Wednesday, November 9, 2011

Income Mobility

There's been a lot of talk lately about income mobility in America. The Pew Economic Mobility Project (EMP) has done yeoman's work in this area. Scott Winship has a good summary of its findings in the latest issue of National Review. The quick takeaway can be summarized by these two points: first, absolute income mobility is still widespread — about 80% of people are better off than their parents were; second, however, relative income mobility is lower in America than in other industrialized countries — for example, people born into the bottom income quintile have only about a 60% chance of escaping it, while the average for most industrialized countries is closer to 70%. That's not a vast difference, but it's measurable.

But, as is his wont, Thomas Sowell steps up with some thoughtful counter-observations. His main point has to do with following actual people over their lifetimes, instead of simply looking at the history of an income bracket.

The Internal Revenue Service can follow individual people over the years because they can identify individuals from their Social Security numbers. During recent years, when "the top 1 percent" as an income category has been getting a growing share of the nation’s income, IRS data show that actual flesh-and-blood people who were in the top 1 percent in 1996 had their incomes go down — repeat, down — by a whopping 26 percent by 2005.

How can both sets of statistics be true at the same time? Because most people who are in the top 1 percent in a given year do not stay in that bracket over the years.

Something Sowell doesn't mention, and that I'd like to see, is relative income mobility by age group. Statistics show very clearly that young adults are much less wealthy than older adults (which makes the current structure of Social Security all the more absurd, but I digress). So it isn't really fair when looking at relative wealth to compare a 25-year-old college graduate to a 60-year-old executive. The bottom quintile will necessarily have a disproportionate number of 25-year-olds, many of whom will climb to higher quintiles through the natural process of wealth accumulation. But suppose we followed a 25-year-old from the bottom income quintile among 25-year-olds? It would be interesting to see what income mobility would look like then. Worse, no doubt. But by how much?

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