Income Inequality II: The Myth of Moving Up

Bumped from the diaries -- Jonathan

The primary argument Republicans advance regarding growing income inequality is anyone can grow up to be rich in America.  This is the classic "rags to riches" story of someone starting poor, working hard and eventually winding up a millionaire.  The question about this myth is simple: is this possible?  The reality is not really.


The Center for American Progress issued a report on April 22, 2006 titled Understanding Mobility in America. Here are some of the study's key findings:


Children from low-income families have only a 1 percent change of reaching the top 5% of the income distribution, versus children of the rich who have about a 22% chance.


Children born to the middle quintile of parental family income ($42,000 to $54,300) had about the same chance of ending up in a lower quintile than their parents (39.5%) as they did of moving to a higher quintile (36.5%). Their chance of attaining the top five percentiles of the income distribution were just 1.8%.


By international standards, the US has an unusually low level of intergenerational mobility: our parents income is highly predictive of our incomes as adults. Intergenerational mobility in the US is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark.  Only the United Kingdom had a lower rate of mobility than the US.


The overall volatility of household income increased significantly between 1990-91 and 1997-98 and again in 2003-04.


Other studies confirm the lack of upward mobility.


A classic social survey in 1978 found that 23% of adult men who had been born in the bottom fifth of the population (as ranked by social and economic status) had made it into the top fifth. Earl Wysong of Indiana University and two colleagues recently decided to update the study. They compared the incomes of 2,749 father-and-son pairs from 1979 to 1998 and found that few sons had moved up the class ladder. Nearly 70% of the sons in 1998 had remained either at the same level or were doing worse than their fathers in 1979. The biggest increase in mobility had been at the top of society, with affluent sons moving upwards more often than their fathers had. They found that only 10% of the adult men born in the bottom quarter had made it to the top quarter.


Take the study carried out by Thomas Hertz, an economist at American University in Washington, DC, who studied a representative sample of 6,273 American families (both black and white) over 32 years or two generations. He found that 42% of those born into the poorest fifth ended up where they started--at the bottom. Another 24% moved up slightly to the next-to-bottom group. Only 6% made it to the top fifth. Upward mobility was particularly low for black families. On the other hand, 37% of those born into the top fifth remained there, whereas barely 7% of those born into the top 20% ended up in the bottom fifth. A person born into the top fifth is over five times as likely to end up at the top as a person born into the bottom fifth.


Two economists at the Federal Reserve Bank of Boston analysed family incomes over three decades. They found that 40% of families remained stuck in the same income bracket in the 1990s, compared with 37% of families in the 1980s and 36% in the 1970s. Aaron Bernstein of Business Week points out that, even though the 1990s boom lifted pay rates for low-earners, it did not help them to get better jobs.


First, I don't think it is too extreme to note that it is incredibly difficult for a person who grew-up poor to rise to the top quintile of income earners.  People born in poverty simply have fewer resources and opportunities than children born into rich families.


Secondly, notice the increase in income volatility, especially in the 1990s. This simply means there is less income predictability now when compared to 20 years ago.  Mid-life career changes are far more common now, especially in the age of corporate downsizing and outsourcing.   The age when people worked for the same corporation for an entire career ended a long time ago.


An increase in income volatility makes it more difficult to advance up the income ladder. For example, suppose a person makes $50,000/year but loses his job.  The first observation is that person has lost his current income, obviously making it impossible to move upward.  In addition, that person now has to dip into savings to maintain his lifestyle.  However, the US has an incredibly low savings rate, implying the person has little time between jobs before his lifestyle is adversely impacted.  If the person does not find comparable work quickly, a downward spiral is possible.


The primary reason for the increase in income volatility is the ever-changing economy - where the pace of change has increased over the last 25 years..  The 1990s are a classic example.  The 90s were the great tech boom, where the economy added a little over a million information service jobs from March 1991 to March 2001.  However, the economy has lost 560,000 information jobs since 2001.  These people have to find new jobs which most likely requires big changes after the person already has established a particular lifestyle.


The Center For American Progress noted the effect of increased income volatility:


Since 1990-01, there has beenn an increase in the share of households who experienced significant downward short-term mobility.  The share that saw their incomes decline by $20,000 or more (in real terms) rose from 13% in 19990-91 to 14.8% in 1997-98 to 16.6% in 2003-04.


