Lecture 2 Income Inequality, Mobility, and the Limits of Opportunity

Today’s Topics Is rising inequality in America a problem? What is income mobility and how much is there? Why does inequality persist? How does Americans’ belief in meritocracy influence our approach to inequality and poverty?

Is rising inequality problematic? Read “Unequal America” at – 22.pdfhttp://harvardmagazine.com/2008/07-pdfs/ pdf –Focuses on concepts of relative deprivation, loss of social capital and subsequent unwillingness to help others, and mobility.

What is income mobility and why is it important? Income mobility refers to the amount of movement across income ranks experienced by persons or families –the simplest measure of economic mobility is the percentage of individuals who move into a new income quintile. Easiest to use Social Security earnings records to follow persons Income mobility is important because it offsets inequality. Increasing inequality might be accepted if it were accompanied by increasing mobility. Without mobility, short run changes in inequality become long term trends.

How much income mobility is there in the U.S.? Method: –In a base year, rank all incomes in the sample from highest to lowest, and then break them into five equal-sized income quintiles, with the top twenty percent in the highest quintile, etc. Then do the same to the incomes of the same individuals in a later year, breaking them into equal quintiles, and then examining the relative movement of individuals within the distribution Estimates vary. –See Daniel P. McMurrer and Isabel V. Sawhill, Economic Mobility in the United States, at

How much income mobility is there in the U.S.? An Illustrative Study Gottschalk (1996) finds that between 1974 and 1991, 62 percent of individuals age 16 or over in 1975 moved to a different quintile –58 percent of those originally in the lowest quintile –56 percent of those in the highest quintile –In the one year between 1974 and 1975, 39 percent moved to a different quintile (33 percent of the lowest quintile, 21 percent of the highest).

Table 2. Income Mobility Transition Matrix,

Intra-generational Income Mobility in the U.S.: How often do the children of the poor become rich? Source: The Century Fund, Rags to Riches: The American Dream is Less Common in the United States than Elsewhere

Inter-generational Mobility, cont. 42 percent of children born to parents in the bottom income quintile were still in the bottom quintile as adults 39 percent of children born to parents in the top quintile remained in the top quintile as adults

Income Mobility in the U.S.: Similarities in Fathers and Sons Incomes Source: The Century Fund, Rags to Riches: The American Dream is Less Common in the United States than Elsewhere,

Income Mobility in the U.S.: What explains the relationship of Fathers and Sons Incomes?

How does income mobility in the U.S. compare to other developed nations?

Conclusions about U.S. Income Mobility There is broad agreement that income mobility in the U.S. is substantial and that life-time earnings are more evenly distributed than annual earnings. About 25 to 40 percent of the American population moves into a new income quintile each year. The rate increases with time approaching 60 percent over a ten years Most people do not move very far. Individuals with at least a college education are more likely to move up than any other group.

Conclusions about U.S. Income Mobility The mobility of those with little education has declined. Mobility has not changed significantly over the past 25 years. Mobility is no higher in the U.S. than in other developed countries Source: Daniel McMurrer and Isabel Sawhill, Economic Mobility in the United States, Urban Institute,

Why does inequality persist? For that matter, why is poverty tolerated in the U.S.? How would Sawhill answer these questions? –Because Americans believe in that equality of opportunity rather than results. The Gallup Social Audit showed that 81% of a representative sample of Americans believe there is plenty of opportunity. –Income inequality reflects the results of a fair system because it reflects differences individual talents, efforts and accomplishments.

Can 81 percent of the population be wrong? Is there “plenty of opportunity” for all Americans? Sawhill argues that the debate should be focused on opportunity, not inequality. –It might be useful to rephrase this to ask what factors constrain opportunity? Sawhill might answer this by saying: –Unequal education systems –Changing demographic patterns Can you add other factors? –Unequal access to health care

How does Americans belief in meritocracy influence our approach to inequality and poverty? We are more willing to accept both because they are viewed as the result of a fair system. Our believe that those at the bottom of the income distribution must share the responsibility for their situation limits the amount of aid we provide. Policies that increase opportunity are preferred to policies that focus on the results and redistribute income from the haves to the have-nots. Our focus is directed toward the perceived obstacles to opportunity.