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Excuse me, which way is up?

Is America still the land of economic opportunity and mobility, especially for the poor?

November 1, 2006


Ron Wirtz Editor, fedgazette
Excuse me, which way is up?

It's the move that everyone hopes, even expects, to make. It's painless, even exceedingly enjoyable. There are no vans to load, no boxes to pack and unpack. Some make the move; others don't. Some move far, others just a spot over; some make the move but end up returning.

This move is not one of geography but of income: the ability of individuals, families and households to raise their earnings and standard of living over time. In more colloquial terms, income mobility is keeping up with, and hopefully passing, the proverbial Joneses.

Income mobility lies at the root of what many perceive to be the greatest strength of the U.S. market economy, and it is a mighty incentive for the poor to work hard. But this notion is also under attack by critics who argue that poverty is becoming more entrenched and that the American Dream is just that: an illusion for tens of millions of families.

Much time and attention today is paid to rising income inequality in this country, but income mobility tends to take a backseat, despite the fact that it's really the driver in terms of people's long-term earnings; just because people are poor today doesn't mean they will be poor tomorrow, next year or next decade.

But whether this country still boasts healthy income mobility is a controversial matter. That's partly because mobility is multidimensional and defies easy trend-spotting. The Cliff Notes version of the research goes something like this: There is still considerable income mobility in the United States, but less than in other developed countries, and incomes might be getting stickier over time. That might sound like a problem—and it might actually be a problem—but we have little idea about what constitutes an optimal level of mobility.

Movin' on up?

High income mobility means that anyone has a good chance of making it big regardless of his or her socioeconomic station in life. Low mobility means you're stuck, that your economic well-being is virtually preordained based on the type of family you're born into. This Calvinistic model is great if you're born into a rich family; not so great if your family is poor.

The common perception of the United States is that income is increasingly unequal, but people still enjoy considerable mobility: In other words, the gap between rich and poor is widening, but with a little elbow grease, today's cellar dweller can still make it to the penthouse.

Few people dispute the first part regarding income inequality. From 1975 to 2000, average income in the bottom 20 percent of households rose by 24 percent, after adjusting for inflation, while the top 20 percent of households saw their incomes rise by 68 percent, according to the Census Bureau. Since then, the gap has widened even further: Income actually declined for the bottom households from 2000 to 2005, while at the top it grew another 12 percent. Research suggests that income inequality has risen in most countries and is particularly high in emerging and second-tier economies such as Russia and those in Latin America. Among rich countries, however, the United States is typically the highest or among the highest in income inequality.

But income inequality is not a particularly glaring concern, many believe, so long as there is ample opportunity for poor workers and families to earn their way up. Here's where things get more complicated. First, despite its importance, we don't know much about mobility. Good mobility studies require longitudinal data that track individual income histories, and such data sets are hard to come by, particularly when you're trying to determine how your mobility compares to that of your parents.

Still, headway is being made. A handful of studies in the past half-dozen years argue that the rose-colored perception of the United States as the land of opportunity might be a bit off-color, particularly compared to other countries. There's something of a tug-of-war going on regarding income mobility within the United States: Some say it's getting stickier, others disagree. Some evidence suggests there is still considerable mobility for low-income people, but it's probably more fragile than policymakers imagine. Annual income tends to be more volatile than many realize, which means considerable flow into and out of poverty is likely. In other words, getting into poverty doesn't mean you can't get out, and getting out of poverty doesn't mean that you'll stay out.

All dressed up, no place to go

There are two types of mobility to pay attention to. The first is personal or short-term mobility—the change of income over time for an individual or family. Such mobility is important for gauging whether the poor will stay poor, and for how long. The second kind of mobility—intergenerational—considers the degree to which the income of children (particularly sons) is related to that of their parents (usually fathers).

