‘Economic mobility’ studies mischaracterize U.S. poverty

By BOB MARTIN

Contributing columnist

Due to a misunderstanding about relative versus absolute economic mobility, considerable confusion exists in popular reporting on this subject. Has the “American dream” ended; is economic mobility more difficult?

The distribution of income is a snapshot of incomes at a point in time; among other things, it tells you how many people are in the bottom 10th of the distribution and how much they make and it tells you how many people are in the top 10th of the distribution and how much they make.

Recently, the spread between the top and the bottom has increased, while the median has declined.  This suggests a declining middle class. Further, there is an expanding cohort of families anchored to the bottom of the distribution (more on this in a minute).  

Income distributions are different in different countries. Countries with extended welfare systems tend to have lower median incomes, but less variance in incomes. Countries organized around market principles have higher median incomes, but more variance. This suggests the following question: is there more economic mobility in welfare states than in market-oriented states?    

Relative economic mobility is illustrated by the probability children from the bottom 10th of the distribution can move to the top 10th within their working life. Since this trip normally takes multiple generations, the probability is quite low worldwide. The first thing to notice about this comparison is it is a zero-sum process — someone must fall as you rise.

Absolute economic mobility is illustrated by the probability low income children will earn more real income than their parents. This probability remains quite high, around 80 percent. If economic growth shifts the entire income distribution to higher incomes, this is what is meant by “a rising tide lifts all boats” — which can only be true if nobody has holes in their boat. We know many people have holes and some appear to be busy putting holes in their boats.     

The “American dream” is the promise that children will have more income than their parents, which is an absolute not a relative economic mobility concept. Relative economic mobility also means absolute economic mobility only if the economy is stable or it is growing.

Using relative economic mobility measures for international comparisons is quite problematic. The proportion of children from the bottom 10th percentile who move to the top 10th percentile in Denmark is 14 percent, while this proportion in America is 8 percent. These numbers at first suggest economic mobility is less in America than in Denmark! On closer inspection, however, Danish children from the bottom must increase their income by $45,000 and American children must increase their income by $93,000 to make that trip to the top 10th percentile. The successful American child is more than twice as rich as the successful Danish child. The competent and motivated Danish child is more likely to want to play in America.

At this point, gentle reader has deduced what is needed for international measures: the probability a child from the bottom 10th percentile can increase his income by a fixed amount (say $30,000) for each country. This would be a direct measure of how difficult absolute mobility is in each country and it is normalized for direct comparisons. Since the U.S. remains the favored destination for the world’s “best and brightest,” I suspect the odds are better here than over there.

Since relative mobility measures are low in the U.S. (due to the wide distribution of income) and are available from multiple studies, they are reported as ample evidence the American dream is dead. The problem is the American dream is an absolute economic mobility dream; relative mobility tells us nothing.

Over-reporting on relative mobility hides the very real problem we do have: dynastic poverty among a permanent cohort who cannot find the economic ladder and are unprepared to use it when they find it.  The permanent cohort is growing and as it grows, the problem gets bigger. This has the potential to cause considerable social unrest; it needs fixing now rather than later.

Unfortunately, we appear to value arguing more than solving problems. We have argued for so long and so intensely there is no reservoir of good faith that can support a quest for solutions. Our ancestors would be ashamed of us.

Bob Martin is Emeritus Boles Professor of Economics at Centre College.