The Persistent Truth of Income Mobility

There’s a lot being written these days about income (and wealth) inequality, and how a free market economy allegedly exacerbates the divide between the rich and the poor. Statistical measures of inequality look at income groups in the aggregate, though—they don’t tell us which people are in those low and high income groups, or how the composition of those groups change over time. As the George Mason University’s Tyler Cowen wrote in The New York Times earlier this year:

Income inequality and economic immobility are often lumped together, but they shouldn’t be. Consider the two concepts positively: Income equality is about bridging the gap between the rich and the poor, while economic mobility is about elevating the poor as rapidly as possible. Finding ways to increase economic mobility should be our greater concern.

And as it turns out, there is a great deal of mobility between income groups in the United States. Today in MarketWatch, Prof. Steve Horwitz of St. Lawrence University reminds us that, because of the dynamic nature of a capitalist economy, anyone can end up at the top of the income scale:

What economists call income mobility continues in this country over the course of any individual’s lifetime and across generations. Being poor at any specific point in time, or being the child of poor parents, does not mean people are unable to move up the income ladder. In the same way, there is no guarantee that those at the top will stay there.

The usual rhetoric about income inequality focuses on how the share of total income held by the top 20% has grown while that held by the bottom 20% has fallen over the last few decades. That’s true, but it ignores the question of whether the same people are in the top and bottom from year to year.

My former colleagues at the Tax Foundation have done an excellent job illustrating this effect, in particular with the chartbook “Putting a Face on America's Tax Returns.” Between 1999 and 2007, for example, nearly 60 percent of taxpayers who started out in the bottom quintile moved up to a higher income group. On the flip side, many people who report million-dollar incomes only do so for a single year, often as the result of a sale of a single large asset. As the chart says, millionaire status is fleeting!

Horwitz also reminds us that not only do the fortunes of individuals vary widely over a lifetime, but the same is true of corporations. Today, companies that barely existed ten years are dominating the market, while former behemoths have withered away. And that’s as it should be. No matter how “unequally” income, wealth, or market capitalization seem to be distributed at any given point in time, as long as there’s the freedom to compete for jobs and customers, the U.S. will continue to be a land of opportunity.