Education also comes into play in this equation.  As the Congressional Budget Office notes, college has continually become more expensive:


The cost of four years of undergraduate education, including living expenses, now averages nearly $80,000 at public colleges and over $100,000 at many private institutions. Tuition and fees have risen steadily since 1980, fueling concern that college is becoming prohibitively expensive for many families. In two decades, tuition and fees at public universities more than doubled, from $1,883 (in 2001 dollars) in 1980 to $4,281 in 2001.


The CBO notes this cost is prohibitive for lower income students:


In 2001, about 56 percent of 18- to 24-year-old high school graduates from low-income families enrolled in college compared with 84 percent of their counterparts from high-income families. Although enrollment rates for both groups are about 10 percentage points higher than they were in 1973, the gap between rates for the two groups has remained about the same.


According to USAToday, the average amount of college debt is $19,000.   This debt level has caused serious problems for college graduates:


Among Those Graduating College with Debt: - 34% say they have sold possessions to make ends meet - 42% say they live 'paycheck-to-paycheck' - 27% say they delayed getting a medical or dental procedure


Recent college graduates have an extremely high burden to pay off before they ever enter the workforce.  As a result, their ability to move up the income ladder is greatly diminished.


So, let's tie some of these elements together from a policy perspective.  There is no way to promote 100% income mobility.  People with money have, well, money and connections to maintain their status and open doors for their children.  That's simply the way it is.


The college situation is terrible and some type of clear leadership and policy proposals must emerge.  There is little point in attending college if the amount of debt accumulated to pay for higher education prevents upwards mobility.


Large vacillations in income may be more of a norm in an integrated international economy.   To mitigate the effects of rapid changed in income people need to save more.  This will require a big change in the structure of the US economy, which is 70% based on consumer spending.


If the US decides to achieve a higher level of income mobility, a more progressive level of taxation will be required.  First, this will lower after-tax income of the upper-level taxpayers.  Secondly, an increase in income mobility will require allocating more income resources to building an infrastructure that encourages income mobility.


The reality of the US is it is harder to move up the ladder than portrayed.  Now it's important to ask ourselves if this is the kind of country we want.


Thanks to New Deal Dem for Providing some of the information here.


Bonddad Provides economic analysis for Democratic Candidates and Causes with NRRSA

Tags: Economy (all tags)

Comments

11 Comments

Well

I still believe that, if one works hard, it is possible to go from the bottom to the top. As you blutnly admit, however, it is much more difficult than it was in the past.

I would attribute this factor to the increasing cost of education. A student going to a decent, four year college can easily leave owing $30-40,000 in loans. Should that student attend graduate school, law school, business school, medical school, or pursue a Ph.D, the cost can easily rise to more than $100,000.

I'm 28 and am relatively new to the workforce. But what is holding me back is the fact that I owe a ton in student loans. I went to graduate school immediately after college because I was afraid that, if I didn't go then, I would NEVER go at all. I will be paying the government back for the next 30 years.

What I have struggled with is starting. I can't apply for entry-level jobs because hiring managers tell me that I am "too qualified". Also the salary in these positions is really, really low.  I can't apply for mid-level positions either because I don't have "enough experience". So, in between both positions, I have had difficulty finding work.

I do think that, eventually, I will be able to get ahead. But it's going to be at least ten years from now.

by jiacinto 2006-07-16 11:15AM | 0 recs
Here is some additional information

Below, Joe Hill privides some great links with further documenation.  Here are a few snippets.  If you are interested, please read the articles in the link.

But over the last 10 years, better data and more number-crunching have led economists and sociologists to a new consensus: The escalators of mobility move much more slowly. A substantial body of research finds that at least 45 percent of parents' advantage in income is passed along to their children, and perhaps as much as 60 percent. With the higher estimate, it's not only how much money your parents have that matters--even your great-great grandfather's wealth might give you a noticeable edge today.

Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for every added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000.

In 2001 the top 1 percent of wealth holders accounted for 33 percent of all net worth in the United States, twice the total net worth of the bottom 80 percent of the population. Measured in terms of financial wealth (which excludes equity in owner-occupied houses), the top 1 percent in 2001 owned more than four times as much as the bottom 80 percent of the population. Between 1983 and 2001, this same top 1 percent grabbed 28 percent of the rise in national income, 33 percent of the total gain in net worth, and 52 percent of the overall growth in financial worth.

by Bonddad 2006-07-16 12:25PM | 0 recs
Re: Income Inequality II: The Myth of Moving Up

I do think that, eventually, I will be able to get ahead. But it's going to be at least ten years from now.

