues that productivity growth is what matters, not absolute growth of GDP. Increases in productivity will drive real wages and consumption up, which in turn can
facilitate distribution. He also made a very interesting point about happiness. Current economic theory focuses on maximising income and consumption, but John thinks that after a certain level, addition to growth will not lead to more happiness. In my opinion, this is definitely something economists could focus more on.

He went on to analyse productivity in the UK. According to the findings, the UK’s relative productivity has improved compared to France and Germany. However, there is still a big gap relative to the US. John argues that this is all down to management practices. His data shows that the US has very few badly managed firms, hence, it has high productivity. On the other hand, in developing countries where there are many family businesses, management is much worse. John thinks that competition in the labour market ultimately leads to better selection of managers, which has a great impact on how firms’ productivity.

So what can we do to restore growth? The lecture concludes that structural reforms and macro policies should do the trick. Things like competition policy, public sector planning and better human capital management at the low end (apprenticeship scheme) are going to improve productivity in the long run. Finally, John argues that the austerity measures proposed by the current government will affect long-term employment as private sector cannot speedily adjust to the fiscal shock.

Here are the links to the webcasts of the two lectures if you want more:

Lecture 1: The State of The World Economy (Olivier Blanchard)

Lecture 2: Restoring Growth (John Van Reenen)

About the CEP

The CEP is an interdisciplinary research centre at the LSE Research Laboratory. It was established by the Economic and Social Research Council (ESRC) in 1990 and is now one of the leading economic research groups in Europe. Its current Director is Professor John Van Reenen.

The CEP studies the determinants of economic performance at the level of the company, the nation and the global economy by focusing on the major links between globalisation, technology and institutions (above all the educational system and the labour market) and their impact on productivity, inequality, employment, stability and wellbeing. Its researches have affected numerous Labour policies, in particular the apprenticeship scheme.

The content provided can be in any format about anything related to Economics: current affairs and politics to day-to-day activities, such as analysis of economic concepts in movies and music. We also encourage entries about the social life of Economics students. Most entries will go to Economics in Action blog, but there is a possibility to write a material for other sections of the websites.

Being a contributor for us will be beneficial for you in many ways. Firstly, if you want to pursue journalism, this is a great way to start. The websites are very popular with lecturers and students, so you will have an audience. If you become a frequent contributor, we will make sure your name appears on the websites, and this will look great on your CVs. Finally, writing something contemporary and interesting will widen your views about Economics as well as distract you from all the maths you have to do for your course.

If you are interested, please email Anh with your details and a possible entry. We can also discuss what sort of material you would want to write or feel comfortable writing.

The journey involves Seddiqui experiencing jobs ranging from working as an archaeologist in Arkansas to being a model in North Carolina. Seddiqui is exploring all of the different cultures, environments and careers available in the USA.

Seddiqui is keeping us updated on his whereabouts and experiences on his website – Living in the Map. So far Seddiqui has been offered several permanent jobs and a Hollywood production company are developing a movie about his journey. It seems that unsuccessful interviews are a thing of the past for Saddiqui.

Source:  Sky News.

“Most of the things that economists do don’t even look like economics: adoption policy; money laundering (detecting!)… The range of topics is truly astonishing. From Becker’s early re-widening of mainstream economics, We now analyse

• Auctions
• Sex and race discrimination
• Sport
• What you can and can’t get on the NHS and why
• Competition and quality of education
• Value of time and even life
• Happiness itself
• Inner-city dynamics
• Passenger safety
• Marriage and divorce: which partner gets the most in marriage?
• Crime and drugs
• Social exclusion
• Immigration
• Does performance-related pay make people work harder?
• Are we taxed too much?
• Is competition always good?
• Do people gamble rationally on the lottery and on quiz shows on television?
• What causes wars?
• Obesity
• How to match kidneys?
• Private returns to education (economists do particularly well!)
• Behavioural economics (engaging classroom experiments)
• Voting behaviour
• Social mobility
• Why are there so many junk media channels, all the same?
• Why aren’t there petrol stations in the centre of cities?
• Are cities green?
• Why are cities so astonishingly productive? What are the agglomeration effects of human beings huddled together?
• Should we put folic acid in bread?
• Should nursery care be subsidised?
• Is Sure Start off to an unsure start?
• Of course, there’s the climate and the welfare of future generations
• Yes, all the stuff by Steven Levitt: Do teachers and Sumo wrestlers cheat? Did abortion reduce teenage crime? Do doctors pump up their earnings by performing unnecessary operations?
• Economics, Socionomics, Bionomics, Freakonomics, Wikinomics, Happinomics… Of course no one wants bollonomics: we’re concerned about peer review and the quality of data. Not everything goes.

