Harvard University Press Blog

Why Wages Are Stuck

In 2014’s What Unions No Longer Do, sociologist Jake Rosenfeld outlined the broad and transformative consequences of the steep decline in American labor union membership across recent decades. In documenting what organized labor once did to lessen inequality and empower workers, Rosenfeld made clear that unions were indeed a tide that lifted all boats, benefitting members and non-members alike. He offered evidence suggesting that the wages of nonunion workers had been positively influenced by unions in their heyday, but cautioned against inferring direct cause and effect within the multivariate analyses of wage trends then available.

Now, though, in a new Economic Policy Institute study receiving coverage from the Atlantic, Marketplace, the American Prospect, and Salon, among others, Rosenfeld and colleagues Patrick Denice and Jennifer Laird are able to more affirmatively claim that the decline of unions has lowered wages for nonunion workers.

From the Executive Summary of their report:

Pay for private-sector workers has barely budged over the past three and a half decades. In fact, for men in the private sector who lack a college degree and do not belong to a labor union, real wages today are substantially lower than they were in the late 1970s.

In the debates over the causes of wage stagnation, the decline in union power has not received nearly as much attention as globalization, technological change, and the slowdown in Americans’ educational attainment. Unions, especially in industries and regions where they are strong, help boost the wages of all workers by establishing pay and benefit standards that many nonunion firms adopt. But this union boost to nonunion pay has weakened as the share of private-sector workers in a union has fallen from 1 in 3 in the 1950s to about 1 in 20 today.

While we avoid strict causal claims about wage determination, the analytical approaches summarized in this report enable us to assess the independent effects of union decline on wages and lend confidence to our core contention that private-sector union decline since the late 1970s has contributed to substantial wage losses among workers who do not belong to a union. This is especially true for men. And most hurt by the decades-long decline in the nation’s labor movement are those nonunion men who did not complete college, or go beyond high school—groups with the largest erosion of union membership over the last few decades.

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Nonunion workers benefit from a strong union presence in their labor market in many ways. Strong unions set pay and benefits standards that nonunion employers follow. Those employers may raise pay for some workers to forestall an organizing drive, which leads to an upward adjustment in wages of workers above them, to maintain relative pay differentials (similar to the effects of minimum-wage increases).

Even absent organizing activities in their spheres, nonunion employers may also follow the standards that unions help establish through politicking for labor-friendly policies, instituting informal and formal rules governing labor conditions, and generally serving as a cultural force arguing for a “fairer share” for working men and women. (For example, highly unionized states helped lift minimum wages above the levels of states where labor was comparatively weak.) Higher pay in organized establishments increases competition for labor so that nonunion firms lift wages to prevent their employees from leaving for higher, union wages. And in setting wages, new market entrants often look to what industry leaders are doing; when organized labor was strong, many of these leaders were unionized.

Rebuilding our system of collective bargaining is an important tool available for fueling wage growth for both low- and middle-wage workers and ending the era of persistent wage stagnation.

The overall effects of American labor’s decline in standing are enormous. As Rosenfeld told Marketplace, “we’re talking about over $100 billion a year in lost wages.” As the U.S. eases towards Labor Day, it would seem that Rosenfeld, Denice, and Laird have given all of us further cause both to celebrate the achievements and to mourn the decline of the American labor movement.

Finding Time for American Families

Heather Boushey’s Finding Time: The Economics of Work-Life Conflict is a study of changing patterns of work in America and the pressures that longer hours place on families and individuals. Boushey dedicated the book to “all those too busy to read this book, in the hope that it reaches those with the power to find and return our lost time.” Having just been named chief economist for Hillary Clinton’s transition planning team, Boushey’s own access to that power seems on the rise. That’s good news for American families.

Boushey’s work both in Finding Time and as Executive Director and Chief Economist at the Washington Center for Equitable Growth is about taking work-family policy off the Style pages and into the realm of serious economic issues. In fact, she hates the term “work-family policy,” which brings to mind working mothers and child care. “Compared with traditional male issues,” she writes, “work-family policy doesn’t sound serious. It sounds like something that should take a backseat to real economic matters. As a result, politicians tend to trot out their positions on work-family issues when courting female voters ahead of elections, only to forget them after the victory lap.”

It’s this very dynamic that results in scenes like Ivanka Trump delivering a Republican National Convention speech touting her father’s commitment to providing relief for working families in terms no one could recall ever hearing from the candidate himself.

