FRBSF Joint Board of Directors Meeting Economic Research Seminar Session April 11, 2012 U.S. Income Inequality in Perspective
Economic Mobility Prepared for FRBSF Seminar U.S. Income Inequality in Perspective April 11, 2012 Mary C. Daly Associate Director of Research and Group Vice President Federal Reserve Bank of San Francisco Thanks to Leila Bengali, Jody Hoff, Katherine Kuang, Kevin Riehman and FRBSF staff in Community Development, Economic Research, and the Research Library for assistance with this presentation.
The American Dream Surveys show Americans believe:* Each generation does better than the last Hard work, talent, and effort create success Birthright plays only a small role *Pew Charitable Trust Survey of American Attitudes.
American Beliefs Stand Out Cross Country Perceptions of Mobility Percent of Individuals Agreeing with Each Statement U.S. Max People get rewarded for their effort Median Min People get rewarded for their intelligence and skills Coming from a wealthy family is essential/ very important to getting ahead Differences in income in your country are too large It is the responsibility of the government to reduce the differences in income Source: Sawhill, I., and Morton, J., "Economic Mobility: Is the American Dream Alive and Well?" The Brookings Institution, May 2007. Percent 100 90 80 70 60 50 40 30 20 10 0
Plan of Talk Economic Mobility Primer U.S. Mobility and Its Determinants The American Dream Revisited
Economic Mobility Primer Economic mobility describes: the ability of people to move up, or down, the economic ladder Two types of economic mobility: Absolute mobility (income rises with time) Relative mobility (income rank rises with time) Mobility can be measured over: Individual lifetimes Successive generations (focus of talk)
Absolute: Riding an Escalator Absolute Mobility Changes in the income distribution over time Family Income 100 90 80 70 60 5 4 3 2 1 50 40 30 20 10 Generation 1 Generation 2 Generation 3 Generation 4 Generation 5 Source: Authors' representation of absolute mobility. 0
Economic Mobility Primer Economic mobility describes: the ability of people to move up, or down, the economic ladder Two types of economic mobility: Absolute mobility (income rises with time) Relative mobility (income rank rises with time) Mobility can be measured over: Individual lifetimes Successive generations (focus of talk)
Relative: Walking Up Escalator Relative Mobility Changes in family income rank over time Family Income 100 90 80 70 60 5 4 3 2 1 50 40 30 20 10 Generation 1 Generation 2 Generation 3 Generation 4 Generation 5 Source: Authors' representation of relative mobility. 0
Economic Mobility Primer Economic mobility describes: the ability of people to move up, or down, the economic ladder Two types of economic mobility: Absolute mobility (income rises with time) Relative mobility (income rank rises with time) Mobility can be measured over: Individual lifetimes Successive generations (focus of talk)
Plan of Talk Economic Mobility Primer U.S. Mobility and Its Determinants The American Dream Revisited
Tracking Economic Mobility Need data that tracks families over time Data: Parents (30-50) to Children (30-50) Absolute Mobility: compare real $$$ value of parent s income at age x to the real $$$ value of adult child s income at age x Relative Mobility: compare parent s income rank when child was born (birth income quintile) to income rank when child is an adult (working-age quintile)
Absolute Mobility is High Absolute Generational Mobility Percent of Children with Family Income > Parents' Birth Income Quintile All 67 Top 4th 3rd 2nd Bottom 0 10 20 30 40 50 60 70 80 90 Percent Source: Isaacs, J., Economic Mobility of Families Across Generations, EconomicMobility Project, an initiative of The Pew Charitable Trusts, November 2007.
Holds for all Birth Quintiles Absolute Generational Mobility Percent of Children with Family Income > Parents' Birth Income Quintile All 67 Top 4th 3rd 2nd Bottom 0 10 20 30 40 50 60 70 80 90 Percent Source: Isaacs, J., Economic Mobility of Families Across Generations, EconomicMobility Project, an initiative of The Pew Charitable Trusts, November 2007.