Even this list is parochial and narrow. In government, these are just tips of whole new icebergs. I suspect there may be more exciting topics for the economics student than just the economy.”

NB: the opinions presented here are the personal views of Andy Ross and not necessarily official positions of the GES.

Intute Social Sciences blog has more coverage from the conference.

Listen to the interview

Download audio file (prowse128.mp3)

No matter what qualifications they have or how big their family is, British women face a substantial occupational penalty if they work part-time. That is the central finding of new research by Victoria Prowse, presented to the Royal Economic Society’s 2007 annual conference at the University of Warwick.

This finding is consistent with an inadequate supply of high quality part-time jobs to suitably qualified women, and provides support for the introduction of incentives for the firms to increase the number of part-time jobs in skilled occupations.

The study also finds that women with children who enter the labour market have higher occupational attainment, and experience a smaller occupational penalty, than childless women. Thus, there is no evidence whatsoever of women with children (the majority of whom work part-time) being any less career-focused than women without children.

It is well known that part-time jobs in the UK are concentrated in poorly paid, low skilled occupations such as catering and retail. This study estimates that between 1974 and 2000, an average of 76% of women in full-time jobs were working in non-manual occupations while on average only 56% of women in part-time jobs were working in non-manual occupations.

The study draws on data from the National Child Development Survey in order to build up a picture of the employment choices and occupational attainment of British women between 1974 and 2000. It finds that:

• Holding a university degree reduces, but does not eliminate, the part-time occupational penalty.
• Women with children who enter the labour market have higher occupational attainment, and experience a smaller occupational penalty, than childless women.
• But irrespective of qualifications or family size, all women experience a significant part-time occupational penalty.

A university degree reduces the occupational penalty suffered by women in part-time work: among women aged 24 with no qualifications, those in full-time work are 27 percentage points more likely than part-timers to be working in a non-manual occupation.

In contrast, among women holding university degrees, those in full-time work are only 18 percentage points more likely to hold a job in a non-manual occupation. Therefore, although highly qualified part-timers suffer a substantial part-time occupational penalty, it is far less than that suffered by women with lower levels of qualifications.

The presence of children in a woman’s household also has implications for her occupational attainment. Women with children are more selective in terms of the quality of jobs that they are willing to accept than childless women: conditional on being in either full- or part-time employment, women with children are on average 10 percentage points more likely than childless women to be employed in non-manual occupations.

Thus, there is no evidence whatsoever of women with children being any less career-focused than women without children. Interestingly, this selectivity effect is greater for women in part-time jobs than those in full-time jobs. So the low occupational attainment of women in part-time work cannot be attributed to low occupational ambitions among women with children, the majority of whom work part-time.

Despite variation in the part-time occupational penalty across women with different levels of education and with different family sizes, all women experience a substantial part-time occupation penalty: after controlling for differences in individual characteristics, women in part-time work are on average 14 percentage points less likely than full-time workers to employed in non-manual occupations.

This finding is consistent both with the presence of a constraint on the supply of high quality part-time jobs and with women in part-time employment having a strong preference for jobs in low occupations. To the extent that there is a constraint on the supply of high quality part-time jobs to suitably qualified women, there are grounds for policy interventions aiming to equalise the occupational opportunities of women in full- and part-time employment.

Notes for editors: Part-time Work and Occupational Attainment Among a Cohort of British Women by Victoria Prowse was presented at the Royal Economic Society’s 2007 annual conference at the University of Warwick, 11-13 April.

Victoria Prowse is at the University of Oxford.

For further information: contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).

Find more papers by Victoria Prowse at EconPapers and search for more Internet resources on the issues of women and employment and the labour force and market at Intute: Economics.

