Arnold Kling  

The CBO on income dynamics

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The Wall Street Journal refers to a Congressional Budget Office report which says,


Average income for the bottom 20 percent of all households with children was 35 percent higher in 2005 than it had been in 1991.

I am a bit surprised by their findings, because they seem inconsistent with the failure of the poverty rate to decline.

It is important to remember that the bottom quintile in 1991 and the bottom quintile in 2005 are not the same people. The Census followed a specific panel of households, but only for three years. The CBO analyzed this panel, looking at those who were low-income in 2001.


For those households, average inflation-adjusted income increased by about 45 percent, from $16,700 in 2001 to $24,100 in 2003.

The impression that I get is that a household that is in the bottom quintile in any given year has a fairly high probability of being in a higher quintile in subsequent years. That does not surprise me. First of all, there is bound to be some mean reversion in income--some of the people in the bottom quintile in any given year are merely having a bad year that year. Second, for many households, particularly young households and new immigrants, the trend of income is upward.

Again, for me the most surprising result of the study is the fact that the average income in the bottom quintile was so much higher in real terms in 2005 than in 1991. I would have thought that new immigrants would have held down that figure.

I wish that more would be done to explore the dark continent of income dynamics.


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CATEGORIES: Income Distribution



COMMENTS (5 to date)
Fritz writes:

Arnold,
You have a tin ear for the politics. It is no accident that the data compared the year 2000 data. The data shows a flattening of earnings in the 2000's. There was solid income growth in the 90's. You refer to 1991 to 2005 with a 35% increase, but 1991 to 2000 it was 53% income increase. Agree, 2000 was the peak in the economic cycle, the end of the Clinton miracle, but in a democracy those that fall into the lowest 20%, temporary or not, is a smaller share of national income. Yes they are making more money, but politically their share can be used foster resentment. My guess is that the income rise will take place as unemployment falls towards 4.0%.

Floccina writes:

"My guess is that the income rise will take place as unemployment falls towards 4.0%. "

I disagree, for one reason it is difficult to know how much people make. Bigger houses and more expensive cars do not tell all that much.

spencer writes:

The common perception is that the poor income growth of the past couple of decades has squeezed the poor.
But actually, the squeeze has been much more on the middle class.

from 1991 to 2000 the real income growth for household with children by quintile was.

1st Q ...51%
2nd Q...25%
3rd Q...21%
4th Q...21%
top Q....54%.

This is right in line with numerous studies like this that shows the two extremes of the income distribution are doing much better then the middle
income share of the population.

You can attribute this to numerous factors, but
I would argue strongly that one of the most important is the decline in high wage manufacturing jobs and the people losing those jobs have to settle for significantly lower paying jobs.

Moreover, it shows significant support to those who find that immigrants are not generating downward real wage pressure at the bottom of the wage structure.

The real significant issue in the economy is not the poor or the wealthy, it is the squeeze on the middle class.

Lord writes:

Comparing a recession year to a non-recession year is big no-no.

Floccina writes:

My post should have been:
"Yes they are making more money, but politically their share can be used foster resentment. "
I disagree, for one reason it is difficult to know how much people make. Bigger houses and more expensive cars do not tell all that much.

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