Income mobility

I wrote a post a while ago about the income distribution and probability. What I was suggesting was that the income distribution is really a probability distribution and that it gave an indication of the likelihood of someone earning a particular salary. What I ignored was that the income distribution is really just a snapshot in time. There will be income mobility and so those in a particular income band today may be in a different income band in the future.

I had, however, assumed that this wouldn’t be particularly significant. I am now in the top 10% of earners and, unless something were to go horribly wrong, I suspect I will remain in this band for the rest of my career. I will therefore spend more than half of my career in the top 10% of earners. It also seems (from what I can see) people reach their peak earnings sometime in their late 30s or early 40s. It therefore seems that most people will spend about half their careers in a particular income band and that would, therefore, suggest that there can’t be that much mobility. Basically, it seems that – for example – over the course of a typical career only about 20% of people could spend a significant amount of time in the top 10% of earners. I have, however, discovered that studying income mobility is extremely complicated.

What motivated this post was a video (below) by Steven Horowitz who is a professor of economics at the St. Lawrence University in Canton, New York.
The basic argument in the video is that, when inflation is taken into account, everyone is better off today than they were in the 1980s. Furthermore, income mobility means we shouldn’t be using income distributions when considering poverty because those at the bottom today may not be there in the future. An additional point was that if you consider the average incomes of the bottom 20% and top 20% in 1979, the bottom 20% have seen a much bigger rise than the top 20%.

I will acknowledge the following. It is technically possible for incomes to become more unequal and yet for the lowest earners to still not be in poverty. The issue of poverty being relative or absolute is clearly complicated. I would, however, argue that as inequality increases, the lowest earners become more and more disenfanchised (both economically and politically) and so societal problems will increase as inequality increases. I do, however, think that relative poverty must have some merit. Clearly many people survive in circumstances much worse than almost anyone in the UK or the US. This doesn’t, however, mean that it is acceptable for our society to evolve into one where the lowest earners live in these kind of conditions. How we define poverty must, to a certain, extent depend on the wealth of our societies.

I do, however, have real issues with what Steven Horowitz says about income mobility and about the rise of the lowest and highest incomes since the 1970s. Steven Horowitz says that if you divide people – at a given time – into 5 income intervals (bottom 20%, next 20%, …) and then look at how those in each interval are distributed 10 years later, more than 50% of those in each interval will have moved to a different income interval (i.e., there will be income mobility). This comes from a report that has the following table which compares incomes in 1996 and 2005 and what he says does indeed appear to be true.
What he fails to point out is that at least 70% of those in an income interval in 1996 are either in the same interval in 2005 or in an adjacent interval. Typically, also, a third – or more – remain in the original income interval. A reasonable fraction of those in the bottom 20% in 1996 are still there in 2005 and a majority are in the bottom 40%. Only 5.3% of those who were in the bottom 20% in 1996 made it to the top 20% by 2005.

This doesn’t appear particularly mobile to me and seems marginally consistent with my initial suspicions about income mobility. What’s more, if you look at the video (somewhere near the middle) he has some illustrations of income mobility. The graphics show a bunch of people in the bottom 20% and then shows them moving up (over time) through the income distribution. In the first he shows them ultimately roughly equally distributed in the 5 income intervals. In a later one he shows a larger fraction going from the bottom 20% to the top 20% than to any other income interval. This seems incredibly disingenuous given that a large majority of those in the bottom 20% will ether stay there or move up into the next interval. Only a few percent (over the course of 10 years) will get from the bottom to the top. Although income mobility clearly happens, this videos seems to suggest that it is much more significant than the data would suggest.

Later in the video Steven Horowitz claims that in 1975 the lowest 20% had average incomes of $1263 while the highest 20% had average incomes of $50077. By 1991 he claims that these had increased to $29008 and $54431. The lowest earners had therefore – he claims – seen a much larger increase in their average incomes than the highest earners. I found this very confusing as all the indicators of income inequality (Gini, 90/10 ratio) suggest the reverse. I struggled to find comparable data, but did find US household incomes for the appropriate period. According to this data, the bottom 20% of households had an income (in 2005 dollars) of $9636, while for the top 20% it was $96188. By 1991, this had increased to $10101 and $123179 respectively. Quite how the average income of the bottom 20% could be $29008 when (in 2005 dollars) the household income of the bottom 20% was only $10101. Furthermore, according to this data, the household income of the top 20% had increased (21.9%) by a much larger fraction than that of the bottom 20% (4.6%). This is completely different to what he says and much more consistent with all of the inequality measures that I’ve seen for the same time period. Either he’s made a mistake or he’s selected his data to suit the story he wants to tell.

I think Steven Horowitz has conveniently argued that poverty is not relative and that everyone is better off today than they were in the past. He has over-represented the significance of income mobility and then somehow managed to find some data suggesting that the incomes of the lowest earners has increased by a much larger fraction than the highest earners despite all other indicators suggesting the reverse. I think these kind of discussions are very important but they become incredibly difficult if Economics Professors either don’t understand the data or completely misrepresent it to suit their ideology.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s