It might come as a surprise, but some estimates suggest as many as half of all people are poor at some point in their lives, and for myriad reasons—some long-term in nature (low education and work skills, out-of-wedlock births), others more short-term and episodic (loss of a job, divorce, sickness, even attending college). Generally speaking, poverty is a transient condition. The majority of poor people find their way out of poverty, although some ping-pong across the poverty line. Comparatively few are poor all their lives.

Though poverty frequency and duration would seem critical to the mobility debate, solid data on the matter are rather thin. Research by Ann Huff Stevens at the University of California-Davis in the 1990s has shown that many who fall into poverty will experience it again, possibly several times or for extended periods within the following decade. This is particularly true for those populations that experience higher rates of poverty to begin with, like minorities and single-female households. Mark Rank of Washington University and Thomas Hirschl of Cornell University published a study in 2001 with similar findings: Adults faced a "significant risk of poverty" at some point during their lives—most often in early and late adulthood. Episodes of poverty tend to be short, they noted—about one to two years—"but once poverty occurs, it is likely to occur again."

A more recent contribution is a 2003 Census report by John Iceland (now at the University of Maryland), who looked at poverty longevity on a monthly basis (using pro-rated income thresholds) from 1996 to 1999. Iceland found that 34 percent of all people experienced a bout with poverty lasting at least two months during this four-year period. Of those experiencing poverty, fewer than half saw the spell last for more than four months, and for 80 percent poverty lasted less than 12 months. In other words, roughly 7 percent of the total population experienced poverty for 12 or more consecutive months during a four-year period; just 2 percent of the population was poor for this entire period, and a modestly disproportionate number of the chronically poor were elderly people, who tend to see little change in their income.

But simply rising out of poverty is different from the notion of mobility. A person's standard of living improves much more by moving from the bottom 20 percent of earners to a higher bracket than it does by merely crossing the poverty line. From this perspective, some major studies suggest that mobility for the nation's lowest earners has worsened slightly. In 2002 Kathleen Bradbury and Jane Katz of the Federal Reserve Bank of Boston found that the percentage of families that started in the bottom quintile and remained there a decade later was unchanged at 49 percent from 1969 to 1979, and again from 1979 to 1989. But over the 1990s, poor families became less mobile; 53 percent of families that started in the bottom quintile remained there a decade later.

Such research draws a useful but only partial picture of poverty; it does not gauge the ups and downs of income during the course of that decade. This is important because income is quite volatile. For example, the U.S. Department of Agriculture released a study in late summer this year that looked at the income variability of families to get a better handle on eligibility for free and reduced-cost lunch programs. It looked at three consecutive school years (1997 to 1999) and found that the monthly income variation for households below 75 percent of the annual poverty level was double that of households that were more than 300 percent over poverty thresholds.

Research by Jacob Hacker (Yale University) and Nigar Nargis (University of Dhaka) has shown that family incomes have become much more volatile over time. Using data from 1974 to 2000 from the Panel Study of Income Dynamics (a longitudinal database managed by the University of Michigan that tracks thousands of households), they found that income volatility was higher for certain groups (higher for women than men, higher for blacks than whites, higher for the less educated than the more educated), but had also risen across all groups.

The two also looked at the income shocks. They found that the percentage of families experiencing a drop in income remained fairly steady, but the median size of that drop had grown. In the 1970s, for those experiencing a drop in income, the median decline was 25 percent. By 2000, it had grown to 40 percent. They estimated that the probability of an average family experiencing an income drop of 20 percent or more had more than doubled over the past three decades.

Work hard, get ahead

What's important, at least as it relates to poverty, is whether income volatility translates to upward mobility for the poor. The answer appears to be yes. Iceland's 2003 report found that 38 percent of those in the lowest quintile were in a higher quintile in 1999.

A 2006 study by Tom Hertz of the Center on American Progress at American University looked at variations in income among roughly 20,000 households during three two-year periods (1990-91, 1997-98 and 2003-04). Though he found an increase in large negative shocks in the middle income brackets, short-term mobility for both the bottom quintile and decile improved over the period, "which is encouraging," Hertz said.