Relative Mobility is Less Clear For one, no obvious benchmark or metric Birthright Economy: outcomes are tethered to the socioeconomic class of parents Meritocracy: outcomes are based on talent, effort, hard work Equal Chance Economy: socioeconomic status is equally distributed--20 20 20 20 20
Relative Mobility in the U.S. Relative Generational Mobility Percent of Adult Children in Each Income Quintile by Birth Income Quintile End Middle End Percent 45 40 35 Equal Chance Economy 30 25 20 15 10 5 Bottom 2nd 3rd 4th Top Birth Income Quintile Source: Isaacs, J., Economic Mobility of Families Across Generations, Economic Mobility Project, an initiative of The Pew Charitable Trusts, November 2007. 0
Relative Mobility in the U.S. Relative Generational Mobility Percent of Adult Children in Each Income Quintile by Birth Income Quintile What Does This Chart Show? Working Age Quintile 1 2 3 4 5 Percent 45 40 35 30 25 20 15 10 5 Bottom 2nd 3rd 4th Top Birth Income Quintile Source: Isaacs, J., Economic Mobility of Families Across Generations, Economic Mobility Project, an initiative of The Pew Charitable Trusts, November 2007. 0
Relative Mobility in the U.S. Relative Generational Mobility Percent of Adult Children in Each Income Quintile by Birth Income Quintile Middle is Fairly Mobile Percent 45 40 35 30 Equal Chance Economy 25 20 15 10 5 Bottom 2nd 3rd 4th Top Birth Income Quintile Source: Isaacs, J., Economic Mobility of Families Across Generations, Economic Mobility Project, an initiative of The Pew Charitable Trusts, November 2007. 0
Relative Mobility in the U.S. Relative Generational Mobility Percent of Adult Children in Each Income Quintile by Birth Income Quintile Ends are More Sticky Percent 45 40 35 30 25 20 15 10 5 Bottom 2nd 3rd 4th Top Birth Income Quintile Source: Isaacs, J., Economic Mobility of Families Across Generations, Economic Mobility Project, an initiative of The Pew Charitable Trusts, November 2007. 0
Parental Penalty High in U.S. Relative Generational Mobility Percent of Adult Sons in Each Income Quintile from Bottom Birth Income Quintile Percent 45 40 35 30 25 20 15 10 5 United States United Kingdom Sweden Finland Norway Denmark Source: Jäntti, M., Bratsberg, B., Roed, K., Raaum, O., Naylor, R., Osterbacka, E., Bjorklund, A., and T. Eriksson, American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility in the Nordic Countries, the United Kingdom and the United States, IZA Discussion Paper No. 1938. Bonn: Institute for the Study of Labor, 2006. 0
Parental Advantage is Universal Relative Generational Mobility Percent of Adult Sons in Each Income Quintile from Top Birth Income Quintile Percent 45 40 35 30 25 20 15 10 5 United States United Kingdom Sweden Finland Norway Denmark Source: Jäntti, M., Bratsberg, B., Roed, K., Raaum, O., Naylor, R., Osterbacka, E., Bjorklund, A., and T. Eriksson, American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility in the Nordic Countries, the United Kingdom and the United States, IZA Discussion Paper No. 1938. Bonn: Institute for the Study of Labor, 2006. 0
College is an Equalizer in U.S. Education and Relative Generational Mobility Percent of Adult Children in Each Income Quintile from Top/ Bottom Birth Income Quintile Percent 60 50 No College College No College College 40 30 20 10 Bottom Bottom Top Top Birth Income Quintile Source: Haskins, R., Education and Economic Mobility," Economic Mobility Project, an initiative of The Pew Charitable Trusts, 0
But Not Equally Distributed Education and Relative Generational Mobility Percent of Adult Children in Each Income Quintile from Top/ Bottom Birth Income Quintile Percent 60 50 No College College No College College 89% 11% 47% 53% 40 30 20 10 Bottom Bottom Top Top Birth Income Quintile Source: Haskins, R., Education and Economic Mobility," Economic Mobility Project, an initiative of The Pew Charitable Trusts, 0
One Reason is Rising Cost Change in Cost of College Education Academic Year 1980-1981 Set to 100 Index Value 400 Public Four-Year 350 300 Private Nonprofit Four-Year Public Two-Year 250 200 150 100 50 1980 1985 1990 1995 2000 2005 2010 Source: The College Board, Trends in College Pricing 2010. 0
Plan of Talk Economic Mobility Primer U.S. Mobility and Its Determinants The American Dream Revisited
Do the Data Match Our Beliefs? Economic Mobility Scorecard Each generation does better than the last + Hard work, talent, and effort create success + Birthright plays only a small role Middle of the income distribution + At the ends it is not so clear --
Are Our Beliefs Immutable? Post Great Recession Surveys Say No Will your child s opportunity to succeed be better or not as good as you ve had? Better: 47% Worse: 46% When your children reach your age now, will they be better or worse off than you? Better: 33% Worse: 40% Will your children have an easier or harder time moving up the income ladder? Easier: 21% Harder: 72% *Pew Charitable Trust Survey of American Attitudes 2011.
Is the Dream Important? Reasons that it might: Inequality is harder to tolerate when mobility is limited or restricted The ability to move up drives individuals to work hard, innovate, and contribute Opportunity matters both for the economy and for a just, fair, and civil society
For More Information The Pew Charitable Trusts Economic Mobility Project: economicmobility.org The Brookings Institution topic page on economic mobility: brookings.edu/topics/economicmobility.aspx New York Times economic mobility visualization tool: http://www.nytimes.com/packages/html/national/20050515_class_graphic/index_01.ht ml Isaacs, J., Sawhill, I., and R. Haskins, Getting Ahead or Losing Ground: Economic Mobility in America, Economic Mobility Project, an initiative of The Pew Charitable Trusts, 2008, available online at economicmobility.org/reports_and_research/mobility_in_america. Jäntti, M., Bratsberg, B., Roed, K., Raaum, O., Naylor, R., Osterbacka, E., Bjorklund, A., and T. Eriksson, American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility in the Nordic Countries, the United Kingdom and the United States, IZA Discussion Paper No. 1938. Bonn: Institute for the Study of Labor, 2006, available online at http://ftp.iza.org/dp1938.pdf. Sawhill, I., and Morton, J., "Economic Mobility: Is the American Dream Alive and Well?" The Brookings Institution, May 2007, available online at http://www.brookings.edu/papers/2007/05useconomics_morton.aspx.