Arnold Kling  

Income Mobility

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Is the United States becoming a more rigid class society? Paul Krugman sounded such an alarm, but Tyler Cowen issues a rebuttal.


Yes, there is some correlation in wealth across the generations. But most of that correlation (almost seventy percent) comes from continued hard work and savings. The authors do not examine Krugman's claim that mobility once was greater, but it seems premature to suggest that the American dream is gone.

Cowen cites a paper by Kerwin Kofi Charles and Erik Hurst on the correlation of lifetime earnings across generations.

Age adjusted parental wealth, by itself, explains less than ten percent of the variation in age adjusted child wealth. Furthermore, twenty percent of parents in the lowest quintile of the parent’s wealth distribution have children who are able to break away from their parents low wealth status and end up in the top two quintiles of the child’s wealth distribution. Similarly, one quarter of the parents in the highest wealth quintile have children whose wealth places them in the lowest two quintiles of the child’s wealth distribution. We conclude that while parents do pass on human capital and saving propensities to their children, there is still a sizeable amount of churning in economic position from generation to generation.

My intuition is that as the economy becomes more dynamic, the correlation of wealth across generations is likely to fall. If my generation has an average income of $50,000 and the next generation is going to have an average income of $100,000, then it is going to be very difficult to use my income to influence my children's position in the income distribution. That is because 20 percent of my average income is only 10 percent of my children's average income.

Also, in a more dynamic economy, human capital depreciates more quickly. I might give my children an excellent education, which will give them a head start, but in ten or fifteen years chances are that they will need to re-educate themselves.

Two hundred years ago, land was a significant asset, and your place in the wealth distribution was affected by how much land you inherited. In 1950, ownership of physical capital determined one's place in the wealth distribution, and there were a lot of heirs and heiresses in the list of richest people. Today, where you wind up in the wealth distribution depends a lot on talent and what you do with it. Entrepreneurial propensity is a major factor. This does not strike me as an economic environment that is conducive to a static wealth distribution.

For Discussion. What other features of today's economy promote or discourage intergenerational income mobility?


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CATEGORIES: Income Distribution



COMMENTS (33 to date)
Eric Krieg writes:

The rigid class structure has nothing to do with current income. It has to do with current intelligence.

Read "The Bell Curve". Intelligence is hereditable. In the knowledge based economy, intelligence is the best predictor of income. Thus, it should surprise no one if income mobility falls.

Combine this with the fact that our meritocratic society encourages the intelligent to mate with the intelligent (and vice versa), and you have a recipe for a very rigid class structure.

The problem with academics is that they are very parochial. They have their area of expertise, and they are just about as ignorant as can be regarding other academic areas. Just because you see income inequality does not mean that there must be an economic justification for it. There can be a sociological, psychological, or almost any other justification for it.

Steve writes:

Hard work and education are both meaningless now because of the same issue I've been raging about on this board for several months! OFFSHORING IS THE GREAT EQUALIZER.

The only people who will be successful are the superstars and the folks who inherited from said superstars. Think about why:

No matter how much education you get, your job will get offshored at some point in your life and you will get knocked back down to the bottom rung again in a different industry UNLESS YOU'RE A SUPERSTAR.

It's as simple as that.

drk writes:

fwiw, here's the BW article krugman cites:

http://businessweek.com/magazine/content/03_48/b3860067_mz021.htm

it was also fodder for the onion a little while back, make of that what you will, mirrored here:

http://www.axisoflogic.com/artman/publish/printer_3808.shtml

i think if you take a 'more is different' paradigm, then the power law (zipf) distributions you see in city sizes, will also start showing up in the gini coefficient (also see von thünen and lösch).

me, i don't really see a problem until there's armed rebellion. the power is always with the people, it's only in the illusions they muster and manage to harbor are they pacified or dangerous.

as for income mobility william gates (bill's father) and warren buffett have both come out in favor of the death née estate tax to perpetuate the illusion, whereas public school indoctrination appears to be failing in that regard, viz equality of opportunity and/or job (re)training.

for a convincing look at social stratification see here: http://t0.or.at/bobblack/futuwork.htm

remember for the system of control to work through the machinery of the law, the propagation of its flaws must be minimized, with money as the sink: http://www.macroknow.com/ww3-6.htm#P1-1%20THE%20ORIGIN%20OF%20CAPITALIST%20SELECTION

Steve writes:

drk--Scary, scary stuff. All true. It's already too late to do anything about it especially with Economists clearly in the Alpha camp and spewing anti-labor slogans all day long.

