Income Mobility is Much More Important Than Rising Income Inequality or Stagnating Household Income, and We Have a Lot of It (Mobility)

Source: mjperry

We hear a lot these days about "increasing income inequality" and "stagnating household income," but those discussions rarely include what is probably the most important factor when it comes to income over time: income mobility. In fact, even if: a) income inequality was increasing over time, and b) median household income was stagnant over time, those outcomes wouldn't necessarily be a problem if there was significant income mobility. Reason? If there is substantial movement of households over time from lower-income to higher-income quintiles, households may only be earning the median household income for a short period of time on their way up to a higher quintile.

In other words, it's more likely that most households are "typical" or at the "median" level" only temporarily on their way to a higher income group. The fact that median household income might be stagnant over time seems far less important than what happens as households exceed median income and move up to a higher-income category. In the case of significant income mobility over time, wouldn't households actually benefit from increasing income inequality over time if that allowed them to earn higher incomes relative to the median or low-income quintiles once they arrived at one of the top two quintiles?

Most of those complaining about income inequality and stagnating income seem to statically assume that households or individuals stay in the same income group (by quintile, or the "top 1%," "top 10%," bottom 50%, median income, etc.) forever, with no movement over time. If we assume that you're stuck in the bottom income quintile for life, or even earn the median household income for life (both highly unrealistic), then the concerns about rising income inequality or stagnating median household income have greater strength. But with dynamic movement over time in the income of households and individuals, the "problems" of income inequality and stagnating income seem much less important, and might even be "non-problems."

Thomas Sowell offers this key insight (emphasis added):

“Only by focusing on the income brackets, instead of the actual people moving between those brackets, have the intelligentsia been able to verbally create a "problem" for which a "solution" is necessary. They have created a powerful vision of "classes" with "disparities" and "inequities" in income, caused by "barriers" created by "society." But the routine rise of millions of people out of the lowest quintile over time makes a mockery of the "barriers" assumed by many, if not most, of the intelligentsia.”

Contrary to prevailing public opinion that households get stuck at a given income level for decades or generations, there is strong empirical evidence that households actually move up and down the economic ladder over even very short periods of time.

For example, recent research from the Federal Reserve Bank of Minneapolis is summarized in the table above, based on income data from the Panel Study of Income Dynamics that followed the same households from 2001 to 2007. The empirical results answer the question: For households that started in a given earnings quintile (20 percent group) in 2001, what percentage of those households moved to a different income quintile over the next six years? Short answer: a lot.

Read more here at The Enterprise Blog.

Richard Epstein on Income Inequality in America

Watch Does U.S. Economic Inequality Have a Good Side? on PBS. See more from PBS NewsHour.

Income inequality can be explained by household demographics

From: mjperry

The Occupy Wall Street (OWS) protest has returned national attention to the topic of income inequality; see recent commentary from bloggers Megan McArdle here and James Pethokoukis here and here. Both highlight empirical evidence that challenges the narrative that income inequality has gotten worse over time.
Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households, but it’s also instructive to analyze the demographic differences among income groups at a given point in time to answer the question: How are high-income households different from low-income households? Recently released data from the Census Bureau (available here, here, and here) for American households by income quintiles in 2010 allows for such a comparison: see the chart below.

Here is a summary of some of the key demographic differences between American households in the bottom and top income quintiles in 2010:

1. On average, there were significantly more income earners per household in the top income quintile households (1.97) than earners per household in the lowest-income households (0.43).

2. Married-couple households represented a much greater share of the top income quintile (78.4 percent) than for the bottom income quintile (17 percent), and single-parent or single households represented a much greater share of the bottom quintile (83 percent) than for the top quintile (21.6 percent).

3. Roughly 3 out of 4 households in the top income quintile included individuals in their prime earning years between the ages of 35-64, compared to only 43.6 percent of household members in the bottom fifth who were in that age group.

4. Compared to members of the top income quintile, household members in the bottom income quintile were 1.6 times more likely to be in the youngest age group (under 35 years), and three times more likely to be in the oldest age group (65 years and over).

5. More than four times as many top quintile households included at least one adult who was working full-time in 2010 (77.2 percent) compared to the bottom income quintile (only 17.4 percent), and more than seven times as many households in the bottom quintile included adults who did not work at all (65 percent) compared to top quintile households whose family members did not work (13.3 percent).

6. Family members of households in the top income quintile were about five times more likely to have a college degree (60.3 percent) than members of households in the bottom income quintile (only 12.1 percent). In contrast, family members of the lowest income quintile were 12 times more likely than those in the top income quintile to have less than a high school degree in 2010 (26.7 percent vs. 2.2 percent).

Bottom Line: American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and individuals in higher-income households are far more likely than lower-income households to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.
The American economy and labor market are extremely dynamic, and evidence shows that individuals are not stuck forever in a single income quintile but instead move up and down the income quintiles over their lifetimes. It’s very likely that many high-income individuals who were in their peak earning years in 2010 were in a lower income quintile in prior years, before they acquired education and job experience, and they’ll move again to a lower quintile in the future when they retire.
Last November, presaging today’s protests on Wall Street, columnist Nicholas Kristof wrote in the New York Times (“A Hedge Fund Republic?”) that if Americans want to observe “rapacious income inequality,” they don’t need to travel to a banana republic. Rather, he suggests that “you can just look around” the United States to see “stunning inequality.” Given the significant differences in household characteristics by income group, it shouldn’t be too stunning that there are huge differences in incomes among American households, and it has nothing to do with “rapaciousness.” Rather, it can be easily explained by household demographics.