Similar findings were reported in a 2004 National Poverty Center working paper by Harry Holzer, Julia Lane and Lars Vilhuber, which used a longitudinal database of Illinois workers from 1990 to 1998. The trio concluded, "There is considerable mobility into and out of low-earning employment status. A large fraction of adults who have very low earnings over lengthy periods of time (at least three years) manage to escape this status."

The key here is also an obvious one: work attachment. For those who can manage to hold onto a job, wages tend to rise. A 2002 longitudinal study published in the California Policy Review followed 187,000 California workers, analyzing the payroll data of each in four-year increments from 1988 to 2000. Contrary to studies that look at the faceless changes in group income—which usually find stagnant real wages for low-end workers—this study found "substantial earnings mobility for individual workers. ...We find that real wage gains are greatest for those workers who started out at the lowest wages" and for those who switched industries.

When comparing the earnings of all workers in 1988 to those in 2000, median annual incomes declined by 7 percent (inflation adjusted). However, when a representative sample of workers was tracked individually, median income rose by 24 percent over the same period. Now, there are caveats. For one, this cohort includes no new entrants, who would likely bring down average wages because by definition they have less experience than those being tracked at the start of the study. It also fails to measure those who dropped out of the labor force and had no earnings to track (thus underestimating the share of workers with earnings losses over this period).

Still, the California report pointed out that this methodology speaks to "the natural tendency for an individual's earnings to increase with age and experience." It also speaks to the notion that you can get ahead if you work hard. Over a 12-year period, over 80 percent of California workers in the bottom quintile of the sample managed to make it to a higher quintile (though the study did not state how many fell back to the bottom quintile at any point). Those willing to switch jobs and industries typically saw their earnings rise faster than those who did not switch as often, and this was particularly true for those in the lowest-paying industries, like retail.

Horatio Alger revisited

The other type of income mobility is intergenerational—the degree to which income is connected to the family you're born into.

Most research to date suggests that intergenerational mobility in the United States is low compared to other developed countries. For example, a team of eight researchers published a 2006 working paper with the Institute for the Study of Labor (IZA), located in Bonn, Germany. The study found less mobility in the United States overall: Sons born to poor fathers in the United States were more likely to remain in poverty than those in other (mostly western European) countries, while sons of top-bracket U.S. earners were also less likely to experience downward mobility. It noted that "all countries exhibit substantial earnings persistence across generations," but the differences among countries are "a challenge to the popular notion of 'American exceptionalism'" that most anyone can go from rags to riches here.

Several U.S. economists with pedigrees in mobility research contacted for these stories agreed with that general finding. For example, Gary Solon, from the University of Michigan, said via e-mail that intergenerational income persistence "does seem high in the U.S. relative to other developed countries."

Bhashkar Mazumder, an economist at the Federal Reserve Bank of Chicago, has authored several mobility studies in recent years. He said, also via e-mail, that prevailing mobility research throws water on the common notion that U.S. income is highly mobile and more mobile than other countries. More recent studies, like his own, have used much richer longitudinal data that track income over longer periods of time, giving a more accurate reading of lifetime incomes in the United States. Research over the past decade and a half shows that "mobility is relatively low in the U.S. and lower than we thought," said Mazumder.

There is less agreement about the direction of mobility in the United States. In a study published earlier this year by Solon and Chun-In Lee of Konkuk University, the authors stated, "The research conducted so far on intergenerational mobility trends has produced wildly divergent estimates." That's mostly because of a scarcity of data (particularly longitudinal) that has motivated a multitude of methodologies.

Solon and Lee use a longitudinal survey of 5,000 families that started in 1968, continued annually through 1997 and every other year since then, giving them a deeper look into lifetime earnings. "Our estimates are still too imprecise to rule out modest trends in either direction. For the most part, though, our results for the cohorts born between 1952 and 1975 suggest that intergenerational income mobility in the United States has not changed dramatically over the last two decades."

