Income Mobility Is Substantial. We Move Up and Down the Income Quintiles. What's the Big Deal?
In the study "Economic Inequality: Facts, Theory and Significance" by David Henderson (Associate Professor of Economics Naval Postgraduate School) he makes 5 main points about income inequality:
- Although income inequality has increased, it has not increased as much as some economists claim.
- Even though inequality has increased, almost all Americans have become better off economically.
- Household income varies substantially for three reasons that are often ignored: (i) differences in household size and especially in numbers of workers, (ii) differences in skill levels among people, and (iii), related to both of the above, differences in age.
- Income mobility substantially mitigates inequality, and income mobility in the U.S. economy is quite high.
- The majority of economists judge how just an income distribution is only by how equal it is; they don’t ask how people obtained what they have. This disregards the fact that, by and large, those with higher incomes have earned them.
MP: As the chart above clearly shows, the differences in income between households in the top income quintile (top 20%) and those in the bottom income quintile (lowest 20%) are explained by the facts that:
Households in the top income quintile have:
- Almost 3X as many earners (2.12 vs. 76) as the bottom quintile,
- More than twice as many heads of households working full-time (76% vs. 32%),
- 1.5 times as many heads of households age 35-54 years (peak earning years), and
- Fewer households headed by those in the non-peak age groups (for income) of 15-24 years old, and 75 years and older. Low income households are 9X as likely to be headed by a 15-24 year old, and 5X as likely to be headed by someone older than 75 years.
Further, Henderson concludes that "The idea that income inequality measures anything important is undercut to the extent people shift frequently from one quintile to another. And in the United States, as in many other relatively free countries, income mobility is substantial. To repeat: income mobility is substantial."
That is, Americans typically start out in a lower income quintile when they are younger, advance to the higher income quintiles during their peak earning years of 35-65, and then drop back to a lower income quintile when they retire (even though they might often remain in one of the higher wealth quintiles). That's life.