Urban sociology has long focused on the dynamics of neighborhoods and how they affect people’s lives. Poor neighborhoods are expected to negatively affect their residents’ social mobility potential and future income expectations, but also their health, marriage and education prospects. However, the income causality has been hard to prove quantitatively.

For example, the Moving to Opportunity initiative (MTO), led by the Department of Housing and Urban Development in 1994, aimed to help people out of poverty by moving them to better neighborhoods. It was expected that children of families benefiting from this policy would fare better on the social mobility ladder. However, the numbers didn’t clearly support this thesis.[1] Does this mean that local context doesn’t matter when fighting poverty and inequality?

Armed with new ideas as to how to interpret the definitive results of the MTO experiment, but also with a much wider sample study of five million individuals in the US over 17 years, two economists from Harvard, Raj Chetty and Nathaniel Hendren, have proved sociologists right. The two studies they led show that neighborhoods do affect intergenerational mobility through childhood exposure effects.[2] In essence, moving children under 13 to lower-poverty neighborhood improves their future earnings, therefore reducing the intergenerational persistence of poverty and generating positive returns for tax payers.

Why is it important to be able to measure this? We have previously discussed the negative effects of poverty and income inequality on markets and economic growth, both in a flagship research report[3] and in the pages of this journal.[4] Being able to devise effective policies and strategies to reduce poverty and enhance social mobility is essential for future prosperity. Bringing hard evidence and precision to measures of social impact is a key element of this strategy.

Non-financial aspects of socio-economic development are often difficult, even impossible to quantify. The deeper social dynamics at work in a local community that spur or hinder development are complex: they involve schools, infrastructure and local amenities, but also cultural norms, crime, health standards etc. Taking into account all these items, quantitative and qualitative, would certainly be ambitious.

This complexity of variables, together with the long-term nature of socio-economic development, made it difficult to draw immediate conclusions in the MTO case, and to measure the effectiveness of impact investing overall. The virtuous circle of investing with a social purpose, and collecting the wider benefits of socio-economic development, can take time to settle. This is one of the reasons why studies measuring impact on behalf of businesses can take several years.[5]

However, patience is not the only challenge in measuring comprehensive impact: Precision is another. In structuring a study, it is critical to choose accurately among the myriad of potential variables that could be material to the expected outcome. What probably changed the interpretation of the MTO experiment by the Harvard team was the hypothesis that what matters is the length and the timeliness of exposure to a good neighborhood. They found that children who moved as toddlers clearly benefited from the policy. The net present value of the extra earnings over the long term for a child who moved at 8 years old are estimated at $99,000.[6] Where this matters from the government standpoint is that such individuals are also future taxpayers, and with better economic opportunities come increased tax revenues. A similar logic can be applied to a private impact investment: people pulled out of poverty are more involved in the economy, both as providers and as consumers.

Precision and materiality in the choice of variables are fundamental for determining the real outcomes in any socio-economic impact assessment. The added value of the two Harvard studies is proving, with precise economic measures, the sociologists’ thesis that neighborhoods matter for individual socio-economic outcomes.[7] It also highlights the added value to the study of Economics itself to venture beyond its traditional borders, and find inspiration in other disciplines such as Sociology.

[1] http://www.nytimes.com/2014/09/17/opinion/does-moving-poor-people-work.html

[2] http://www.equality-of-opportunity.org/images/nbhds_paper.pdf and http://www.equality-of-opportunity.org/images/mto_paper.pdf,
the latter authored with Lawrence Katz.

[3] /2014/11/income-inequality-market-mechanism-or-market-failure/

[4] /2015/01/corporate-social-strategies-investment-decision-making-and-income-inequality/

[5] Examples are, the SFO wage experiment in 2000, or the impact study by Unilever in South Africa in 2005. See our report on income inequality for details and references.

[6] See the analysis here: http://www.nytimes.com/2015/05/05/upshot/why-the-new-research-on-mobility-matters-an-economists-view.html

[7] See for example Great American City: Chicago and the enduring neighborhood effect by R.J.Sampson, University of Chicago Press, 2012 http://www.press.uchicago.edu/ucp/books/book/chicago/G/bo5514383.html

Margarita Pirovska, PhD,  is the Policy & Sustainability Analyst at Cornerstone Capital Group. She has over 12 years of experience in international energy markets and sustainable business, working for GDF SUEZ, the International Energy Agency, and Gaz de France. Margarita has a Ph.D. in Economic Science from the University Paris Dauphine, a Master’s in Industrial Organization and a BA in Applied Economics.