Eric Krieg writes:

There will be economic returns to intelligence in any modern or even modernizing country. With a billion people, the odds of there being an intelligent Indian are a lot higher than they are here, but I suspect the Flynn Effect juices up our numbers quite a bit more than in India.

And then there are things like proper sanitation and pollution controls that we have going for us and the Indians do not.

Steve writes:

Eric--Intelligence is born into someone and cannot be improved once conception takes place (as you learned from "The Bell Curve").

How do those of us who don't belong in Mensa fix the fact that we will soon be obsoleted by offshore resources?

What's the Flynn effect? does it have something to do with Tron or some other sci-fi movie?? ;P

Eric Krieg writes:

You know, guys, the BW article is not measuring globalization. It is measuring women in the workplace.

Working women have had a profound inflationary impact in three areas:

1)child care

2) housing

3) college education

The extra income that working women bring to their households has done nothing more than bid up the cost of housing, child care, and college education (and maybe even stocks). The debt that families take on to afford these items consumes more and more of the average household budget, leaving less and less for anything else, and making the risk of being laid off that much worse (this phenomonon pretty much explains the explosion in personal bankruptcy over tha last generation).

And because women are in the workplace, and families have to take on so much college and motgage debt, it pretty much forces women to work. It is a self reinforcing phenomonon.

The law of unintended consequences rears its ugly head once again.

I just bring it up as another example of the myopia of certain academics. There may be a sociological explanation for economic phenomenon.

Also, Steve, any comment on being forced to compete with women for jobs? I mean, working women drive down male wages just as much as Indians do?

Eric Krieg writes:

>>Eric--Intelligence is born into someone and cannot be improved once conception takes place (as you learned from "The Bell Curve").

Not 100% true. Maybe 50% true. But true enough that there are sociological implications.

Intelligence is not entirely determined at birth, but it is by far the most determining factor.

Steve writes:

Eric--Do you know any American Women programmers who will work for $5000/year?

Eric Krieg writes:

>>What's the Flynn effect? does it have something to do with Tron or some other sci-fi movie?? ;P

Are you sure that you were a computer programmer? GOOGLE IT!

Actually, the Tron reference proves that you were a computer programmer! Geek. ;P

The Flynn Effect is pretty cool. Check it out.

Steve writes:

Anyone care to debunk the links that "drk" posted earlier?

I'm already putting the deposit down on a bomb shelter with steel doors.

I'll research the Flynn effect. If another HP user thinks it's cool, it must be. :)

Boonton writes:

'The Bell Curve' has been at least 80% or more discredited at this point. It's not clear that 'intelligence' is linked to success or the other way around (in other words, being successful lets you perform better on IQ tests). It's not clear that there is one type of intelligence rather than multiple types (such as someone who is good with abstract logic versus someone who is good with communication).

Bringing up the Bell Curve reminds me of Keynes's famouse quote about the power of even defunct ideas.

Eric Krieg writes:

>>'The Bell Curve' has been at least 80% or more discredited at this point.

Are you sure about that? There is a lot of hyperbole out there about the Bell Curve (mostly from people who are not experts in the field of intelligence and who have political agendas), but "debunked" is a pretty strong word.

I don't know too many high income morons. The basic thesis of the Bell Curve seems pretty solid.

We're all pretty intelligent on this web site. I'm willing to bet that there isn't one person here with an IQ below average. I'm also willing to bet that there isn't one person here with a below average income.

Any takers? For reference, I got a 1310 on the GRE, which translates to about 130 IQ. I make more than the median income AND the average income.

And if I DID SOME WORK instead of post here, I'd probably make a lot MORE money.

Eric Krieg writes:

>>Bringing up the Bell Curve reminds me of Keynes's famouse quote about the power of even defunct ideas.

Like most of Keynes ideas?

HA! Walked into that one.

Eric Krieg writes:

Steve, use of a Reverse Polish Notation calulator adds to the Flynn Effect.

I told you it was cool.

Steve writes:

Eric.. You're right. I'm around 128 (S-B test from about 15 years ago, never took the GRE), personal-income a bit more than 1.5X the average for an entire household. Even though I am highly productive and semi-irreplaceable in the short run, you should now understand why I fear going to work every day.

Not a lot of rich morons... True there.

I could name a bunch, actualy, but they all play sports for a living.

True on the posting here vs. making money thing.

