SOCIAL INDICATORS 2007
Most societies through the ages have had flat income distributions. The overwhelming majority of people lived near subsistence levels with a very tiny minority living in splendor. There was equal distribution but very little opportunity for an individual to improve economic status. Since the Industrial Revolution we have seen a great expansion in the distance between the top and bottom of the income distribution, forming a bell shaped curve where the majority of the population is clustered halfway between the top and bottom. But contrary to the historic norm, there is an extreme fluidity to the people moving back and forth across the distribution over their lifetimes.
Thus, the two options have been:
A. (Historic) Fairly equal distribution of income with most people living near subsistence levels and with little hope of significant improvement in their lives.
B. (Market Economy) An uneven distribution of income with most people living well above subsistence levels but with considerable opportunity or risk of moving up or down in economic status.
The trade-off has been a reduction in economic stability (but equal distribution) for more opportunity and risk (but unequal distribution with most people living well above subsistence.) If an economic system is a house where the wealthiest are the ceiling and the poorest are the floor, then the market economy is less concerned with the height of the ceiling or the distance between the floor and the ceiling. The market economy is concerned with how high the floor is and how many people have the opportunity to rise off the floor. To what degree does this mobility exist within the American economic system?
Growth in median household income is a frequently used barometer for how people are doing economically over time. The “median” is the amount earned by the household who is on continuum halfway between the household making the most and the household making the least. The idea is that some people will do well in the economy while others will not do so well, but overall economic status should be rising:
Median household income has risen at a steady rate over the last thirty-seven years, increasing by almost 30% in constant dollars (2006 dollars.) Minor dips in the growth are all directly linked to recessions starting in 1969, 1973, 1980, 1981, 1990, and 2001. What is noteworthy is the steady growth.
However, as we noted yesterday, household size has shrunk by nearly 20% over the last forty years. That means the constant dollar income is being spread across more households than would have been the case in the 1967. Each household has fewer people making a demand on the household income. Furthermore, non-cash benefits like healthcare, which have become a sizable portion of work compensation and social welfare assistance in recent years, are not included in these income calculations. Therefore, improvement on an individual basis is probably understated.
Income Change by for Specific People
Quintile analysis is another way of looking at economic distribution questions. Typically, people look at the median income for, say, the lowest quintile and measure changes from date A to date B. This really doesn't tell us anything about whether income is improving over the lifetimes of particular people. (This is true of aggregate median income as well.) No change from A to B would only tell us that there is no change for people who are at the starting wage in society, not that people will be stuck at they wage for forty years. We need to see how specific people fair over time.
The chart below comes from a report called Economic Mobility of Families Across Generations published by the Economic Mobility Project, an Institute of the Pew Charitable Trusts. The Pew study was based on a sample of 2,367 individuals who were between the ages of 0 and 18 in 1968 and were tracked into adulthood.
There are many nuances to this forty year study. Two-thirds of the children had higher incomes than their parents and one third were lower. About 80% of those in the lowest quintile ended up making more than their parents did. The income for men in their thirties has remained relatively stagnate over this period but it has been increasing for women. Part of the reason for our improving economic standard is that there are more working couples and shrinking household sizes. The average family size decreased from 3.58. to 3.13 from 1970-2006, and the average household size shrank from 3.14 to 2.57, according the Census Bureau. It also needs to be acknowledged that while, by definition, each quintile represents 20% of households, the bottom quintile represents only 14.8% of the population while the top quintile represents 24.3%. The bottom quintile had an average of 1.9 people with .6 workers while the top quintile had 3.1 persons with 2.1 workers. (1) Divorce and the increasing rate of single moms with no father present are major factors here.
Making analysis even more difficult are comparisons of what income actually buys. The typical house is now 2.5 times large than forty years ago, plus technologies like computers, cable television, and cell phones, which did not exist forty years ago, are an expected part of family life. Many goods have become much cheaper in real dollars which is every bit as much an increase in economic status as is increased wages. Yet there has been an escalation of what goods one needs to own to fell "normal" in society.
Another study by the Treasury Department, and reported on in the Wall Street Journal, gives us further insight.
The Treasury study examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.
Of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, and only 17% moved down. This is a stunning show of upward mobility, meaning that more than half of all lower-income Americans in 1996 had moved up the income scale in only 10 years.
Also encouraging is the fact that the after-inflation median income of all tax filers increased by an impressive 24% over the same period. ...
... The Treasury study found that those tax filers who were in the poorest income quintile in 1996 saw a near doubling of their incomes (90.5%) over the subsequent decade. Those in the highest quintile, on the other hand, saw only modest income gains (10%). ...
Only one income group experienced an absolute decline in real income--the richest 1% in 1996. Those households lost 25.8% of their income. Moreover, more than half (57.4%) of the richest 1% in 1996 had dropped to a lower income group by 2005. Some of these people might have been "rich" merely for one year, or perhaps for several, as they hit their peak earning years or had some capital gains windfall. Others may simply have not been able to keep up with new entrepreneurs and wealth creators. ...
The study is also valuable because it shows that income mobility remains little changed from what similar studies found in the 1970s and 1980s. Some journalists and academics have cited selective evidence to claim that income mobility has declined in recent years.
But the 58% of lowest-income earners who moved to a higher income quintile in this study is roughly comparable to the percentages that did so in several similar studies going back to the late 1960s. "The basic finding of this analysis," says the Treasury report, "is that relative income mobility is approximately the same in the last 10 years as it was in the previous decade."
The idea of a cadre of wealthy people forty years ago, expanding their wealth at the expense of others is false. The more accurate picture, referring back to the house analogy, is of a rising floor with an even faster rising ceiling, and highly fluid movement of a great many people up and down between the two. This is the compensation for a growing GINI Index (see previous post) and greater variance in income levels.
I said at the beginning of the previous post that most people think of economic status in terms of income and wealth. But there is yet a third way we can think about economic status. Many economist suggest we are much better served by looking at consumption patterns instead income patterns. What can we learn from consumption patterns?
1. David Schmidtz. Elements of Justice. New York: Cambridge University Press, 2006. 128.