In contrast, Boushey shows that the kinds of policy changes she recommends—all currently in place in various parts of the country—are crucial to America’s economic well-being.

Researchers studying the kinds of policies that families and households need to make ends meet, and in turn what businesses need from their employees, have some surprising findings to share. Across a range of different social science traditions, methods, and topics, they find that addressing sources of anxiety inside the home has a profound impact on what happens outside the home, including in the larger economy, and can affect the current and future competitiveness of American firms and workers. That’s why I prefer the term work-life policies. This phrase reminds us of the intimate connection between the hours we clock for a job and the off-the-job hours that support strong families and a strong economy.

Finding Time is focused on core economic questions: If we sought to alleviate family economic insecurity today, what would our agenda look like? Would our efforts be good or bad for the economy overall? Rather than submitting to the bog of partisan squabbles over “handouts,” Boushey urges us to think about how keeping people gainfully employed while they care for their families benefits the economy overall. It’s in that vein that she presents solutions to everyday economic problems facing workers across four areas: Here (at home), There (at work), Care, and Fair.

The Elephant Chart in the EU Room

For several years now, economists have remarked on the simple yet striking representation of world income growth in a chart by Branko Milanovic. The chart plots relative gain in household per capita income between 1988 and 2008 at different points of the global income distribution, showing that the gains from globalization are very unevenly distributed. Known as the “elephant chart” because it resembles an elephant with a raised trunk, the chart indicates that the lower middle classes of the rich world made the weakest relative gains during the most intense phase of globalization to date. So while those of modest means in wealthy countries may still have more to their names than even well-to-do citizens of developing nations, it’s those lower income Americans, Japanese, and Western Europeans who’ve seen their global standing degrade—this while watching their wealthiest countrymen make gains commensurate with those in economically emerging parts of the world.

In early 2015, Paul Krugman forecast that the trend depicted in Milanovic’s chart would be a “crucial factor in developments over the next few years.”

Cue xenophobia. Cue Donald Trump. Cue nationalism. Cue Brexit.

Polanyi in the Air

In a much discussed and very welcome piece for Dissent, historian Patrick Iber and Roosevelt Institute fellow Mike Konczal outline the resurgent ideas of the great political economist Karl Polanyi. Konczal and Iber, whose study of the cultural Cold War in Latin America we published last year, see Polanyi’s thought resonating throughout our political moment, particularly among followers of Bernie Sanders. In detailing Polanyi’s work on markets, money, and labor—embodied most significantly in 1944’s The Great Transformation—they hope to help us understand the 2016 presidential election:

Polanyi wouldn’t have been surprised by the rise of Trump. He knew that the double movement—the protective steps that people take when exposed to too much unfettered capitalism—does not always benefit the left. Trump supporters clamoring to make America great again reflect one version of this; they hearken to a time when life was more secure and stable, at least for certain types of working- and middle-class whites.

In fact, one of the reasons that Polanyi rushed The Great Transformation to press was to warn post-Second World War policymakers that poor economic institutions could lead—through the double movement—to disastrous consequences for democracy. For Polanyi, it would make sense that the Sanders and Trump insurgencies happened simultaneously, and that there are some people who would rank those two as their favored candidates, in spite of them seeming to come from opposite ends of the political spectrum. Both campaigns are based in part in complaints about the corrosive effects of exposure to global markets. Both are against so-called “free trade” and skeptical of open borders, though only Trump’s campaign is shot through with xenophobia and only Sanders wants to reform the Wall Street practices responsible for the Great Recession. Still, in spite of all their differences, both Sanders and Trump look like expressions of “double movement” politics.

In addition to the prevalence of Polanyian arguments in the public sphere, Iber and Konczal note a renewed academic interest, citing Fred Block and Margaret Somers’s The Power of Market Fundamentalism, among other recent studies. As we know, by the time an academic book is bound, its ideas often aren’t arriving on the very most sharpest point of the leading edge—which is to say that the Polanyi surge is more than just folks feeling the Bern. Indeed, as Iber and Konczal write, “The future of the party does not belong to Bernie Sanders himself, but the Karl Polanyi Democrats are here to stay.”

Wealth Managers and the One Percent

World leaders have fallen in the days since the massive “Panama Papers” leak, but, as Brooke Harrington explains in a piece for the Atlantic, most of the activity detailed in those documents is perfectly legal. And Brooke Harrington would know. A sociologist at the Copenhagen Business School, Harrington spent two years training to join the ranks of the world’s elite wealth managers, all purpose financial fixers who do the work behind Mossack Fonseca’s spilled secrets. She tells their stories and details the ways of offshore banks, shell corporations, and trusts in Capital without Borders: Wealth Managers and the One Percent, coming this fall.