Haven't even researched Flynn yet. :) Will do tonight.

winterspeak writes:

The true test of how flexible (and meritocratic) the labor market is is how it responds to shocks.

Even if we see essentially zero mobility between generations, it could still be efficient if human capital was entirely transfered through genes and cultural traits transmitted through childhood. Something would be wrong is smart, hard working people did not make a lot of money, and something would be wrong if the smart, hard working children of smart, hardworking parents did not make a lot fo money.

The true test is how the systems responds to shocks. Do lazy rich idiots have low income (even if they were born into high income families)? Do hard working genuises rise to the top even if they were born into poor families. Krugman needs to show that the above two examples do not happen to support his rigid, stratification case. I have not seen him even frame it this way yet.

Boonton writes:

Re: "Bell Curve"

Assuming everyone here has a high IQ and above avg income, this does not demonstrate Murray's thesis.

1. This doesn't establish that our IQ's came from genetics.

2. This doesn't establish that IQ is a cause of our income...our income may put us in a cultural group that scores well on standardized IQ tests.

3. This doesn't establish that IQ exists as anything meaningful.

4. This doesn't establish IQ (high or low) is a racial characteristic.

Tim Shell writes:

Has anyone here read Drucker's recent article in which he claims the US imports more jobs than we export? I haven't, but it seems like a very interesting thesis, and Drucker is always someone to take seriously. So I'd be interested if anyone has comments on it.

Steve writes:

He's right! We imported 8 million illegals to do gardening work and other manual labor while we only exported 2-3 million high-end $100,000/year jobs! The "D" man is a genius again!

Ronnie Horesh writes:

"In 1950, ownership of physical capital determined one's place in the wealth distribution.... What other features of today's economy promote or discourage intergenerational income mobility?"

I am not familiar with the US, but it seems that in the UK and New Zealand [for instance] it is increasingly difficult for ordinary people to earn enough to buy their own property, unless they inherit. Capital gains are more lightly taxed in the UK, and not taxed at all in NZ, but the poor cannot convert income into capital gains as can the rich. I suspect that it's similar in the US, after reading Barbara Ehrenreich's book about starting work at the bottom of the ladder, with no dependants, and trying to live on a low income. If owning property is out of reach for people prepared to work hard, then there is a real chance of a permanent underclass developing.

Arnold Kling writes:

I am not familiar with the US, but it seems that in the UK and New Zealand [for instance] it is increasingly difficult for ordinary people to earn enough to buy their own property, unless they inherit. "

In the U.S., the home ownership rate was approaching 70 percent last time I looked, which probably means that over 90 percent of people who are stable enough to do so own their own residence.

Eric Krieg writes:

>>In the U.S., the home ownership rate was approaching 70 percent last time I looked, which probably means that over 90 percent of people who are stable enough to do so own their own residence.

From what I've seen of property values in the UK, the problem is housing supply, not incomes. Increased incomes would just result in the limited supply of housing being bid up in price.

It is happening in the US as well, just not to the extent that it is happening in the UK.

Arnold, may I suggest a new book for you? "The Two Income Trap". The authors are not economists, and I would love an economist's review of the book (check it out on Amazon).

Eric Krieg writes:

The only retraction that Charles Murray has made with regard to the Bell Curve is the items on race and IQ. It seems that there has been some research in that area that superceedes the research that he cited in his book.

Your other 3 items are pretty well explained in the IQ literature (linked on the internet, once again just google it). Basically you are wrong on all 3 counts, from what I've seen. IQ is real, it IS a measure of intelligence, it is heritable to a high degree, and it is correlated to success (though by no means is it the sole determinant of success).

It is a phenomenon that economists need to investigate more, because it may be the driver of many of the things that they are interested in.

Eric Krieg writes:

>>Eric--Do you know any American Women programmers who will work for $5000/year?

Steve, at what point do you get concerned that someone's actions are negatively impacting your wages? You're okay with your wages being suppresses 30% because of women in the workplace, but not 50% because of offshoring?

And male wages are not the only thing that has been effected. Housing prices and college costs are the items that have been inflated the most because of women in the workplace.

So once, again, both women in the workplace AND offshoring negatively effect you. Why is one okay and the other not?

Ray Gardner writes:

When I first laid eyes on this log I knew it would wind up rehashing the bell curve wars.

Well, IQ is real of course and the opponents of inherited intelligence have lost the bell curve wars. The research supporting the validity of IQ itself and that of hereditable IQ is just too overwhelming. Facts withstand time, obtuse notions of engineered equality fade away.

