Two forms of mobility: relative and absolute. This section
focuses primarily on relative mobility.
There are periods of low and high relative and absolute income mobility
in the US.
There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005
period as over half of taxpayers moved to a different income quintile over this period.
This study examined income mobility of individual taxpayers age 25 and over for the period from 1996 through 2005 using
information reported on individual income tax returns. The key findings are that there was considerable income mobility of
individuals in the U.S. economy during the 1996 through 2005 period and that the degree of income mobility
among income groups is unchanged from the prior comparable period (1987 through 1996).
There are also many barriers that have grown against upward
mobility, as the welfare state grows. The number of weeks of unemployment had grown to 99 weeks, Medicaid
income levels have grown, number of people not paying income tax has
grown. All point to a perhaps slower upward mobility from the lower
quintile in the future.
All of the data here looks at income at pre-tax and pre-transfer
In Europe the mobility is lower as is the Gini coefficient:
About half (50 percent) of parental earnings advantages are passed
onto sons in the United States compared to less than 20 percent in
high-mobility European countries.
In a fast moving economy going through some structural changes, what
should be the income mobility and distribution? No one seems to
know. The biases of any author does seem to come to the surface in
answering this question.
Important finding: free enterprise does not
correlate with income distribution being askew.
The notion of absolute and relative mobility is explained in the
video below. The question of how much stickiness exists in any
period of time is pertinent and the answer is that it is very
dynamic. More data below.
· About half (50
percent) of parental earnings advantages are passed onto sons in the
United States compared to less than 20 percent in high-mobility
European countries. This means that it takes an average of six
generations for family economic advantage to disappear in the United
States compared to three generations in Canada, Finland, Norway and
Denmark. (‘International’ Figure 2)
· 42 percent of
American men born into the poorest fifth of families stay in the
bottom fifth of the earnings distribution as adults, compared to 25
to 30 percent in some other countries.
· A smaller
percentage of Americans move from the bottom to the top fifth in one
generation, than do people in other European countries. Note that
Americans making such a climb travel a further distance in absolute
dollars than do Europeans because of greater earnings inequality in
the United States.
· 36 percent of
children born to parents in the bottom wealth quintile remain in the
bottom as adults, and 36 percent of children born to parents in the
top quintile remain in the top as adults. (‘Wealth’ Figure 8)
· Only 7 percent
of children born to parents in the bottom wealth quintile make it to
the top quintile in adulthood.
· 35 percent of
adult children of parents in the bottom wealth quintile move up to
the top 3 quintiles and 41 percent of those born to parents at the
top move down to the bottom 3 quintiles.
· Those born to
parents in the middle of the wealth distribution have an almost
equal likelihood of moving up or moving down a quintile or more.
The first Treasury study found that
86 percent of taxpayers in the lowest income quintile in 1979 had moved
to a higher quintile by 1988 and 15 percent of them had moved all the
way to the top quintile.
Compound that with the most horrifying fact you will read today. A single parent family with income of $14,500.00
actually has more disposable income in the United States than a family earning $60,000.00 a year. Yes, you read that correctly.
The forces operating on all portions of the population will be
explored in Chapter 5, by that name. From a mobility
standpoint jobs, economic conditions, welfare incentives, growth of
single parent families, even changes in the tax structure and
economic cycles all come together to affect each quintile
IRS, Treasury on Mobility:
Table at right shows changes from 1979 to 1988:
For the very wealthy, the discordant relationship between income and wealth is the result of the dynamic nature of the
income reported by this segment of the population. Two studies using panel data from U.S.
Federal income tax returns have shown that the composition of the group of individuals whose incomes place them near the top of
the income distribution changes dramatically over time (Frenze, 1992; U.S. Treasury, 2007). The U.S. Treasury Department study found,
for example, that fewer than half of those in the top 1 percent of the income distribution in 1996 were still in the top 1 percent in 2005.
This volatility increased at the very top of the distribution, so that only about 25 percent of the individuals in the top 1/100th
percent in 1996 remained in the top 1/100th percent in 2005. The Treasury report concluded that the income of many of the highest-income
taxpayers is transitory and generally declines over time (U.S. Treasury, 2007).
The transitory composition of income quintiles over time can be partially attributed to decreases in wage income for individuals
above retirement age. Also, for wealthier individuals, return on capital becomes an increasingly important source of income. For the very
wealthy, however, income from capital can be particularly susceptible to manipulation to minimize tax liability. For example, it has been
shown that rates of return on investments decline as wealth increases among the very wealthy (Steuerle, 1985; Wahl and Johnson, 2004).
If this is the case, then, for these very wealthy individuals, measures of well-being that focus solely on realized income will
understate their true economic status.
Five weeks ago the Wall Street Journal (WSJ)
commented on a study (pdf)
by the Treasury Department on the income mobility of American
families. The newspaper proudly reported that 58 percent of
households who were in the lowest quintile (the poorest 20 percent)
of the income distribution in 1996 had moved to a higher income
category by 2005.
Almost 25 percent jumped into the middle or
upper-middle income groups, and 5.3 percent made it all the way to
the highest quintile. Of those in the second lowest
quintile, almost 50 percent moved up and 17 percent moved down. The
WSJ’s comment on table 1 stopped there. The evidence was described
as "a stunning show of income mobility."