As she writes in the Atlantic, the world’s richest people pay wealth managers to help them hide money and defeat the purpose of laws and policies without strictly breaking them:

What Mossack Fonseca and its counterparts all over the world really provide is the expertise that allows their clients to stay just on the right side of the law—or far enough into the legal grey zones that the clients have a real chance to prevail if they end up in court. That’s why many of the people who have seemingly been exposed by this leak will likely never face charges of any kind… When the firm writes that “we have a strong compliance record” and “we are responsible members of the global financial and business community,” they are not lying through their teeth, as some might suspect. Keeping clients out of legal trouble is a core element of their business model: that is how they earn their money. If they, or firms like them, were to lose their reputations for keeping clients on the right side of the law, the clients would take their business elsewhere.

And there’s always an elsewhere to take it—the wealth management industry’s main professional society has roughly 20,000 members. Indeed, despite the sheer volume of the Mossack Fonseca leak, what’s there is the work of just one company in just one place. In the course of her study, Harrington conducted interviews with sixty-five practitioners in eighteen countries. While many wealth managers may project a buttoned-down, old school sensibility—the better with which to woo old money—a quaint scene this is not.

Wealth managers take full advantage of the decades of work done removing restrictions on the international flow of capital, but one of their most valuable services is ensuring the free movement of their clients themselves, through the world and even, in a sense, through time. Here’s Harrington in a piece from last year:

Tax avoidance—the perfectly legal practice of minimizing one’s tax obligations—is really the least of the wonders that wealth managers achieve for their clients. They can also help clients swap nationalities when holding the passport of a particular country means submitting to undesirable requirements. Remember when the Facebook founder Eduardo Saverin renounced his American citizenship for a Singaporean passport? Classic wealth-management strategy. And thanks to the expanding number of practitioners, U.S. citizenship renunciations are at an all-time high, and growing. Finally, wealth managers can give their clients a kind of financial immortality, in the form of inheritances tied to the performance of certain duties by the heirs, such as going into the family business or producing grandchildren.

The underlying point to Harrington’s work is that the massive accumulation of wealth, rising inequality, the reign of global plutocrats—these things don’t just happen on their own. They require work, and they require workers. Those workers and their clients are now catching some sunshine through the haze of the Panama Papers. Harrington’s work may leave some burnt.

Minority-Serving Institutions in Illinois and Beyond

The state of Illinois has been without a budget for nearly a year, as Republican Governor and private equity titan Bruce Rauner remains at odds with the state’s Democrat-controlled legislature. As reported last week by Marketplace, the absence of funding has many of Illinois’s 57 public universities and community colleges on the brink of collapse. Some of the larger among them are able to tap endowments and other sources to stay afloat, but the looming closure of schools like Chicago State University—a drastic measure one cannot imagine being easily reversed by any eventual provision of funding—signals a distinct threat to the minority communities frequently served by such smaller institutions. Even if larger schools could increase enrollments to absorb the students of shuttered colleges, to conceive of such a shift as merely a zero-sum reshuffling, or, worse, an efficiency-achieving shakeup, is to fundamentally misunderstand the challenges of twenty-first century higher education.

Marketplace quotes higher ed expert Clifton Conrad on the cultures and practices of minority-serving institutions like Chicago State, schools that have long been invisible across much of the landscape of higher education. Along with Marybeth Gasman, another leading scholar of higher education, Conrad is the author of Educating a Diverse Nation: Lessons from Minority-Serving Institutions, for which the pair conducted extensive studies of a dozen high-achieving MSIs across the country. As they explain in the book, we’ve passed the moment when providing equal access to educational opportunities hinges on getting diverse students through the door—they are coming. Rather, the difficulty “lies in providing students with access to institutions that understand and value their experiences and resources, challenging them with the obligation and the opportunity to learn what really matters to them, and getting them to a degree.”

In the following excerpt from Educating a Diverse Nation, Conrad and Gasman detail the missions of MSIs, and the methods they employ to meet the challenge of educating many whose needs are often overlooked by mainstream institutional models—a challenge greatly exacerbated by the kind of budget conflict that Illinois currently represents so extremely.