You are living in a fantasyland if you think things are going to look up for you in 10 yrs.  28+10=38.
When you are 38, you will be susceptible to the wonderful practice of age discrimination, because despite the fact that law prohibits such practices, the fact remains that companies continually find newer and ever more innovative ways of shedding those members of its workforce that it finds too cumbersome to keep on.  Specifically, those pushing age 40 and over.  At 38, you will be a health insurance liability for them because you will seek to actually use your health insurance for age-related issues such as: bad knees due to no cartilage; aging dental fillings in need of root canal.  At age 38, you won't actually live by the philosophy of living to work as you do now.  By age 38, you will have realized that spending time with your family is a hell of a lot more rewarding/important than working 100 hours/wk of unpaid OT for the prick in the corner office.  You will have realized and come to implement the theory of working to live instead of vice versa.  

How do I know all of this?  Because I once stood where you are.  I am 39 yrs old and have 20 yrs of employment experience that encompasses several industries.  I possess a Bachelor's degree, plus several profl technical certs PLUS a paralegal cert PLUS I am now a first year law student and guess what.  Employment is still -at best- a tenuous retention because employers keep finding ways to pink slip me so they don't have to give me health insurance and there isn't a damn thing I can do about it.  BTW, don't go thinking I am terminally ill - I am otherwise healthy but for the maintenance issued described above.  

by Zen Warrior 2006-07-16 01:33PM | 0 recs
Re: Income Inequality II: The Myth of Moving Up
Such a good article. And so trye. Upward mobility really is a myth.
Welcome to capitalism, where the value of one's work goes to the owner of the means of production. You will never get rich by working hard but by having others work really hard and long for you and using only very little of resources. Then you pocket the extra they've created, the surplus value.
The income of the top 0.25% is not 14 times the lowest bracket, it's more like 80.000 times.
The more capital, the easier to gather more.
So the rate of accumulation increases with more capital, and decreases with less capital.
If you're born poor, you'll stay poor. But if you're born rich, u can go both ways. It's always easier to get poor than rich. And the rich wouldnt be rich unless they devoted all their time through an instrument they created to protect their wealth  'the government' that has only 2 functions (all rest is just random):
  1. Protect the wealth of those that have it.
  2. Protect the system of wealth transfer from those that don't have to those that have.
Everything that's on the news starts to make sense if you keep those two points in mind.
The only thing the rich have ever wanted is everything.
by 4thReich 2006-07-16 03:30PM | 0 recs
Also See NYT Series on Class

Last year the NY Times ran a great series on Class, and then compiled it into a book called CLASS MATTERS.  It also said that social mobility - regardless of education and new "opportunities" is almost nonexsistent.  It even made the point that the gap between the rich and super-rich is growing.  Basically, the only group that does any better is teh super-rich.

I inhaled every one of those articles, and I highly recommend it.

by schultzy 2006-07-16 04:55PM | 0 recs
Demographics

Bondaddy,

You are right but you neglect to mention the real pressure in the cooker.

Right now, educational costs alone have been the driver for a widening gap in wealth. But it's also that immigration and even women's rights movements overexpanded the labor supply far too quickly for the job creation. So for years, we've seen little or no growth in the real wage and an appalling willingness to pass on structural financing issues to our children.

But the demographics indicate that already, this is changing. The Boomers and their parents are dangerously close to death to hold all our nations wealth. But they do, and as no workers are being created to fill their absences...already there is such a push that in my Los Angeles neighborhood...many retail establishments need new workers and can't find them. So the inevitable outcome will be that suddenly young people will find themselves commanding more and more money because labor competition will be gone. And when the dollar declines and collapeses the "wealth class" will see their means evaporate while wages will rise.

So much as people are struggling now because they didn't take education seriously or because they really belived the conservative or DLC economic propaganda...soon the real dilemma will be what this younger generation does with it's new found status and a nation of old, decrepit people requiring the majority of the government's largesse?

Soylent Green anyone?

by risenmessiah 2006-07-16 05:19PM | 0 recs
Soylent Green anyone?

