Switching Places ... or Not: Intragenerational Mobility

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Over the last several decades, income inequality in the United States has increased dramatically. Back in the early 90s, conservatives were looking for ways to demonstrate that inequality had not gotten worse. Glenn Hubbard (who later was one of the architects of the 2003 Bush tax cuts), while on leave from an academic post, released a study from the U.S. Treasury's Office of Tax Analysis which purported to show that:

86 percent of households in the bottom fifth in 1979 had climbed out of poverty by 1988.

Here is Paul Krugman from 1992 explaining the "strange procedure" that produced this result:

Here's what Hubbard's report did: it tracked a group of individuals who paid income taxes in all ten years from 1979 to 1988, and compared their incomes not with each other but with those of the population at large. The restriction to individuals who paid taxes in all years immediately introduced a strong bias toward including only the economically successful; only about half of families paid income taxes in all ten years. This bias toward the successful was apparent in the fact that by the end of the sample period the group contained very few poor people and a lot of affluent ones: indeed, only 7 percent of the sample were in the bottom quintile by the sample's end, while 28 percent were in the top quintile. More important, by comparing the sample with the population at large rather than with each other, the report essentially treated the normal tendency of earnings to rise with age as representing social mobility. The median age of those whom the study classified as being in the bottom quintile in 1979 was only twenty-two.

Kevin Murphy, a labor economist at the University of Chicago, neatly summed up what the Treasury study had found: 'This isn't your classic income mobility. This is the guy who works in the college bookstore and has a real job by his early thirties.'

So why bring up outdated and poorly conceived research?

Steve Horwitz, a professor of economics at St. Lawrence University, managed to get an op-ed published in The Philadelphia Inquirer on January 26 using this bogus statistic.

Adding insult to injury, Horwitz's op-ed claimed that work by the Economic Policy Institute, documenting the rise in inequality over time and published in the State of Working America, is flawed precisely because it fails to examine how the income of individual households changes as those households age (intragenerational mobility). The 2008/2009 edition of the State of Working America has a careful review of the literature on income mobility.  The following appears on Page 100 under the heading Switching places ... or not: Intragenerational mobility:

A central question of mobility research is: How far do families move up or down across the income scale over their life span? Of those families, who start out at the bottom, middle or top of the income scale, what share is still there years later?... Table 2.1 [see above] presents this type of analysis for two 10-year periods: 1984-94 and 1994-2004 (two-year averages are used to control for transitory income fluctuations).  The number at the top of the left column ('Lowest') shows that 55.6% of persons who were in the bottom fifth in 1984 were still there 10 years later.  Only 3.3% (the top number in the right column labeled 'Highest') made the long upward trek from the bottom to the top fifth over these years.  Summing the first two cells in the first row (55.6% plus 24.1%), about 80% of the sample started in the bottom fifth in 1984 and ended in the bottom 40% 10 years later.  The percent of “stayers” (those who did not move out of the fifth they started out in) are on the diagonal, shown in bold.

Most persons end up close to where they started. In the latter period, for example, of those that started in the fourth fifth in 1994, more than 80% ended up in that same quintile or one quintile higher or lower 10 years later.  In both periods, about half stay in the highest fifth.

In fact, and this an important finding from this work, the rate of mobility was remarkably constant over these two time periods.  Comparing the fifths between the two panels, a statistically significant difference occurs in only one case: the share that jumped from the bottom fifth to the top fifth was smaller in the second period compared to the first (i.e. 3.3% down to 0.9%). Comparing overall mobility — the share of persons who made a quintile transition over the decade — is particularly revealing of how static the rate of mobility was between these two periods.  In the first period, this share is 60.0%; in the latter period, it is 59.6%.

These data solidly belie any claim that increased mobility has offset rising inequality.  Income classes are further apart now than in the past, and families are no more likely to traverse that greater distance.

The rest of Horwitz's op-ed attempts to explain that inequality is not a problem because being poor, working or middle class means having a living standard that only kings enjoyed a mere hundred years ago.  Once again, the Economic Policy Institute:

Absolute gains in real family income of the type discussed above...matter too, since higher real incomes enable families to raise their living standards.  But inequality researchers have found that relative positions mean a lot to people.  Our well-being, along with our sense of accomplishment, is not simply a matter of what we can afford to buy given our income levels.  It is also a matter of how we are faring relative to others from our same generation.  Research shows that if they pass us by — if we are downwardly mobile relative to others in our cohort — we experience economic stress, even if our buying power is up.

For more on income mobility from the latest edition of the State of Working America, go here.

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