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January 30, 2006

Income Mobility: Alive and Well

Has income mobility in America stalled? No way. It hasn’t even slowed. By David R. Henderson.


“As Rich-Poor Gap Widens in the U.S., Class Mobility Stalls,” blares the headline on page one of the May 13, 2005, Wall Street Journal. When you see such a headline, wouldn’t you think it means that the income mobility of Americans is no longer as great as it was? That’s what we tend to think when we see the verb “stalls.” If it were really true that the ability of Americans to move from one income group to another has diminished, that would certainly justify a front-page article in the Wall Street Journal. But it’s not true. And here’s the amazing thing—the Journals very own article doesn’t claim that income mobility is falling. You read that right. An article with a dramatic headline about income mobility having “stalled” doesn’t claim that income mobility has fallen. In the third paragraph, when the article’s author, David Wessel, finally gets to the important facts, he writes:

As the gap between rich and poor has widened since 1970, the odds that a child born in poverty will climb to wealth—or a rich child will fall into the middle class—remain stuck. . . . Americans are no more or less likely to rise above, or fall below their parents’ economic class than they were 35 years ago.

In other words, income mobility, according to the article, has not changed over the last 35 years. So the Journal uses the word “stalls” to mean “remains constant.” Imagine what the headlines would look like if the newspaper’s editors had the same news sense when writing about other things that didn’t happen or that continued on normally:

“California Goes Another Month without Earthquake”

“War between France and U.K. Nowhere on the Horizon”

“Women Continue to Get Pregnant”

Wessel is not alone. On May 15, just two days later, the New York Times carried an article similar in tone: “Class in America: Shadowy Lines That Still Divide.” According to the Times, “mobility seems to have stagnated.” Note the word “stagnated.” When the article’s authors, Janny Scott and David Leonhardt, get to the facts, they write: “Some economists consider the findings of the new studies murky; it cannot be definitively shown that mobility has fallen during the last generation, they say, only that it has not risen. The data will probably not be conclusive for years.”

Yet throughout their piece, the reporters undercut the message that income mobility is unchanged. They write, for example, “Conservatives tend to assert that mobility remains quite high, even if it has tailed off a little.” Yet they cite no evidence that mobility has tailed off. They quote Amherst College president Anthony W. Marx as saying, “If economic mobility continues to shut down, not only will we be losing the talent and leadership we need, but we will face a risk of a society of alienation and unhappiness.” But Marx’s statement assumes that economic mobility has shut down. A good reporter would either have omitted this statement because it contradicted the truth or would have offset it with a quote or a comment pointing out the statement’s falsity. Scott and Leonhardt did neither.

Moreover, the tone of the Times piece is that there’s a problem here. Even while pointing out the many luxuries available to the mass of Americans now compared to 50 years ago, the authors are determined to find a pile of manure in with the pony. For example, in discussing who gets the best school districts, the “right preschool program,” or the best medical specialists, they refer to “the quiet contest among social groups that the affluent and educated are winning in a rout.” The word quiet has become one of the most pernicious in modern American journalism. By using it, the Times reporters connote that competition for good schools and good doctors is sinister.

What is the truth about income mobility? The facts, both those the reporters cited and those they didn’t, show that income mobility in the United States is high. Consider data that Wessel cites from a study of wages for American men born between 1963 and 1968. The study, by Bhashkar Mazunder, an economist at the Federal Reserve Bank of Chicago, shows that 32 percent of men whose fathers were in the bottom 25 percent of earners were themselves in the top half and that 34 percent of men whose fathers were in the top 25 percent were themselves in the bottom half. Mazunder also found that 14 percent of men whose fathers were in the bottom 10 percent of the wage scale made it to the top 30 percent and that 17 percent of men whose fathers were in the top 10 percent dropped down to the bottom 30 percent. Wessel made sure to put the word only in front of these percentages, presumably to persuade the reader that this is not much mobility, but it seems high.

 

Work Counts

Also interesting is what factors cause some people to be at the top of the statistical distribution of income. Not surprisingly, work is one such factor. The Times piece quotes a study that found that in 1973 the highest-paid tenth of the country worked fewer hours than the bottom tenth. Today, according to that study, the highest-paid tenth works more hours. Imagine that—working more hours and getting more income.

Although the Times didn’t cite the specific study that reached this conclusion about work hours, the one it had in mind is probably that of MIT economist Dora Costa. She found that in 1991 workers whose total earnings put them in the bottom tenth of the wage distribution worked an average of 7.5 hours a day, compared to 8.5 hours for workers whose earnings put them in the top tenth. Part of the low income of low-income workers is a result of many of them choosing to work fewer hours. So even if there were decreased mobility from one income group to another, some of this would reflect choices on the part of low-income workers not to work harder. Such choices are not necessarily bad choices; more power to them if they want to enjoy their leisure. But then any slowing of movement from a lower-income group to a higher-income group would not necessarily be a sign of increased difficulty of moving up.

