Income Mobility in the US

Keith Chu of the Bend Bulletin wrote a very nice article on the new US Treasury Department study of income mobility in the US. He called me to chat but I don't think he learned anything from me - he seemed to grasp the whole thing already. Perhaps he'll become an economics reporter, goodness knows we need more good ones (I once spent an exasperating 20 minutes with an editor of the Denver Post trying to explain the CPI and I still don't think he got it). Anyway, I think he does a nice job explaining the evidence, so I'll let him tell it. Here is an excerpt of his article (which is not available to non-subscribers):

U.S. Treasury notes trend of upward economic mobility
Some labor experts say findings represent natural earning cycles
By Keith Chu / The Bulletin

WASHINGTON — Nearly half of the poorest Americans moved into a higher income bracket over the past 10 years, according to a study released this week by the U.S. Treasury Department.

The department and conservative commentators touted the study as proof that the American dream is alive and well. Two labor market experts said the latest numbers say more about how a person’s earnings change over a lifetime than whether they can climb the economic ladder.

The study compared individuals’ earnings on tax returns from 1996 to their earnings in 2005. It showed that 77 percent of people in the lowest 20 percent of earners saw their incomes increase from 1996 to 2005. About half of the people in the top 20 percent of earnings saw their incomes decrease in that time. All incomes in the study were adjusted for inflation.

“It’s basically saying that the rich are not staying rich and the poor are not staying poor,” said Treasury Department spokesman Andrew DeSouza.

“I think it definitely shows that with the strong economic growth that we saw over the past decade and in recent years of this millennium, (economic growth) contributed significantly for people to move between income groups, whether it is up or down.”

That’s true, but misleading, said Patrick Emerson, assistant professor of economics at Oregon State University. Rather, he said, the Treasury study shows that people naturally make different amounts of money at different points in their lives.

A 62-year-old who is in the top quarter of earners in 1996, for example, would likely be retired in 2005.

Meanwhile, a student leaving grad school at age 25 would probably make significantly more 10 years later.

“This is exactly what you would expect to see just from a standard life cycle of earnings,” Emerson said.

The Treasury study found that 55 percent of people in the bottom 20 percent of earnings remained in that category 10 years later. But about 24 percent in the bottom level moved up one rung, while 11 percent reached the middle 20 percent of earners. About 4 percent of people in the lowest 20 percent reached the top 20 percent of earners, with 7 percent of the lowest category reaching the second-highest level.

Another study released this week, by Julia Isaacs, a fellow at the Brookings Institution, a think tank in Washington, D.C., showed that about two-thirds of U.S. residents live in households with higher incomes than their parents.

That’s probably good news, Isaacs said, but the reason for that mobility is an increase in families with two wage-earners, not higher wages.

“We see some signs that things are good, that there’s been a rise in incomes over generations,” Isaacs said. “Men’s incomes, though, have been stagnant.”

Things like the difference in earnings between rich and poor and income across generations are better gauges of people’s chances of improving their lot than the Treasury report, Emerson said. By those measures, the U.S. ranks behind some European countries, especially Scandinavian ones. Some European countries are much more likely to have residents move up and down the income scale, according to a study by the Organisation for Economic Co-operation and Development, an international think tank.

“It turns out the U.S. actually does worse in those sorts of income-mobility comparisons,” Emerson said.

Mark Thoma has the Wall Street Journal Editorial Page's take on the data.