Do rich families contribute to inequality?

A recent article in the Washington Post about the lack of mobility in Western economies alluded to the fact that the problem partly lies with family businesses.

The article said: “Rich kids who can go work for the family business – and, in Canada at least, 70% of the sons of the top 1% do just that – or inherit the family estate don’t need a high school diploma to get ahead.”

It went on to say that poor children with a good education are much less likely to enter the top echelons of society, because they don’t have all the advantages of their rich counterparts. Rich kids can fail and they are still more likely to be rich than poor kids with good educational backgrounds.

The Canada statistic quoted was from a piece of research by professor Miles Corak at the University of Ottawa. Corak cites much evidence to back his argument up, including that the “transmission of employers between fathers and sons is greater, the greater the father’s earnings, and rising distinctly and sharply for top earners”.

Of course, Corak wasn’t saying that this phenomenon is only perpetuated by family businesses, but the implication is that they are part of the problem of social mobility in the 21st century.

But is this true? Inequality has become much more of an issue for Western societies in recent times, partly due to the publication of Thomas Piketty’s book Capital in the 21st Century, and a few years earlier by another book called The Spirit Level. Family Capital has previously written about this, and there is little doubt that many family business owners benefit from the appreciation of capital – and in many cases more than they do from earning income.

But here are four points that counter the argument about family businesses perpetuating inequality.

 – Many countries with strong family business sectors are less unequal than societies with weaker family business sectors. The obvious examples are Germany and Japan. They have lots of family businesses but their Gini coefficients – a common way of measuring inequality – show less inequality than the UK and the US, where the family business culture is less prevalent. 

 – The multiple between the salaries paid to a chief executive of a non-family owned listed business and the average salary of the staff of that business is likely to be much higher than at a non-listed family business. Two academic studies support this, one from The Ratio Institute in Stockholm and the other from a group of European academics from Italy, the UK and the Netherlands. Salary differentials are a big contribution to inequality.

 – Family businesses are more likely to be involved in worker and community support than their non-family business counterparts. This argument is more abstract, but there is plenty of anecdotal evidence to back it up. Professor Guido Corbetta argues this point in a comment he wrote for EY’s family business blog. He says that family businesses actually step in to welfare provision traditionally provided by the state, when the state pulls back from providing them. Others argue that family businesses are more likely to be philanthropic than their non-family business counterparts.

 – Family businesses are wealth creators and employ more people than their non-listed counterparts. As such, they are more likely to create more wealth for all in society, not just family business owners. This is more of a general point, but it is important to the debate.

Of course, there is considerable evidence to suggest that family businesses do perpetuate nepotism and as such lessen social mobility. Despite what family businesses say about the importance of education, most of them will hire the less qualified family member to help run the business than the better qualified outsider. 

Nevertheless, the argument that family businesses are part of the problem of inequality isn’t as straightforward as it might seem. Indeed, in many cases it is arguable that in the long run, they do things which create greater equality.