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Is There Income Mobility in America?

We often hear that the rich are getting richer and the poor are getting poorer. While a surface-level examination of U.S. households by quintile from 1967 to 2009 would seem to support this claim, Professor Sean Mulholland uses other data to show that this measure overlooks two vital pieces of information that should concern those who care about the welfare of the poor.

First, the share of total income does not tell us anything about whether income increased or decreased when adjusted for inflation. From 1967 to 2009, the real mean household income of the top quintile increased by 71 percent, meaning the rich became much richer. Over the same period. The real mean household income in the bottom quintile increased by 25 percent. This means the poor became richer as well. This measure shows that Americans in the lowest quintile could afford more goods and services in 2009 than in 1967.

Second, these measures do not tell us what happened to particular households. Household income can change from year to year, but these measure do not track that. If we look at the households in the bottom quintile in 1987 and follow those households until 1996, we find that about 45 percent of them have moved up to a higher quintile. If we look at the next 10-year period, we find that 40 percent of households move up. Professor Mulholland also discusses income mobility from the top quintile down and across generations. He argues that these facts suggest that more improvements have been made for the poor in the past 40 years than many people believe. “To continue these improvements,” he says, “we should seek ways to expand opportunities for income growth and, with it, greater absolute mobility for those across the income distribution.”

Sources:

1. Data on household income shares by quintile come from here: http://www.census.gov/hhes/www/income/data/historical/household/. U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements, Table H-2.  Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households, All Races: 1967 to 2009

2. Data on mean household income levels by quintile come from U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements, Table H-3.  Mean Household Income Received by Each Fifth and Top 5 Percent, All Races:  1967 to 2009. These data can be found here: http://www.census.gov/hhes/www/income/data/historical/household/.

3. Data on relative household income mobility by quintile comes from: U.S. Treasury Department, (2008). Income Mobility of the United States from 1996 to 2005, Washington, D.C. It can be found here:
http://www.treasury.gov/resource-center/tax-policy/Documents/incomemobilitystudy03-08revise.pdf.

4. Data on generational income mobility comes from: Isaacs, Julia B. (2007). Economic Mobility of Families Across Generations. The Brookings Institutions. It can be found here: http://www.brookings.edu/~/media/research/files/papers/2007/11/generations%20isaacs/11_generations_isaacs.pdf

Are the Poor Getting Poorer? (video): Steve Horwitz explains that, contrary to popular belief, the poor are getting richer.


Hollenbeck on Income Inequalities (video): Dr Frank Hollenbeck talks to Jennifer Cordingley about income inequality.


Is "Income Stagnation" an Economic Myth? (video): Thomas Sowell argues that the economy has grown faster than most people realize


Economic Mobility in the United States (video): A counterargument to Prof. Mulholland's video suggests that America is suffering from a lack of income mobility.


The rich are getting richer and the poor are getting poorer. We hear this statement all too often, but is this actually the case?

Imagine if I ranked all households in the U.S. in order of their annual household income and then broke them into five groups. We call these groups quintiles.

The result would be five groups of households arranged by income level, each quintile representing one-fifth of all households in the U.S. From 1967 to 2009, the share of total income for the top quintile increased from 43.6 percent to 50.3 percent. During the same time period, the income share of the bottom quintile fell slightly, from 4 percent of total income to 3.4 percent. These two statistics seem to support the claim “the rich are getting richer and the poor are getting poorer.”

However, those statistics alone do not tell the whole story. They overlook two vital points that should concern those who care about the welfare of the poor.

First, the share of total income doesn’t tell you whether absolute income (adjusted for inflation) increased or decreased. That is, it doesn’t reveal whether or not households were able to afford more or better goods and services.

Second, these measures do not tell us what has happened to particular households. Household income can change from year to year, but these quintile measures don’t track that. They’re unable to reveal whether particular individuals or families experienced income mobility.

So let’s take a deeper look. From 1967 to 2009, the real mean household income of the top quintile increased by about 71 percent. So the rich, by this measure, did get much richer.  Yet over the same period, the real mean household income for the bottom quintile also increased by 25 percent. So the poor did not get poorer; they actually got richer as well. This means that Americans in the lowest income quintile could afford more goods and services in 2009 than in 1967.

But these measures still fail to capture the importance of income mobility at the individual household level.  Therefore we need to follow individual households to determine whether the household has experienced either absolute income mobility, through changes in their real income, or relative income mobility, by moving from one quintile to another.

For example, if we look at households in the bottom quintile in 1987 and then follow those individual households until 1996, we will see that about 45 percent of them have moved up to a higher quintile. If we look at the next 10-year period, we find that movement again, with 40 percent of households moving up to a higher quintile.

And what about the top 20 percent of income earners? We find mobility there, too. About 42 percent of households that were in the top quintile in 1987 had fallen to a lower quintile by 1996. And in the following ten years, another 40 percent of top income earners moved to a lower quintile.

This is pretty incredible. Just by looking at the top and bottom income groups, we see that there is remarkable movement across the income distribution over time.

And what about income mobility across generations? Do we see the kids of the rich getting richer and the poor getting poorer? If you examine data about children who grew up in the top 20 percent of households in the late 1960s and early 1970s, by the year 2000, their median income was about the same as their parents’ income had been after adjusting for inflation. So by that measure, the children of the rich are not any richer than their parents.

Meanwhile, if you look at the data for children who grew up in the poorest 20 percent of households in the late 1960s and early 1970s, by the year 2000, 82 percent had higher real income than their parents. Not only a little higher; their median real income was double that of their parents.

This is really incredible, and it’s evidence that the possibility of upward mobility in the United States is still very real. Now these facts do not discount the real problem and difficulties still faced by those who are poor. But they do suggest there have been more improvements for the poor in the past 40 years than many people believe. To continue those improvements, we should seek ways to expand opportunities for income growth and, with it, greater absolute mobility for those across the income distribution.

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