Listen to the interview

Download audio file (drinkwater128.mp3)

The typical Asian working age male is now younger, better educated and more likely to be UK-born than his parents generation were. According to research by Ken Clark and Stephen Drinkwater, each of these factors contributes to lower rates of self-employment, particularly among men of Indian and Chinese ethnicity. This suggests greater assimilation of these groups into the UK labour market and education system.

But the study, presented to the Royal Economic Society’s 2007 annual conference at the University of Warwick, also finds relatively stable rates of self-employment among Pakistani and Bangladeshi men. It seems likely that discrimination in paid employment against these groups is keeping them in self-employment, working long hours in relatively poorly rewarded sectors such as catering and taxi-driving

The stereotype of the Asian businessman, often a shopkeeper or restaurant owner, is one of the common perceptions of Britain’s ethnic minorities. But the evidence shows that there is huge diversity in rates of entrepreneurship between different ethnic minority groups, and that patterns of ethnic self-employment have been changing over time. Asian groups (Indian, Bangladeshi, Pakistani and Chinese) typically have higher rates of self-employment than Whites, while Black groups (Black African and Black Caribbean) have lower rates.

Since 1991, there has been some convergence in self-employment rates; some of those groups with the highest rates have seen a reduction in entrepreneurial activity while some of those with the lowest rates have seen their rates rise. In particular, Indian and Chinese males are now less likely to become self-employed than in the past.

Self-employment is generally higher than average among Asian groups: for example, while around 17% of White men in employment worked for themselves in 2001, this rate was 19% for Bangladeshis, 21% for Indians, 27% for Pakistanis and 28% for the Chinese. But among Britain’s other main ethnic groups, rates are much lower: Black Africans and Black Caribbean men had rates of around 13%.

There is also ethnic diversity in changes over time. Against a backdrop of a generally stable aggregate self-employment rate (after the dramatic increases of the 1980s), the period since 1991 has seen rates fall significantly for Indians (by around 2 percentage points) and the Chinese (6 percentage points). By contrast, Black Caribbean rates grew from 9% to 13% and Black African rates grew by around 1 percentage point. Only the Pakistani and Bangladeshi groups saw their rates stay broadly the same.

The researchers use data from the 1991 and 2001 Censuses, along with the Labour Force Survey, to analyse these trends. They find that much of the falling self-employment among Indians and Chinese can be ascribed to factors consistent with the greater assimilation of these groups into the UK labour market and education system.

In particular, the proportion of Chinese men with higher qualifications grew from 27% to 43% between 1991 and 2006 while for Indians the figures were 24% in 1991 and 40% in 2006. Formal educational qualifications are more highly rewarded in the paid employment sector so this growth in human capital has contributed to the decline in self-employment for these groups.

Similarly, the fact that the average working age Asian is now younger and more likely to be born in Britain, compared with 1991 also tends to reduce the propensity of entrepreneurship as older workers and first-generation immigrants have an increased likelihood of being in business for themselves.

One puzzle that emerges from the research is the fact that self-employment rates of Pakistani and Bangladeshi males have remained broadly stable in spite of the fact that this group shares many of the demographic trends of the other Asian groups. It is estimated that the Pakistani/Bangladeshi self-employment rate should have fallen by around 3 percentage points on the basis of demographic changes alone.

The fact that it did not suggests other factors are at work. It seems likely that discrimination in paid employment against Pakistani and Bangladeshi men is responsible for pushing them into self-employment, working long hours in relatively poorly rewarded sectors such as catering and taxi-driving. Given this, government policy should pay attention to the quality, as well as the quantity, of self-employment among all ethnic groups.

Notes for editors: ˜Changing Patterns of Ethnic Minority Self-Employment in Britain: Evidence from Census Microdata by Ken Clark and Stephen Drinkwater was presented at the Royal Economic Society’s 2007 annual conference at the University of Warwick, 11-13 April.

Stephen Drinkwater is at the University of Surrey; Ken Clark is at the University of Manchester. Their research was funded by the Joseph Rowntree Foundation.

For further information: Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).

Find more papers by Ken Clark and Stephen Drinkwater at EconPapers and search for more Internet resources on the issue of entrepreneurship at Intute: Economics.

Download audio file (res2.mp3)

Britain’s national minimum wage has not only raised the pay of low-paid employees. It has also led to a reduction in the rate of these employees absence through sickness  and hence improved their productivity. That is the finding of new research by Marco Ercolani and Martin Robson, presented at the Royal Economic Society Conference 2007. This effect might help to explain why the introduction of the minimum wage was greeted with apparent equanimity by many employers.