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Minority-Serving Institutions (MSIs) are a diverse collection of colleges and universities. Although they continue to remain invisible to many both within and outside of higher education, MSIs—Historically Black Colleges and Universities (HBCUs), Tribal Colleges and Universities (TCUs), Hispanic-Serving Institutions (HSIs), and Asian American and Native American Pacific Islander–Serving Institutions (AANAPISIs)—have become an increasingly important part of American higher education, especially as a gateway to higher education for many traditionally underrepresented students across our country.

In 2011, degree-granting MSIs enrolled 3.6 million undergraduate students—one-quarter of all undergraduate students in the United States and a disproportionate percentage of students of color.

Designed with the needs of minority students at the forefront, MSIs provide culturally relevant opportunities for students who have historically been marginalized in our nation’s mainstream colleges and universities. In so doing, MSIs have called out, disrupted, and questioned the historical roles of race and class with respect to student access and success in higher education. As institutions that are relevant to the students who matriculate at them, their relevance finds expression in their missions, environments, programs, and practices.

Missions

The long-standing mission of MSIs has been to increase the capacity of higher education to serve students whose earlier educational experiences have been shaped by such life experiences as poverty, immigration, and life on reservations. In turn, MSIs have been designed to play a major developmental role: to provide a sound education and, in so doing, call attention to the barriers that communities of color face as they seek to participate in American social institutions as equals. In recent years, many MSIs have begun to play that role for communities other than the one for which they were originally designed.

Gender Equality by Design

Today we celebrate International Women’s Day with the publication of Iris Bohnet’s What Works: Gender Equality by Design. Bohnet, Professor of Public Policy at the Harvard Kennedy School, Director of the Women and Public Policy Program, and co-chair of the Behavioral Insights Group, told us early on that she had three goals for the book.

First, she wanted to convince readers that we all have implicit biases that the best of intentions can’t override and that a world of workshops can’t undo. These biases are a major problem, keeping us from valuing people for who they are.

Second, she hoped to communicate that this problem is costly—not just for the affected individuals, but for society at large. This is especially so in the stubborn case of gender, where biases can lead us to overlook fully half of the talent pool, at potentially great cost to our families, organizations, and economies.

Thirdly, she wanted the book to show that we can do better. We can design environments that help biased people get it right. We can move the needle towards more equality and better performance, and we can start right now.

Bohnet’s invitation to readers is to become behavioral designers, employing the research evidence presented throughout the book to change the environments in which we live, learn, and work. Small changes can have surprising effects, and opportunities are everywhere. We constantly make choices about how to present and evaluate information, how to structure interviews and create teams, whom to hire and promote. There is no design-free world. Why not design a bit more thoughtfully?

 

Immigration Policy and Global Inequality

In 2012, the UK announced an impending change to immigration policy: effective April 2016, non-EU migrants who have spent more than five years working in the country will be required to earn an annual income of £35,000 (roughly $50,000) or else face deportation. Scrutiny of the policy has intensified as implementation nears—a petition against is quickly approaching the 100,000 signatures necessary to force consideration by Parliament—but the government has thus far maintained its position that a “more selective immigration system” is in the national interest.

In an important new book that we’re soon to publish, former World Bank lead research economist Branko Milanovic adds global inequality—inequality among nations—to the already-roiling consideration of inequality within them. Globally, a person’s income depends significantly on where they were born, with natives of wealthy nations enjoying what Milanovic refers to as the “citizenship premium.” That premium and its implications for inequality of opportunity, along with the migration policies that govern such inequality’s maintenance, are enormously important factors in global inequality, and so feature heavily in Milanovic’s work. Below, in an excerpt from Global Inequality: A New Approach for the Age of Globalization, he details why a wealthy nation like the UK would want to limit the influx of low-paid workers, as well as the impact of such policies on a global scale.

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The existence of the citizenship premium has important implications for migration: people from poor countries have the opportunity to double or triple or increase ten-fold their real incomes by moving to a rich country. But the fact that the premium varies as a function of one’s position in the income distribution carries additional implications. If a person considers two countries with the same average income as his possible migration destination, his decision (based on economic criteria alone) about where to migrate will also be influenced by the expectation regarding where he may end up in the recipient country’s income distribution, and thus about how unequal the recipient country’s distribution is. Suppose that Sweden and the United States have the same mean income. If a potential migrant expects to end up in the bottom part of the recipient country’s distribution, then he should migrate to Sweden rather than to the United States: poor people in Sweden are better off compared to the mean than they are in the United States, and the citizenship premium, evaluated at lower parts of the distribution, is greater. The opposite conclusion follows if he expects to end up in the upper part of the recipient country’s distribution: he should then migrate to the United States.

