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Sunday, June 27, 2010

Economic Mobility

I thought it was a pretty well established fact that if you were born poor you stayed poor in this country.  Ditto being rich, with the overall effect that economic mobility was rare and difficult to achieve.

Not so, says Steven Horowitz.  

The bottom line is that income mobility is alive and well and seems pretty consistent regardless of who is president or who controls Congress.  The underlying market processes appear to be doing well at enabling a majority of those who start out poor to move up the income ladder within a decade or less. 

.   .   .

As good as these results are, allow me to steal from a favorite source of mine and say "just think what we might do" if those market processes were even freer to work their magic.

Well, there certainly is a coordination problem if you try to balance that with this recent post at G&T.

Can it really be true that:  "Of those taxpayer households in the lowest quintile of income in 1999, 57.5% had moved up at least one quintile by 2007 and over 30% jumped two quintiles or more."

 This is wildly inconsistent with not only the great spread in wealth disparity, but also with anemic GDP growth, dismal job creation, and increasing poverty levels over the period.  It also suggests the number in the lowest quintile should be declining, which I'm pretty sure is not the case.

Something seems terribly wrong here.  Can anybody explain this?


BadTux said...

Uhm, I'm making more money today than I made when I was 18 years old. It's called *EXPERIENCE*. People with more experience get more money and move into a higher income class. Duh.

The question is, do children make more money than their parents did at a given age and experience? The paper you're looking for is "Intergenerational Mobility in Europe and North America", by Jo Blanden, Paul Gregg, and Stephen Machim. The correlation between parental income at age 30 and children's income at age 30 is the highest of any of the nations studied -- .289. What that means is that if you were born poor, there's a high probability that you'll die poor -- almost a 1/3rd chance. And the strength of this correlation also tends to indicate that if you're born poor and you better yourself, it's likely not by much -- you'll at best make it to the middle class. The rich man who falls to living in the ghetto, or the poor man who ascends to the millionaire's mansion, is rare indeed.

If you want the American Dream, you need to move to Europe -- in most European nations, it is far more common for the poor child to die wealthy than it is here in the USA. Indeed, even in the most unequal of all European nations -- Britain -- the intergenerational mobility correlation is lower than in the United States. Huh, how interesting.

- Badtux the Stats Penguin

Adam Ozimek said...


So your number says that if you're born poor there's a 2/3 chance you won't die poor? And that's not mobility?


What your seeing is that your narrative is not supported by the data. You should reconsider your narrative.

BadTux said...

Adam, the statistics don't work like that, and you know it. We are talking about a normal distribution, not a linear line. That is, if you are born middle class, it's pretty much certain that you're going to die somewhere in the middle quartiles. And while people do fall off the ends of the lines (extremely wealthy and extremely poor) they fall in a normal distribution centered upon their original socioeconomic class -- i.e., they don't fall far, on average. The correlation factor determines how "fat" the normal distribution is, a higher correlation factor squeezes the normal distribution towards the center (i.e. makes it more likely you're going to die close to where you were born), a lower one spreads it out.

The issue is not that social mobility doesn't exist in the United States -- clearly it does, albeit not in the dramatic form posited by libertarian apologists for crony capitalism (i.e., the number of people born at the bottom of the socio-economic ladder who will die rich approaches zero). The issue is whether a) social mobility is as high as in other advanced nations -- and clearly it isn't -- and b) whether social mobility is as high today as it was in the past -- looking at the studies, that appears to not be the case also, when the mobility study was repeated using earlier data, the correlation factor was much lower than it was in the most recent studies.

I realize this does not comply with your ideology and thus must be disregarded. But it is what it is. The U.S. with its crony capitalism system has the least social mobility of any Western society. The "American Dream", apparently, is no longer true -- there is social mobility, but the apple doesn't fall far from the tree compared to other nations.

- Badtux the Fact-based Penguin

Jazzbumpa said...

Adam -

First off, when I wrote this post, I didn't have a narrative, I had questions: How can great economic mobility be present in an economy that is slouching toward stagnation? How can there be great mobility when the spread between percentiles is increasing all along the spectrum?

Since writing, I've learned a couple of things. First, income data like this is pretty consistent over the last several decades. Second, income mobility is a total red herring. The significant thing to look at (as Tux pointed out) is inter-generational economic mobility. That's where you find out about being born and dying in poverty - along with your children and their children. And Tux is right - we and the Brits lag Europe.

There will be a follow up post. I just haven't had time for it this week in the press of other things.