MB Civic

Income Inequality II: The Myth of Moving Up

by Bonddad, Sun Jul 16, 2006 at 03:49:40 PM EST
Bumped from the diaries — Jonathan

The primary argument Republicans advance regarding growing income inequality is anyone can grow up to be rich in America.  This is the classic “rags to riches” story of someone starting poor, working hard and eventually winding up a millionaire.  The question about this myth is simple: is this possible?  The reality is not really.

The Center for American Progress issued a report on April 22, 2006 titled Understanding Mobility in America.  Here are some of the study’s key findings:

Children from low-income families have only a 1 percent change of reaching the top 5% of the income distribution, versus children of the rich who have about a 22% chance.

Children born to the middle quintile of parental family income ($42,000 to $54,300) had about the same chance of ending up in a lower quintile than their parents (39.5%) as they did of moving to a higher quintile (36.5%).  Their chance of attaining the top five percentiles of the income distribution were just 1.8%.

By international standards, the US has an unusually low level of intergenerational mobility: our parents income is highly predictive of our incomes as adults.  Intergenerational mobility in the US is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark.  Only the United Kingdom had a lower rate of mobility than the US.

The overall volatility of household income increased significantly between 1990-91 and 1997-98 and again in 2003-04.

Other studies confirm the lack of upward mobility.

A classic social survey in 1978 found that 23% of adult men who had been born in the bottom fifth of the population (as ranked by social and economic status) had made it into the top fifth. Earl Wysong of Indiana University and two colleagues recently decided to update the study. They compared the incomes of 2,749 father-and-son pairs from 1979 to 1998 and found that few sons had moved up the class ladder. Nearly 70% of the sons in 1998 had remained either at the same level or were doing worse than their fathers in 1979. The biggest increase in mobility had been at the top of society, with affluent sons moving upwards more often than their fathers had. They found that only 10% of the adult men born in the bottom quarter had made it to the top quarter.

Take the study carried out by Thomas Hertz, an economist at American University in Washington, DC, who studied a representative sample of 6,273 American families (both black and white) over 32 years or two generations. He found that 42% of those born into the poorest fifth ended up where they started–at the bottom. Another 24% moved up slightly to the next-to-bottom group. Only 6% made it to the top fifth. Upward mobility was particularly low for black families. On the other hand, 37% of those born into the top fifth remained there, whereas barely 7% of those born into the top 20% ended up in the bottom fifth. A person born into the top fifth is over five times as likely to end up at the top as a person born into the bottom fifth.

Two economists at the Federal Reserve Bank of Boston analysed family incomes over three decades. They found that 40% of families remained stuck in the same income bracket in the 1990s, compared with 37% of families in the 1980s and 36% in the 1970s. Aaron Bernstein of Business Week points out that, even though the 1990s boom lifted pay rates for low-earners, it did not help them to get better jobs.

First, I don’t think it is too extreme to note that it is incredibly difficult for a person who grew-up poor to rise to the top quintile of income earners.  People born in poverty simply have fewer resources and opportunities than children born into rich families.

Secondly, notice the increase in income volatility, especially in the 1990s.  This simply means there is less income predictability now when compared to 20 years ago.  Mid-life career changes are far more common now, especially in the age of corporate downsizing and outsourcing.   The age when people worked for the same corporation for an entire career ended a long time ago.

An increase in income volatility makes it more difficult to advance up the income ladder.  For example, suppose a person makes $50,000/year but loses his job.  The first observation is that person has lost his current income, obviously making it impossible to move upward.  In addition, that person now has to dip into savings to maintain his lifestyle.  However, the US has an incredibly low savings rate, implying the person has little time between jobs before his lifestyle is adversely impacted.  If the person does not find comparable work quickly, a downward spiral is possible.

The primary reason for the increase in income volatility is the ever-changing economy – where the pace of change has increased over the last 25 years..  The 1990s are a classic example.  The 90s were the great tech boom, where the economy added a little over a million information service jobs from March 1991 to March 2001.  However, the economy has lost 560,000 information jobs since 2001.  These people have to find new jobs which most likely requires big changes after the person already has established a particular lifestyle.

The Center For American Progress noted the effect of increased income volatility:

Since 1990-01, there has beenn an increase in the share of households who experienced significant downward short-term mobility.  The share that saw their incomes decline by $20,000 or more (in real terms) rose from 13% in 19990-91 to 14.8% in 1997-98 to 16.6% in 2003-04.

Education also comes into play in this equation.  As the Congressional Budget Office notes, college has continually become more expensive:

The cost of four years of undergraduate education, including living expenses, now averages nearly $80,000 at public colleges and over $100,000 at many private institutions. Tuition and fees have risen steadily since 1980, fueling concern that college is becoming prohibitively expensive for many families. In two decades, tuition and fees at public universities more than doubled, from $1,883 (in 2001 dollars) in 1980 to $4,281 in 2001.

The CBO notes this cost is prohibitive for lower income students:

In 2001, about 56 percent of 18- to 24-year-old high school graduates from low-income families enrolled in college compared with 84 percent of their counterparts from high-income families. Although enrollment rates for both groups are about 10 percentage points higher than they were in 1973, the gap between rates for the two groups has remained about the same.

According to USAToday, the average amount of college debt is $19,000.   This debt level has caused serious problems for college graduates:

Among Those Graduating College with Debt: – 34% say they have sold possessions to make ends meet – 42% say they live ‘paycheck-to-paycheck’ – 27% say they delayed getting a medical or dental procedure.

Recent college graduates have an extremely high burden to pay off before they ever enter the workforce.  As a result, their ability to move up the income ladder is greatly diminished.

So, let’s tie some of these elements together from a policy perspective.  There is no way to promote 100% income mobility.  People with money have, well, money and connections to maintain their status and open doors for their children.  That’s simply the way it is.

The college situation is terrible and some type of clear leadership and policy proposals must emerge.  There is little point in attending college if the amount of debt accumulated to pay for higher education prevents upwards mobility.

Large vacillations in income may be more of a norm in an integrated international economy.   To mitigate the effects of rapid changed in income people need to save more.  This will require a big change in the structure of the US economy, which is 70% based on consumer spending.

If the US decides to achieve a higher level of income mobility, a more progressive level of taxation will be required.  First, this will lower after-tax income of the upper-level taxpayers.  Secondly, an increase in income mobility will require allocating more income resources to building an infrastructure that encourages income mobility.

The reality of the US is it is harder to move up the ladder than portrayed.  Now it’s important to ask ourselves if this is the kind of country we want.

Thanks to New Deal Dem for Providing some of the information here.

Bonddad Provides economic analysis for Democratic Candidates and Causes with NRRSA