Nathan Grawe has also done research on income mobility as an economics professor at Carleton College in Minnesota. In his estimation, the four best studies done to date on intergenerational mobility have both positive and negative findings, and most results were not statistically significant; in other words, the findings aren't particularly trustworthy. "All told," Grawe said via e-mail, "I'd say we have no evidence of change."

Part of the problem is that studies done before about 1990—which generally concluded that the United States had high mobility—are widely discredited today as faulty, mostly because they relied on very small windows of income data, often just a few years or less. In 1992, Solon published one of the first papers suggesting that U.S. mobility was not as high as everyone thought.

Mazumder's research comes to the same conclusion. But his most recent effort with Daniel Aaronson (also of the Chicago Fed) might have something of a silver lining. They found that current mobility might simply be returning to its historical trend line after experiencing an uptick in the 1970s. In other words, mobility might be worse compared to the 1970s, but it might well be in line with the country's historical average.

How loose the chains?

It's hard to say what to make of all this. The notion of mobility is both simple and desirable, and few experts would argue that U.S. mobility is close to perfect. But neither do we have any idea of what perfect mobility would look or act like.

"I don't think we have much empirical evidence on optimal mobility levels," said Christopher Jencks, a Harvard sociologist who has studied mobility, via e-mail. "And if we did I would be suspicious, since I think optimal policies would reduce or eliminate some obstacles to mobility but not others."

The notion of perfect mobility—an equal chance for any outcome, regardless of where you start—has a hint of social and economic chaos, by virtue of the fact that it implies a lack of predictability in outcomes regardless of the very things that families and societies tend to value: effort, ability, education and other human capital investment, and parenting.

Economists believe incentives motivate behavior. Grawe, from Carleton College, noted that mobility research was often written "in ways which suggest more mobility is better." But a society with no obvious determinants for income "would clearly have all sorts of incentive problems."

For example, parents' attempts to offer certain advantages to their kids—reading to them, sending them to better schools, saving for college, transmitting certain values—might be for naught in a world where these things have no lasting economic effect. In a 2002 working paper on the notion of perfect mobility, sociologist Adam Swift of the University of Oxford wrote, "Even those that regard current mobility patterns as evidence of morally unacceptable unfairness should acknowledge that some mechanisms by which parents transmit advantage—or disadvantage—to their children are unobjectionable and would exist even in an altogether just society."

Miles Corak authored a study earlier this year for the IZA that found that father-son income was much more closely related (and thus, showed less mobility) in the United States and the United Kingdom than in Canada and most European countries. Though Corak outlined several options for equalizing opportunities across income, "it is very likely that in no society would a policy maker find support for entirely eliminating the relationship between parent and child incomes."

But neither are there convenient, hard-and-fast linkages when it comes to lifetime earnings. Jencks, for instance, believed that moms and dads parent with short-term goals and incentives in mind, rather than lifetime earnings.

"Economic payoffs down the road aren't unimportant, especially when parents think about how much to spend on higher education. But mostly we do the right thing because it pays off in the short run—say the next year or two—not the long run," Jencks said. "Parents toilet train their kids because they don't want to spend the next 18 years changing diapers, and they discipline their kids because they want them to behave soon, not because they want them to do what their boss asks" when they get their first job.

Researchers have only scratched the surface of what mobility means and the factors for its presence or absence. Swift pointed out that existing research only looks at the distribution of outcomes, rather than opportunity. "It is true that one cannot achieve an outcome without having had the opportunity. ... But the converse does not hold. One can perfectly well have the opportunity to achieve an outcome that one does not in fact achieve."

It's important to know where people start out and where they end up. But according to Swift, "What we care about is not whether people from different origins have the same statistical chance of ending up in particular destinations but whether they have the same opportunity to do so. ... But mobility research tells us nothing about that.

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.