Lecture 2

1. Lecture 2 Income Inequality, Mobility, and the Limits of Opportunity

2. Today’s Topics • Is rising inequality in America a problem? • What is income mobility and how much is there? • Why does inequality persist? • How does Americans’ belief in meritocracy influence our approach to inequality and poverty?

3. Is rising inequality problematic? • Read “Unequal America” at • http://harvardmagazine.com/2008/07-pdfs/0708-22.pdf • Focuses on concepts of relative deprivation, loss of social capital and subsequent unwillingness to help others, and mobility.

4. What is income mobility and why is it important? • Income mobility refers to the amount of movement across income ranks experienced by persons or families • the simplest measure of economic mobility is the percentage of individuals who move into a new income quintile. • Easiest to use Social Security earnings records to follow persons • Income mobility is important because it offsets inequality. Increasing inequality might be accepted if it were accompanied by increasing mobility. • Without mobility, short run changes in inequality become long term trends.

5. How much income mobility is there in the U.S.? • Method: • In a base year, rank all incomes in the sample from highest to lowest, and then break them into five equal-sized income quintiles, with the top twenty percent in the highest quintile, etc. Then do the same to the incomes of the same individuals in a later year, breaking them into equal quintiles, and then examining the relative movement of individuals within the distribution • Estimates vary. • See Daniel P. McMurrer and Isabel V. Sawhill, Economic Mobility in the United States, at http://www.urban.org/publications/406722.html

6. How much income mobility is there in the U.S.? An Illustrative Study • Gottschalk (1996) finds that between 1974 and 1991, 62 percent of individuals age 16 or over in 1975 moved to a different quintile • 58 percent of those originally in the lowest quintile • 56 percent of those in the highest quintile • In the one year between 1974 and 1975, 39 percent moved to a different quintile (33 percent of the lowest quintile, 21 percent of the highest).

7. Table 2. Income Mobility Transition Matrix, 1968-91 • http://www.urban.org/publications/406722.html

8. Intra-generational Income Mobility in the U.S.:How often do the children of the poor become rich? Source: The Century Fund, Rags to Riches: The American Dream is Less Common in the United States than Elsewhere http://www.tcf.org/Publications/EconomicsInequality/ragrichrc.pdf

9. Inter-generational Mobility, cont. • 42 percent of children born to parents in the bottom income quintile were still in the bottom quintile as adults • 39 percent of children born to parents in the top quintile remained in the top quintile as adults

10. Income Mobility in the U.S.: Similarities in Fathers and Sons Incomes Source: The Century Fund, Rags to Riches: The American Dream is Less Common in the United States than Elsewhere, http://www.tcf.org/Publications/EconomicsInequality/ragrichrc.pdf

11. Income Mobility in the U.S.: What explains the relationship of Fathers and Sons Incomes?

12. How does income mobility in the U.S. compare to other developed nations?

13. Conclusions about U.S. Income Mobility • There is broad agreement that income mobility in the U.S. is substantial and that life-time earnings are more evenly distributed than annual earnings. • About 25 to 40 percent of the American population moves into a new income quintile each year. • The rate increases with time approaching 60 percent over a ten years • Most people do not move very far. • Individuals with at least a college education are more likely to move up than any other group.

14. Conclusions about U.S. Income Mobility • The mobility of those with little education has declined. • Mobility has not changed significantly over the past 25 years. • Mobility is no higher in the U.S. than in other developed countries • Source: Daniel McMurrer and Isabel Sawhill, Economic Mobility in the United States, Urban Institute,http://www.urban.org/publications/406722.html

15. Why does inequality persist? For that matter, why is poverty tolerated in the U.S.? • How would Sawhill answer these questions? • Because Americans believe in that equality of opportunity rather than results. • The Gallup Social Audit showed that 81% of a representative sample of Americans believe there is plenty of opportunity. • Income inequality reflects the results of a fair system because it reflects differences individual talents, efforts and accomplishments.

16. Can 81 percent of the population be wrong? Is there “plenty of opportunity” for all Americans? • Sawhill argues that the debate should be focused on opportunity, not inequality. • It might be useful to rephrase this to ask what factors constrain opportunity? • Sawhill might answer this by saying: • Unequal education systems • Changing demographic patterns • Can you add other factors? • Unequal access to health care

17. How does Americans belief in meritocracy influence our approach to inequality and poverty? • We are more willing to accept both because they are viewed as the result of a fair system. • Our believe that those at the bottom of the income distribution must share the responsibility for their situation limits the amount of aid we provide. • Policies that increase opportunity are preferred to policies that focus on the results and redistribute income from the haves to the have-nots. • Our focus is directed toward the perceived obstacles to opportunity.