Saturday, November 12, 2011

Income Mobility

Income mobility is a measure of how likely it is that a person from one economic class will end up in another economic class: do people from middle class families end up rich?  Do people from rich families end up poor?  Do people from poor families end up rich?  Over at Super-Economy is a thoughtful, data-filled posting about income mobility, pointing out that many of the common themes of the left on this subject turn out to be wrong--as measured by data the U.S. government collects:
The Occupy Wall Street protesters and their sympathizers in the media are angry about four trends they believe characterizes American capitalism.

1. Income inequality has been going up (true).
2. The Middle Class is stagnating (false).
3. Wealth is taken, not created (I believe false).
4. American income mobility is falling (false).

I will write about the middle class stagnation myth and about value creation next time.

The Bureau of Labour Statistics provides the NLSY97 dataset, tracking a large representative number of Americans. In addition to your current earnings, NLSY97 reports the income of your parents when growing up.

Of the Americans whose average income during the last five years put them in the "Top 1 Percent" richest, 7 out of 10 did not have rich parents (defined as the top 10% highest earning parents).

The richest 1 percent do not come from poor homes, they mostly come from upper-middle class homes. Note that because income is measured imperfectly, these numbers likely overestimate mobility.

Nevertheless, you get a similar result from the Forbes 400 list of the richest people in the United States. Forbes magazine lists the source of wealth :

“Two-thirds of the members of the Forbes 400 have fortunes that are entirely self-made.”
Perhaps more importantly from the standpoint of fairness:
A recent study by Berkley Economist Emmanuel Saez and coauthors confirms that while income inequality has been getting worse, income mobility has not. Instead, driven entirely by women, upward income mobility has actually improved. Saez writes (emphasis in original) “long-term mobility has increased significantly over the last five decades.”

According to Saez, the probability that someone currently in the top one percent will remain in the top one percent five years from now is only around 60%, where it has remained for a very long time. The notion of a permanent elite taking hold of top incomes during the last few years is entirely a myth. There remains a substantial churn among the top one percent, with almost half dropping out every five years.
 To me, this is not surprising.  Many of those in the top 1% of income are going to bring in a huge pile of money each year, and if they are not utterly foolish, they will put most of it into savings every year.  At some point, they can retire, or perhaps the opportunity that allowed them to make a huge annual income (being on a hit TV show, working in a very good job in a very health economic sector) ends...and someone else takes their place.

I would also point out that income mobility does not have to mean wealth mobility.  A person who makes $500,000 a year for several years, unless they are very short-sighted, will put that money into savings, and be set for life.  Similarly, as long as a middle class person puts their money into reasonably safe investments (not including a big house), a decline in income need not necessarily lead to a dramatic reduction in wealth.  It may require a substantial reduction in lifestyle to avoid burning through capital, however.

1 comment:

  1. Thanks for the link to an excellent article. I think many are worrying too much about income inequality when income mobility is the thing they should be worrying about.

    Europe traditionally has more income equality and less income mobility than the United States. That's why many of our ancestors moved here.

    Income mobility does work both ways though. A friend of mine's dad was born a poor white sharecropper, and had a promising career and wound up owning a nice house when he retired. Remarkably, the man who did this never went to college. My friend went to college and racked up enough student loans to keep him from ever owning a home.

    I fear more of our young people are going to wind up like my friend. Buried in debt with an unmarketable degree and not much future.