Employee sickness absence is widely recognised as a major problem for the economy. In recent years, for example, it has been calculated that the direct costs of sickness absence in terms of the value of lost output amount to over £11 billion per annum; around 1% of the country’ annual GDP.

On top of this, there are the indirect costs such as the loss of employee morale among those required to cover for absent colleagues. While many instances of employee sickness absence represent genuine cases of ill health, a significant proportion almost certainly does not.

The problem is that the latter cannot easily be distinguished from the former. So what can be done to discourage the shirkers and encourage them to turn up for work? This is an issue with which employers and governments have wrestled for a long time.

Studies by economists have demonstrated that there tends to be a negative relationship between employees pay and their rate of sickness absence: low-paid employees are more likely to be absent than those on higher earnings. So does this mean that paying higher wages will help to reduce employee sickness absence?

Unfortunately, the answer to this question is not straightforward. The negative relationship between employee pay and sickness absence might be observed because those with a poor record of absenteeism are less productive and are less likely to be promoted.

To answer the question properly, what is needed is the ability to study the effect of some kind of external shock that has the effect of raising an employees pay regardless of his or her level of productivity. Such an opportunity is provided by the introduction of the national minimum wage in April 1999.

The introduction of the minimum wage at a rate of £3.60 per hour for adults and £3.00 per hour for employees aged 18-2 is estimated to have raised the pay of around 1.2 million low-paid employees. Using data from the nationally representative Labour Force Survey, this study examines the effect of the change in the real value of employee pay induced by the introduction of the minimum wage on the rate of employee sickness absence.

The research finds that after controlling for the potential two-way relationship between sickness absence and earnings, a 1 percentage point increase in the rate of growth of the real value of employee earnings reduces the rate of sickness absence by about 0.05 percentage points, on average.

The introduction of the minimum wage is estimated to have raised the pay of those low-paid employees who were directly affected by around 4%. Thus, the introduction of the minimum wage is estimated to have led to a reduction in the rate of employee sickness absence of around 0.2 percentage points, on average a little under one-tenth of the average rate of sickness absence over the period studied.

By reducing the rate of employee sickness absence, the introduction of the minimum wage can therefore be seen to have had a beneficial effect on the productivity of low-paid employees, an effect that has not previously been highlighted in studies of the impact of minimum wage legislation. This effect might help to explain why the introduction of the minimum wage was greeted with apparent equanimity by many employers.

Notes for editors: Does Raising the Pay of Low-Wage Employees Reduce their Rate of Sickness Absence? Evidence from the Impact of Minimum Wage Legislation by Marco Ercolani and Martin Robson was presented at the Royal Economic Society’s 2007 annual conference at the University of Warwick, 11-13 April.

Marco Ercolani is at the University of Birmingham. Martin Robson is at Durham University.

For further information: contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com)

Find more Internet resources on the issue of the Minimum Wage by searching Intute: Social Sciences and find more papers by Martin Robson and Marco Ercolani at EconPapers

These are the findings of new research by Holger GÃrg and Sourafel Girma, which explores whether acquisitions of British companies by foreign multinationals are a threat to domestic labour.

Their study, presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, looks at one aspect of this topical question: whether wages change in firms after they have been taken over by foreign firms.

The research analyses the impact of an acquisition of a domestic establishment by a foreign multinational enterprise on wages for skilled and unskilled workers using establishment level data from the Annual Respondents Database (provided by the Office for National Statistics) for the UK electronics and food industries.

Assuming that an acquisition does not change any of the main characteristics of the takeover target (at least in the short run), a possible effect of the foreign acquisition on wages in the domestic target can be attributed to the change in ownership from domestic to foreign. The empirical results suggest that:

There is substantial heterogeneity in the post-acquisition wage effect depending on the nationality of the foreign acquirer and the skill group of workers.

In particular, there is a robust and economically significant wage effect for both skilled and unskilled workers acquired by US multinationals.

For skilled workers, this takes effect some time after acquisition and stands at more than 8%.

The impact on unskilled wages is discernible at the time of acquisition and reaches nearly 13% two years after the acquisition.

