16 November 2011

U.S. Income Mobility Modest

Americans frequently move up or down in income rankings. Yet there is evidence they are doing so less often than they used to, and less than residents of Canada and Western Europe.

"Yes, the U.S. has a lot of mobility," says Sheldon Danziger, an economist at the University of Michigan. "But we also have a lot of inequality, and particularly a lot of stickiness at the top and at the bottom." . . .

During George W. Bush's presidency, the Treasury Department released figures, based on tax returns, that demonstrated the complexity of the issue. According to the report, which tracked taxpayers from 1996 to 2005, just 40.3% of those in the top 1% in 1996 remained there nine years later. But most didn't fall far: 86.5% remained in the top 20%. Meanwhile, more than half of those in the bottom quintile in 1996 remained there nine years later. . . .

Americans' incomes have dropped since 2000 and they aren't expected to make up the lost ground before 2021, according to economists in the latest Wall Street Journal forecasting survey.

From the Wall Street Journal via the Tax Profs Blog. See also detailed tables.

Of those who were in the top 20% in 1996, nine years later in 2005 there were 61% still in the top 20%, 22% in the next 20%, 9% in the middle 20%, 5% in the second to bottom 20% and 4% in the bottom 20%. Thus, 83% stayed within one quintile of where they started, while the rest fell further.

Of those who were in the bottom 20% in 1996, in 2005 there were 55% still in the bottom 20%, 24% in the next to bottom 20%, 11% in the middle 20%, 7% in the second to top 20%, and 4% in the top 20%. Thus, 79% stayed within one quintile of where they started, while the rest advanced more.

Culturally, Americans tend to think of their society as one with considerable social mobility, probably more than really exists. Dramatic swings aren't unheard of, one in twenty-five people at one quintile extreme are at the other nine years later. In part this is due to normal and expected factors like retirements, one time capital gain realizations, and entering the work force, rather than changes in expected lifetime incomes, but in part, the shifts are more meaningful. But, the sample was restricted to taxpayers age 25 and older, limiting entry into the workforce effects.

It is worth recalling that these figures don't reflect the large numbers of people who have dropped out of the middle class as a result of the recession. The 1996-2005 time period covers a period with only one significant recession, the tech bust, and that was relatively brief and mostly recovered from by 2005.

It also doesn't capture intergenerational shifts in income, which are mostly what we think about when we talk about social mobility. The most glaring cause of stickiness there is the fact that lower income people who are academically comparable to their more well off peers are much less likely to attend or complete college. The odds that an excellent student from a poor family will complete college are roughly the same as the odds that a really bad student from an affluent family will complete college.

We expect, in a meritocratic view, that children of the successful will themselves be more likely than average to be academic achievers who are likely to be successful themselves. The children of the successful have genetic, parenting, social and financial advantages relative to their peers (although statistically, the child rearing and social benefits are much smaller relative to the other benefits than one might expect). But, the effect of social class on higher educational opportunity is much more profound than this effect.

Likewise, the fact that poverty suppressed the lifetime IQ of children who grow up in it, is notable for those who favor a meritocratic society. Genetics appears to set a ceiling on IQ that is realized or nearly realized in families that are middle class or better, but that is not realized in the poor where environmental effects are much more important relative to hereditary effects.

There is also a view that sees poverty as mostly a temporary condition. A society in which 80% of people are in poverty at some point for a year or two, but few people are in poverty for a prolonged period might be more palatable than one in which our society has, as it was once popular to call it, an "underclass" that is poor and stuck that way. The WSJ data (via the IRS), however, suggest that perhaps 11% of the U.S. population (about 35 million people) is part of an "underclass" that is not just poor, but is stuck in poverty on a long term basis. This is a more troubling reality.

A quintile analysis also omitts the general trends during this time period. The four lower quintiles and about half of the top quintile, were economically stagnant over this time period that were boom years overall for the U.S. economy. The top gained a lot. So the stakes involved in being one of the one in ten who are winners in the economy have grown dramatically.

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