More to the point though of intergenerational income mobility; intelligence does indeed predict future income but behavior is the ultimate hinge point in all of this.

One culture has an average IQ one standard deviation above the norm of 115. In that culture, it is rare to find teenage pregnancy and drug abuse.

The cultures at the bottom of the IQ averages all have aberrant social behavior in common; rampant teenage pregnancy, drug abuse, stratospheric drop out rates and so on.

It is a return to a medieval hierarchy of sorts. We used to have the rural component living off of the land and completely uneducated while the merchant class - the bourgeoisie - inhabited the gated villages and towns. The noble classes had their estates, securely ensconced in their villas and small castles.

The average IQ of the nobles as compared to the most successful of the merchant or middle class wasn’t what made the difference, as evidenced by so many of history’s greatest contributors coming from the lower classes. But the higher social strata contained more social stigmas and a higher sense of purpose.

So today our middle class bulges with apparent wealth but the offspring of this affluent merchants’ stratum are doing drugs, having children out of wedlock and so on; all while continuing to finish their degree at the local state university or community college.

This will produce some intergenerational income stasis but nothing like what the former Enron advisor Krugman is suggesting.

Ray Gardner writes:

Ronnie mentions Barbara Ehrenreich’s book. This is a perfect example of what I was just illustrating.

The young woman who doesn’t do well in school, has children with the wrong guy and way too young finds herself struggling to live the “American Dream.” And this is of course our collective American fault.

One of the enlightening points of research found in The Bell Curve is this; keeping in mind the irrefutable evidence of IQ predicting income, a single mother with an IQ in the top 5% stands a 30% greater chance of living in poverty than a married mother who has an IQ at the bottom of the scale.

So destructive behavior trumps a high IQ but, statistically speaking, which groups of people display the most destructive behavior? Those in the lower strata.

And to further clarify my notion of a return to medieval social strata; today, the uneducated masses live, not in rural hovels but in monolithic apartment complexes and crumbling subdivisions. The upper middle class move to the newer subdivisions (villages) and some gated communities (towns) while the top echelon still isolate themselves with large urban homes fortified like castles, suburban and rural estates and the newest addition, the ultra planned community.

Eric Krieg writes:

IQ, or genes for that matter, is not destiny. Just becuase you are intelligent does not mean that you are going to be sucessful, just that you are more likely to do so.

But behavior trumps IQ. Drop out of high school, get knocked up, or get hooked on smack and all the IQ in the world isn't going to bail you out.

Eric Krieg writes:

Actually, Charles Murray wrote a book "Income Inequality and IQ". Look for it at your library, because it is out of print.

Ray Gardner writes:

Another good book is "Intelligence, Race and Genetics." It is written by Frank Miele, the "Skeptic" editor and is a conversation of sorts with the great Arthur Jensen.

The man behind the -ism.

Jensen, for those not boned up on their study of human intelligence, was the first academic in modern America to make note of and back up with data that IQ was largely hereditary and the difference of IQ averages among different races.

Alky writes:

Discourages intergenerational income mobility: the structural shift (secular trend) of substituting capital for labor.

Bernard Yomtov writes:

" twenty percent of parents in the lowest quintile of the parent’s wealth distribution have children who are able to break away from their parents low wealth status and end up in the top two quintiles of the child’s wealth distribution. Similarly, one quarter of the parents in the highest wealth quintile have children whose wealth places them in the lowest two quintiles of the child’s wealth distribution. "

I am always suspicious of such carefully selected numbers and carefully phrased claims. Why the movement to the top two and bottom two quintiles specifically? Sounds like most of that movement was to quintiles two and four, and one and five were thrown in for effect. Also, this says the parents "have children who.." But parents often have more than one child, so the movement may be less than a quick reading suggests.

Without reading the paper carefully I don't want to be too critical, but there is one point that needs to be noted: The study was done on families where the parents were still living, so it took no account of bequests. That looks like a major omission to me.

Bernard Yomtov writes:

A few more points:

The paper deals with wealth, not income, and the authors say in their summary that the intergenerational effects are large, especially in the tails of the distribution.

Parental wealth may easily affect the child's income in any number of ways, obviously. It is also true that parental wealth may manifest itself in the children's lives in ways that do not show up in a simple measure of children's wealth.

I think it makes sense to look at this sort of result as describing an upper bound on mobility, rather than an estimate.

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