This last result has unpleasant implications for rich countries that are more egalitarian: they will tend to attract lower-skilled migrants who generally expect to end up in the bottom parts of the recipient countries’ income distributions. Thus, having a more developed national welfare state could have the perverse effect of attracting migrants who are less skilled and can contribute less. Another element, however, has to be taken into account, even in this admittedly very rough sketch: how much social mobility there is in the recipient country. More unequal countries with strong social mobility will, everything else being the same, tend to appeal to more-skilled migrants who expect to end up in the upper part of the recipient countries’ income distributions. The ability to move up the ladder was precisely the image, and might also have been the reality, of the United States in the nineteenth century and perhaps most of the twentieth. But this third attractive feature of the United States (in addition to higher mean income and more unequal income distribution) may be losing some of its luster, since, according to some studies, intergenerational mobility is now lower in the United States than in northern Europe.

Some countries with highly developed welfare states may try to isolate themselves from the “negative” effects of disproportionately attracting low-skilled migrants. One way to do it, as in Canada, the United Kingdom, and Australia, is by accepting only “qualified” migrants. These are migrants with high levels of education or some special characteristics which make them attractive to the recipient country (say, high athletic or artistic ability). Other countries try to attract rich migrants. In this case, residency permits and ultimately citizenships are bought: a person needs to invest a certain amount of money (which may range from a couple of hundred thousand to several million dollars) into a company or real estate. The United States is one of the countries that takes this approach, allowing migrants who invest $1 million in US companies (or $500,000 in companies located in rural or high-unemployment areas) to receive a green card. A number of countries in Europe allow foreigners to reside there, and thus to travel visa-free within the Schengen zone (an area of free movement within most of the European Union), in exchange for a real estate investment. Both such filters, education and money, are supposed to improve the pool of immigrants a country receives, and thus ultimately to contribute to the country’s economic output and enable the maintenance of its welfare state by minimizing the number of migrants who depend on social transfers. From the point of view of individual countries, these are intelligent strategies. The problem is that from the global perspective, this approach to migration is heavily discriminatory. To one set of “discriminations,” the citizenship rent, we add another set of discriminations whereby this rent may also be enjoyed by those who were not lucky enough to have been born in a rich country but have exceptional abilities or wealth. We run the risk that such policies will result in the poor world, and I am thinking especially of Africa here, becoming even poorer as its most educated and wealthiest members leave.

All of these problems illustrate both the complexity of the issues in the era of globalization and the need to think of the problems from a global perspective rather than solely from the point of view of individual nations and their populations.

What Works for Our Shared Shelf

On January 6^th the actor and activist Emma Watson tweeted her desire to start a feminist book club.

Hi Team, ❤️ I want to start a feminist book club but so far have only brainstormed ‘Feminist Book Club’ and ‘Emma Watson Book Club’.

— Emma Watson (@EmWatson) January 6, 2016

By January 7^th the group had a name, “Our Shared Shelf,” and its first selection, Gloria Steinem’s My Life on the Road. On the group’s Goodreads page, Watson outlines the idea:

As part of my work with UN Women, I have started reading as many books and essays about equality as I can get my hands on. There is so much amazing stuff out there! Funny, inspiring, sad, thought-provoking, empowering! I’ve been discovering so much that, at times, I’ve felt like my head was about to explode… I decided to start a Feminist book club, as I want to share what I’m learning and hear your thoughts too.

The plan is to select and read a book every month, then discuss the work during the month’s last week (to give everyone time to read it!). I will post some questions/quotes to get things started, but I would love for this to grow into an open discussion with and between you all. Whenever possible I hope to have the author, or another prominent voice on the subject, join the conversation.

If you fancy it, please join up and participate. Everyone is welcome. I would be honoured!

The page for the group, which is already approaching 100,000 members, also hosts an active discussion board, where tens of thousands of people have suggested books to turn to next. Here at HUP we’re soon to publish a title we hope they’ll consider.

What Works: Gender Equality by Design, is by Iris Bohnet, a behavioral economist and Director of the Harvard Kennedy School’s Women and Public Policy Program. As research has repeatedly shown, and as resources like Project Implicit help to demonstrate, humans have biases related to characteristic like race, gender, and sexual orientation that the best of training and the purest of intentions can’t easily override. With What Works, Bohnet presents a relentlessly practical but determinedly optimistic guide to straightforward behavioral interventions that overcome gender bias by limiting opportunities for its intrusion.