In a May 2005 Wall Street Journal op-ed, economist Alan Reynolds points out a related finding about the connection between work and income that economists who study the issue have noted for at least 25 years: One main reason some households have more income than others is that the higher-income households have, on average, more people working than the lower-income households. He notes that, in 2003, median income for households with two full-time workers was $85,517, compared to only $15,661 for households in which nobody worked. Reynolds cites a 1980 study by Princeton’s Alan Blinder, a former adviser to President Clinton. Blinder found that the highest-income fifth of families worked 30 percent of total weeks worked in the economy, whereas the lowest-income fifth worked only 7.5 percent of total weeks worked. Given the average incomes of the various quintiles at the time, on an income-per-week-worked basis, the ratio of income of the highest fifth to the lowest fifth was only two to one.

More important, life isn’t a race, unless you insist on making it one. Even in the rare case that someone starting in the lowest fifth never makes it out of the lowest fifth, that doesn’t imply slow progress. It means only that she or he is not progressing in real income as fast as many others. But the person is progressing quickly. Why? Consider what that person has compared to his or her counterparts only a decade or so earlier. In their book Myths of Rich and Poor, Michael Cox, an economist with the Federal Reserve Bank of Dallas, and journalist Richard Alm compare poor households in 1994 with their counterparts in 1984 and with all households in 1971. They found substantial progress in ownership of color TVs, microwaves, refrigerators, VCRs, computers, stoves, washing machines, and air conditioners. In fact, for most of these items, the poor in 1994 were doing as well as or better than the average for all families in 1971, just one generation earlier.

But isn’t this because the inflation-adjusted prices of many of these items have fallen? Yes. Economic progress occurs when people figure out how to do more with less. That the real prices of many of these goods have fallen and the quality has increased means that even poor people are doing much better than they were. That’s irrelevant only to those who believe, in the words of the bumper sticker, “He who dies with the most toys wins.”

 

Cell Phones, Eggs, and Health Care

The improvement in people’s standard of living, no matter which quintile they’re in, is even more dramatic over longer periods. Think about three things we take for granted today. In the mid-1960s, Dick Tracy’s wireless phone was pure science fiction. Now a large percentage of people at all income levels own cell phones.

Maybe cell phones don’t matter much to you. But surely food must. An item that was almost a luxury at mid-century was eggs. In today’s dollars, a dozen eggs in 1950 sold for about $3.00. Nowadays, you can buy a dozen eggs for about a dollar, a two-thirds drop in price. Moreover, the real price of food has fallen across the board.

Finally, consider health care. My father had polio in 1943. My sister had it in 1952, and in that same year, 3,145 Americans died of polio. But because of a doctor named Jonas Salk and a drug company named Parke Davis, a vaccine for polio was invented and marketed in April 1955. By 1993 the number of U.S. cases of polio—not deaths, but cases—was three. Moreover, typhoid fever, small pox, tuberculosis, and many other diseases have either disappeared or occur far less frequently than they did even 50 years ago. The incidence of these horrible diseases declined not because some government official decreed that people had a right to be free from such horrors. Instead, it was because thousands of strangers who didn’t care directly about you wanted to make money off your sickness, not by making you sicker, but by making you well.

Which brings us back to income mobility. One reason people want income mobility is that they can’t stand inequality in income. So, in their view, it had better not last long. But that ignores an important function of income inequality: It gives people an incentive to serve others. If income inequality were eliminated so that everyone made the same amount of money, why would someone bother working on the Alaska pipeline in the dead of winter so that you can heat your house when it’s 20 below outside? Why would doctors work long hours to make people better? Why would music composers keep coming up with new music that enhances your life? Why, in short, would people work hard, work in unpleasant situations, and persist in their visions? It’s not just that you would go without Bill Gates and a few thousand people like him. You would also go without the few million people, only a handful of whom you know, who improve things in marginal ways that, added together, make a huge difference in your life.

The whole focus on income inequality is mistaken. Most Americans are doing as well as they are because a few million or so are making a lot of money figuring out how to create new products and new ways to increase our productivity. Instead of sifting through the data to find inequality, pundits and analysts should recognize the many ways that governments hold people down and figure out how to end those oppressive measures. Then virtually all of us would be freer and wealthier.


David R. Henderson is a research fellow with the Hoover Institution. He is also an associate professor of economics at the Naval Postgraduate School in Monterey, California.


A longer version of this essay appeared in the Freeman, October 2005. Available from the Hoover Press are Varieties of Conservatism in America and Varieties of Progressivism in America, edited by Peter Berkowitz. To order, call 800.935.2882 or visit www.hooverpress.org.