President Obama has been expressing inordinate alarm about differences between income groups, and about mobility between such groups over time. “The combined trends of increased inequality and decreasing mobility,” he says, “pose a fundamental threat to the American Dream, our way of life, and what we stand for.”
A fundamental limitation of annual income distribution figures is that income in any given year may not be at all typical of a family’s normal or lifetime income. Job loss or illness can push one year’s income well below normal, for example, and asset sales can produce one-time windfalls. People are commonly much poorer when young than they are by middle age, after accumulating experience and savings. For such reasons, the President’s strong opinions about “decreasing mobility” could be important, if true.
We need to separate two concepts of mobility. One is intergenerational mobility – whether “a child born into poverty … may never be able to escape that poverty,” as the President put it. Another involves intertemporal mobility – whether starting with a low wage at your first job supposedly impedes moving up the ladder of opportunity.
The President’s opinion that intergenerational mobility has declined was rigorously debunked by Raj Chetty, Emmanuel Saez and others. As for inequality and mobility being related, they also found that, “the top 1 percent share is uncorrelated with upward mobility [p. 40].” Moreover, “The fraction of children living in single-parent households is the strongest correlate of upward income mobility among all the variables we explored [p.45].” Since other countries have fewer single-parent households, this is just one reason for being wary of facile international comparisons.
Intertemporal mobility is not about links between parents and children, but about the ease with which individuals move from a lower to a higher income group, and vice-versa. Are we stuck with the same paycheck we had just after leaving school, or can we move up with effort, experience, learning and saving? Did having a big gain in the stock market in 2007 ensure that would happen again in 2008-2009?
The Federal Reserve Board’s Survey of Consumer Finances (SCF) tracks income mobility of the same families over time. It turns out that mobility is surprisingly hectic even over short periods.