Bohnet often introduces the notion of designing for gender equality by pointing to the simple but illustrative case of orchestras. From the book:

As late as 1970, only 5 percent of musicians performing in the top five orchestras in the United States were women. Today, women compose more than 35 percent of the most acclaimed orchestras, and they play great music. This did not happen by chance. Rather, it required the introduction of blind auditions. The Boston Symphony Orchestra was the first to ask musicians to audition behind a screen, and in the 1970s and 1980s most other major orchestras followed suit. When they did so, usually in preliminary rounds, it raised the likelihood that a female musician would advance by 50 percent and substantially increased the proportion of women hired.

Addressing the disparity, as Bohnet writes, required only “awareness, a curtain, and a decision. Or, more precisely, a design decision.” The blind assessment practiced by orchestras isn’t always feasible, but the approach—a focus on de-biasing systems rather than people—is an enormously useful tool for moving the needle towards equality.

What’s critical to recognize in the orchestra example is that the result isn’t just more female musicians: it’s also better music. Even if the gatekeepers and string-pullers of the world can’t be made to prioritize gender equality, rare are those who’d ignore proven strategies for improved performance. And yet, even as Bohnet emphasizes the business benefits of designing around biases, those gains cannot be the foundation for the changes we need:

While the macro- and the micro-evidence hold the promise of a business case, gender equality is not a magic bullet automatically leading to economic progress. This is why, at the end of the day, the case of gender equality must rest on a moral argument. It just is the right thing to do. Full stop. We cannot afford to get it wrong.

Certainly wonkier than a Gloria Steinem memoir, but What Works explains how, using behavioral insights, we can collapse gender inequality within our lifetime. A fitting book for Our Shared Shelf.

Fixing Our Broken Banking System

“One of the great ironies in modern America is that the less money you have, the more you pay to use it.” So writes Mehrsa Baradaran in How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, her study of how the American banking industry stopped serving the poor, and the “fringe banks” that arose to fill the void. With the unbanked paying as much as 10 percent of their income just on the financial services required to use their money, being poor has become very expensive indeed. In the conversation posted below, we spoke with Baradaran about how we got into this mess—and how we might get out.

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Q: Who takes out payday loans?

Payday loans are typically taken out by people with a steady income who need a few hundred dollars to deal with an unexpected expense. It is a common misconception that people who borrow payday loans don’t know what they’re doing or are “financially stupid.” The truth is that these borrowers have no other credit options.

The more interesting question, to me, is: why are there no other options? The entire payday lending sector began in the 1980s when community banks and credit unions abandoned poor neighborhoods and the savings and loan industry imploded after its deregulation. These institutions today function much like banks and generally avoid small accounts. The fringe banking industry has grown exponentially since.

Q: Some observers have suggested that innovations such as microcredit and mobile banking might help serve the unbanked. What do these kinds of programs do, and what are their limitations?

Microcredit can help solve “microproblems.” For example, if you want to start a business and need a few hundred dollars of start-up capital, microcredit can do the trick. Microcredit has worked with some limited success (and not without controversy) in the third world, but it has not taken off in the United States in large part because it does not address the credit needs of the American population. Americans have a functioning banking and credit system and most businesses need more than a few hundred dollars to get started. Even if microcredit were widely needed and available in the United States, the interest rates rival that of payday lenders and pawn shops and therefore it serves as a loan of last resort.

Mobile banking as it is currently envisioned will make the lives of bank account holders much more efficient. For those who have access to the banking system, they can now make money transfers, deposit checks, and make payments on their mobile phones. This is all great news, but does very little to address the needs of the unbanked. No one in the United States has proposed that mobile phone providers replace banks; nor is that even possible given the complexity of the U.S. banking sector. In Kenya, the introduction of mobile banking through M-Pesa created access where little existed. However, this is because the mobile company had a practical monopoly and they worked with the central bank to increase access. This is not the situation in America. The good news is that once the population had access to banking, the economy boomed and trade became much more efficient—once again demonstrating that access to banking services has many small and large-scale benefits.

Financial and technological innovations certainly have the potential to increase ease and access for all of us and we should continue to foster and encourage them. But we shouldn’t rely solely on technological advances to meet the banking needs of the poor. The problem is much bigger in scope than any of the programs can address, and the source of the problem is rooted in an unequal banking system—it is not just a gap in services.