In stark contrast, there is no evidence for any causal effect on wages, skilled or unskilled, following acquisition by multinationals based in the European Union.

Finally, positive unskilled wage effects are documented for the first two years (4.4% and 6.8%) following acquisition by multinationals from the rest of the world.

Evaluating the Foreign Ownership Wage Premium Using a Difference-in-differences Matching Approach by Sourafel Girma and Holger GÃrg was presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, 18-20 April. The authors are at the University of Nottingham.

For further information: contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).

Related research to this paper is available via EconPapers while further details about the work of Sourafel Girma are available from IDEAS. Intute: Social Sciences links to more resources on the topic of wages.

The study, presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, examines how intergenerational mobility compares between the UK, the United States and the Nordic countries of Norway, Denmark, Sweden and Finland. The main results are that:

Despite the commonly-perceived view of the US as an open society with ready opportunities for individuals to rise from poverty to affluence (from rags to riches), the evidence shows that the opposite is true. On average, a son’s earnings are more closely related to his father’s earnings in the United States than in any of the other countries.

In the UK, the connection between sons earnings and fathers earnings is weaker than in the United States, but stronger than in the Nordic countries. There is substantial earnings persistence across the generations in all countries.

In all of the countries, intergenerational earnings persistence is most pronounced in the tails of the distributions. In other words, the likelihood of a son having earnings similar to his father’s is greater for those born into particularly poor or particularly affluent backgrounds, relative to those from backgrounds with average earning fathers.

In most countries, the likelihood that a son with a very high earning father (in the top 20% or highest quintile of earners) will also subsequently be a top earner himself is especially high. For example, in the UK, 30% of sons with fathers in the top earnings quintile become top quintile earners themselves. In a world of perfect intergenerational mobility this figure would be 20%. Persistence tends to be even greater at the top than at the bottom of the earnings distribution.

The UK differs from the Nordic countries in the very low likelihood that the son of a high (top quintile) earner will become a very low (bottom quintile) earner. The probability is just 10%, half what it would be in a world of perfect mobility. In this, the United States is very similar to the UK. Downward mobility is very low in the UK and the United States.

The major difference between the United States and all the other countries is in the very poor prospects of sons with fathers earning in the lowest 20% or bottom quintile. These sons have a 40% likelihood of themselves becoming bottom quintile earners, twice that which would arise with perfect mobility and much higher than in the other countries. In the UK, the figure is 30% while in the Nordic countries it is 25-28%. The rags-to-riches depiction of intergenerational mobility in the United States is a myth: upward mobility is especially low there.

The Nordic countries tend to differ from the UK and the United States in the apparent protection of the life chances of sons of low earning fathers. The sons with fathers in the lowest quintile tend to have rather similar earnings to those with fathers in the next lowest quintile. Thus, there is a non-linear relationship between sons and fathers earnings in the Nordic countries. This contrasts with the UK and the United States, where there seems to be a relatively linear relationship between sons and fathersearnings: the lower the earnings of the father, the lower the earnings of the sons, on average, across the distribution.

This is not the first research to look at how intergenerational mobility compares across countries. But it is one of the first to do so using a common statistical methodology applied to highly standardised datasets for the different countries. For all countries, the data refer to sons born around the late 1950s and use information on the earnings of sons both in their 30s and in their 40s. Information on fathers earnings at the age of around 40 is also used.

The dataset for each country is chosen so as to enable close data equivalence to the National Child Development Study data for the UK. The NCDS data refer to all children born in the UK in a particular week in March in 1958. Fathers earnings are for 1974 when the child was aged 16. Sons earnings data are collected when the sons were aged 33 and again when they were 41 in 1999/2000. The NCDS is recognised as a very rich dataset that forms the basis for much of the leading work on the empirical analysis of intergenerational mobility in the UK.

Non-linearities in Intergenerational Earnings Mobility: Consequences for Cross-country Comparisons’ by Bernt Bratsberg, Knut Røed, Oddbjørn Raaum, Markus Jäntti, Tor Eriksson, Robin Naylor, Eva Österbacka and Anders BjÃrklund was presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, 18-20 April.

For further information: Contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).

Related research, items by these authors and papers references by them are available from IDEAS and EconPapers. Search for more websites on the issues of earnings and social mobility at Intute: Social Sciences.