U.S mobility: moving in the right direction?

A popular narrative in the U.S is that the middle class is shrinking and that socio-economic mobility is disappearing. Such a narrative was manifested by the Occupy Movement of late 2011 and has even been espoused by politicians from both sides of politics in the U.S. The notion that America is no longer a land of opportunity is now accepted by the mainstream. However, before accepting such a narrative it is important to assess the evidence. In this article I will analyse socio-economic mobility over time in the U.S context and compare it to other OECD countries.

Understanding Socio-Economic Mobility

There are two types of socio-economic mobility. Firstly, there is intra-generational mobility, which is the extent to which an individual can change class/income group within their own lifetime. Secondly, there is inter-generational mobility or intergenerational income elasticity, which is the correlation between parents’ income and their children’s income. Both forms of mobility are intrinsic components of the American Dream, that is, if a person works hard they will be rewarded proportionately. Such notions have underpinned much of 20^th century American political and philosophical thought.

Furthermore, the magnitude of socio-economic mobility is also pertinent to the income inequality debate. This is because evidence shows that higher rates of mobility actually mitigate income inequality. This has given rise to the appositely titled ‘Great Gatsby Curve’ pictured below:

Figure 1, Source

 

The question remains however, how has socio-economic mobility behaved over time?

 

The Acs & Zimmerman Study (2008)

One study measuring intra-generational mobility found that mobility has not changed appreciably over time. The authors remarked that this finding was surprising given the changes to the economy and the rise in income inequality that occurred over the time series. This study’s method was to select two groups of 25-44 year olds and assess how their economic positions changed over time in both absolute and relative terms. The first group was assessed from 1984-94 and the second from 1994-2004. The study’s findings are summarised graphically below. One can see that there is little difference in the upward mobility between the 1984-94 group and the 1994-2004 group.

The Brookings Institution Study (2013)

The results of the above study were contradicted by a 2013 Brookings Institution study which used a larger sample size and superior econometric methods. The 2013 study decomposed income into two components – the persistent and the transitory. The study then examined which of these two components contributed more to the cross-sectional variance of income (i.e. the study’s preferred measure of income inequality). The study found that for male labour earnings the variance of the persistent component of earnings increased over the sample period, but the variance of the transitory component did not. This leads to the conclusion that the increase in income inequality documented in much of the economic literature is marked by a higher degree of permanence than income distributions in previous times. The results are summarised on the graph below:

 The Chetty, Hendren, Kline & Saez Study (2014)

The most recent major study on mobility over time in the US found that there was no substantial change in mobility over the last 20 years. This study analysed a sample comprised of tens of millions of anonymous tax records. The study found that, on average, children from the poorest group end up 30 percentiles lower in income distribution than children from the richest families. Furthermore, this trend has remained relatively constant over time as depicted on the graph below.

What the study did find though was that whilst there was little variance in intergenerational mobility over time, there was substantial variance by geography. This variance lead the author’s to describe America as the “lands of opportunity” rather than the “land of opportunity”. These findings are displayed on the map below.

Comparison to other OECD economies

Whilst the academic literature seems conflicted on socio-economic mobility over time, the jury is out on how the US compares to other economies. As Emmanuel Saez commented after the release of the 2014 study “The level of opportunity is alarming, even though it’s stable over time”. This is because socio-economic mobility in the U.S remains lower than it is in Canada and Western Europe. Thus, regardless of whether mobility has declined or remained constant over time the chances of escaping poverty through effort and ability are higher in other OECD countries. This is probably due to differences in factors affecting mobility such as education, social capital/community involvement, city structure and family structure. However, hypotheses on what drives the transatlantic disparity in mobility have not been empirically tested in a robust manner and are therefore speculative. 

Conclusion

While the assertions of politicians at rallies or rowdy youth at protests that socio-economic mobility has disappeared in the US are most likely incorrect, the picture is far from rosy. At best, mobility has remained constant from the second half of the 20^th century in the U.S but this level of mobility is too low. It is too low when compared to other OECD countries. And it is too low given the recent increase in income inequality. Thus, I would echo calls by fellow ESSA contributor Marco Madzzar that addressing income inequality should be high on the US government’s agenda. However, this need not be achieved through radical measures such as a global wealth tax as advocated high-profile economist Thomas Piketty. Rather, the evidence shows that a reduction in income inequality can be achieved through measures to increase socio-economic mobility such as reforms to education, city planning and social policy.