Tuesday, June 10, 2008

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.


At 6/10/2008 11:19 PM, Anonymous Anonymous said...

Mark, you're not fooling anyone we see that some people are poorer than dirt and they aren't moving up and down the quintiles.

We know that some people just don't have it and it isn't their fault they were born that way or had an accident or experienced some other tradgedy.

All this talk about how people move up and down the quintiles isn't going to let you sleep better at night or assuage the guilt you seem to have because you keep bringing up this topic.

A person with no income might be very wealthy, correct? A person in the top 1% of income earners might be paying off a huge judgment and living very poorly indeed.

Your numbers and a couple of paragraphs don't tell the whole story.

At 6/10/2008 11:31 PM, Blogger John said...

Don't you hate when a commenter appears not to have read and/or understood your postings?

Also, why is its never the poor peoples fault for being poor?

At 6/11/2008 6:52 AM, Blogger AtlanticSoutherner said...

There will always be a bottom. And I am sure the bottom is better now than it was 50 years ago. Henderson's study does point out some huge variables regarding the "Class War" which many Dobbs-like war hawks fail to present in their righteous quest for income equality. America's economy allows for an individual or firm to earn as much as they want if they have the ideas and work hard.

At 6/11/2008 8:31 AM, Blogger OBloodyHell said...

> Don't you hate when a commenter appears not to have read and/or understood your postings?

I started to think he was clueless, too. Then I thought about it, and realized he's probably making fun of such idiots. Just a bit too subtly.

My own experience with people making >60k a year is that they typically work between 50 and 70 hours a week, usually towards the higher end of that range. Society rewards people who give up their lives to be individually highly productive. What kind of rampant nitwittery reasons that this should this be either a surprise or undesirable?

At 6/11/2008 9:00 AM, Blogger Virginian said...

Isn't it income inequality when a hard, productive worker is denied the fruits of his work, when a significant part of his income is confiscated instead and given by government to someone less productive and less hard working? It seems to me that this productive person is getting less income for the value of his effort, and the recipient of this forced transfer of wealth is getting more income for the value of his own work effort. That inequality can become stifling.

At 6/11/2008 12:16 PM, Anonymous Anonymous said...

"why is its never the poor peoples fault for being poor?"

Because they generally are not. Moral hazard from social insurance programs has reduced the stimuli to improve their situation. Thus they focus their faculties on things other than work and education.

The blame, lies almost entirely at the feet of "social justice".

At 6/11/2008 7:45 PM, Anonymous Anonymous said...

"why is its never the poor peoples fault for being poor?"

It's a cultural thing. I grew up with upper-middle class professional parents, and I don't know how to be poor. Being an upper-middle class professional comes naturally for me. The time I have hung out with inheritance rich people lead me to realize I don't know how to be inheritance rich either.

Poor people grow up in a poverty culture. The best we can do is avoid stupid policies that help to keep them in that culture (War on Drugs, etc.)


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