How about Soylent Greed?

by Bill from Dover 2006-07-16 06:14PM | 0 recs
Re: Income Inequality II: The Myth of Moving Up

"I still believe that, if one works hard, it is possible to go from the bottom to the top."

I would suggest that "believe" is the operative word here.  There is no factual evidence to justify this, its just something you are supposed to "believe".

The facts that Chris and others cite, plus the next entry about CEOs routinely stealing from their companies, suggests that if this happens anymore its very rare.  I'm about Zenmaster's age (36) but wouldn't go as far as him.  Still, it may be better to gear your expectations around the idea that hard work won't get you to the top, and plan accordingly.

by Michels 2006-07-16 06:32PM | 0 recs
Re: Income Inequality II: The Myth of Moving Up

While accepting the validity of the statistics, all the same I'd contend Bonddad paints a picture that's too pessimistic.  Why?  Because my personal experience tells me that large numbers of people of my generation (I'm 53) and younger have moved up in social class.  I grew up in a mid-middle class farm family. I self-financed 95% of my education from college through an MBA and JD (which I earned at age 38) via work and student loans.  My wife did the same (more like 100%) to get her JD.  Together our income today is closer to 200K than 100K, somewhere around the mid-nineties with respect to the national percentiles.  My wife's brother, about age 40, worked his way up from cable installer to telecom executive with no college at all.  Most of my 6 siblings, older and younger, are also reasonably well off as well as multiple cousins who started from similar average backgrounds.

Are things more discouraging for those getting started today?  Perhaps they are, but forgive me if I take the "gloom and doom" with a grain of salt.

by tomhodukavich 2006-07-16 10:09PM | 0 recs
Re: Income Inequality II: The Myth of Moving Up

So you are saying that you have an MBA and a JD and then offer anecdotal evidence for why you think things aren't as bad as the numbers predict? Do you not see the irony of that? If not let me explain: We study statistics precisely because "it worked for me, why can't you do it!" is idiocy. Objective measurement is the aim here, not meaningless subjective anecdotes.

Honestly though, I appologize for my above candor, but I have become more and more frustrated with an American culture that increasingly accepts anecdotal evidence, in it's many forms (kato institute 'studies', testimonials, phsycic detectives, et cetera ad nauseum) as reliable fact. Just because working hard worked for you, doesn't mean it did for the next person.. Heck, ever thought about the other people who have interviewed for the jobs you got in the past? Ever wondered if you would have gotten the job if you were black, female, gay or had a different eye color? It's time we started looking at things with an objective scientific perspective again.

</rant>

-TTT

by TimThe Terrible 2006-07-17 07:16AM | 0 recs
Re: Income Inequality II: The Myth of Moving Up

Tim, I appreciate your point -- you're right, opportunities for personal advancement are not available on an equal basis to all, and the stats may well show, as Paul Krugman often argues in the NY Times, that they are far too inadequate.  Heck, even David Brooks concedes, if I recall, that our society has developed a perverse sort of meritocracy in which the badges of "merit," i.e, degrees awarded by prestigious colleges and universities, are for the most part perpetuated from one elite generation to the next.  That being said, what prompted my comment was my own aversion to what struck me as potential promotion of a "What's the use, why bother trying since the deck is stacked against me" way of thinking.  If you think that because I'm white and male that I was granted some golden ticket in life, you'd be mistaken.  Without going into sordid details, I had to overcome the limitations of an introverted, sorely-lacking-in-confidence, socially awkward personality, a process that took many years and probably still has some ways to go - and let me tell ya, I was passed along the way by many women and minorities not so encumbered.

While I despise what the right has done to politics in this country, I'm admittedly not one who contends that everything conservatives argue is inherently mistaken and therefore must be opposed.  In my view there is always some tension between, on the one hand, truthfully pointing out, as Bonddad sets out to do here, unpleasant or disturbing statistics and, on the other hand, the potentially harmful aspects of promoting what's often described as a "victim mentality."  I think we all know that the right absolutely loves to caricature the left as a motley collection of self-described victims of some powerful group, waiting for Big Government to rescue them from failure.  Well, I just wanted to point out that upward mobility may be difficult, but it's still not just a myth, and that there IS factual evidence that it is possible to go from the bottom to the top.  Agreed, "one swallow does not a summer make" (or something like that), but I also don't think that I belong to some special, completely unrepresentative group of over-achievers.

by tomhodukavich 2006-07-17 07:56PM | 0 recs

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