Arnold Kling  

Ongoing Escalation of Income

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A Wall Street Journal editorial reports,

The Treasury study examined a huge sample of 96,700 income tax returns from 1996 and 2005 for Americans over the age of 25. The study tracks what happened to these tax filers over this 10-year period. One of the notable, and reassuring, findings is that nearly 58% of filers who were in the poorest income group in 1996 had moved into a higher income category by 2005. Nearly 25% jumped into the middle or upper-middle income groups, and 5.3% made it all the way to the highest quintile.

Of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, and only 17% moved down. This is a stunning show of upward mobility, meaning that more than half of all lower-income Americans in 1996 had moved up the income scale in only 10 years.

My metaphor for income distribution is an escalator, with new families and immigrants starting at the bottom and most people moving up. This new study appears to be consistent with the metaphor.

A commenter found the actual study. I did not read it carefully, but I don't see how looking at tax returns can be complete, because some people don't file (of course, many who file pay no taxes, but that is ok as long as their returns are included).

Meanwhile, another study was conducted by Julia Isaacs of the Brookings Institution, using the Panel Study for Income Dynamics, following families from the late 1960's through today.

Isaacs' study is called the Economic Mobility Project. It is covered in The Wall Street Journal. The Executive Summary says,

Median family income for adults who were children in the late 1960s and are now in their 30s or 40s increased 29 percent, from $55,600 for parents to $71,900 for their children, adjusting for inflation. Moreover, family sizes have shrunk over this same period (from 3.1 to 2.3 individuals between 1969 and 1998), so higher incomes are spread over fewer people.

...four out of five children whose parents were in the bottom fifth of the income distribution end up with higher incomes than their parents.

...Forty-two percent of children born to parents in the bottom fifth of the income distribution remain in the bottom, while 39 percent born to parents in the top fifth remain at the top.

An executive summary of Differences by Race says,

Between 1974 and 2004, white and black men in their 30s experienced a decline in income, with the largest decline among black men. However, median family incomes for both racial groups increased, because of large increases in women's incomes. Income growth was particularly high for white women.

The lack of income growth for black men combined with low marriage rates in the black population has had a negative impact on trends in family income for black families.

...Overall, approximately two out of three blacks (63 percent) exceed their parents' income after the data are adjusted for inflation, similar to the percentage for whites.

However, a majority of blacks born to middle-income parents grow up to have less income than their parents. Only 31 percent of black children born to parents in the middle of the income distribution have family income greater than their parents, compared to 68 percent of white children from the same income bracket.

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CATEGORIES: Income Distribution

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COMMENTS (19 to date)
Trent McBride` writes:

Just off the top of my head, I would assume one shortcoming of the study is that it does not catch people who don't file a tax return, and these people likely are the poorest of all. The question is, is this a significant number?

F Chow writes:

But since the study tracks the same people and people gain experience over time, the increase in income may simply reflect the gain in work experience.

Bruce Jenks writes:

Also, consider those retiring and entering into a lower income bracket.

cjc writes:

F Chow, that's the point: it shows the weakness of statements along the lines of "X% of Americans are in poverty!" That statement is less strong that it may appear, because some large fraction of X% move out of poverty in a surprisingly short amount of time.

Eric writes:

Link to study here

mgroves writes:

Walter E. Williams has always postulated that the decline of 2-parent households is responsible for things like the "majority of blacks... [who] grow up to have less income than their parents". I think this study supports that.

Buzzcut writes:

I wonder if Arnold has thought out how two of his beliefs contradict himself:

1) There is an income ladder and over time people go from young and poor to old and rich.

2) Inequality is by the interelation of IQ and associative mating (the Bell Curve thesis).

Aren't those 2 things mutually exclusive?

General Specific writes:

The WSJ opinion page lacks objective credibility. Best to ignore it.

spencer writes:

I find it interesting that they say much of the income gains have occurred because the women have gone to work.

In other words they are often comparing a one income family 30 years ago with a a two income family now.

But they provide no data on how this impacted their results.

In the census data, for example the real income of families with one earner stagnated over this period while the real income of families with two earners grew at a a 1.4% average annual rate.

I wonder why they do not provide this information
because it surely strongly influences their results.

Boonton writes:

Did the study correct for class? In other words, an upper-class kid who is a HS senior or at Harvard in 1996 may be making next to nothing at the local Blockbuster or as an intern but in ten years his income will explode but this isn't really income mobility.

How many of that type of story is contained in the 96K tax returns and how many stories of min. wage immigrants turning into business owners?

Brad Hutchings writes:

It also fails to catch "poor" people who have their hussle on. Maybe I just know a lot of people who play in the cash economy and stay below the radar of the IRS, but my sense is that there is a lot of unreported income. I'd be more interested in a study of trends in accumulated wealth.

Fly Fisher writes:

"The WSJ opinion page lacks objective credibility. Best to ignore it."

Does this mean that the Treasury Department report doesn't exist? Or possibly that the report exists, but the WSJ is spreading their typical nonobjective lies when they state that the Treasury report claims "The basic finding of this analysis is that relative income mobility is approximately the same in the last 10 years as it was in the previous decade."?

Many of the objective complaints about the report express concern for the care with which this government agency carried out its study. Perhaps we should throw more money at the agency, and legislate that all studies of income mobility be conducted by the agency. From what I have read on the opinion pages of more objective newspapers, this seems to be the way to fix health care, education, and other important problems.

Troy Camplin writes:

At 36 and 3 years out of my Ph.D. I'm still waiting for my income to go up. Of course, it would help if I had me one of those job things -- more than the occasional adjunct position, anyway.

Tom writes:

"General Specific writes:

The WSJ opinion page lacks objective credibility. Best to ignore it."

Self diagnosing , heh?

Herbert L Fenster writes:

This data is only a piece of a much larger set of issues for this new century. We are unhappily developing a class system in this country and that phenomenom is recognized in a series of articles that, coincidentally, appeared almost simultaneously in the NYT, the WSJ and the Economist starting in May of 2005(NYT and WSJ and going to July of 2005 Economist). The starting point was the NYT series titled "Class Matters"

General Specific writes:

The WSJ opinion page has a filter that can take any study and, from it, produce data in support of their extremist ideological position. So it doesn't matter what the actual study said.

What they milked from this study, when reworded, says that if you have a lot of income, you're income isn't likely to increase. If you have little income, it's likely to increase. And they look at tax returns, not actual individual income.

Pretty meaningless if you ask me. Yet they'll use it to hammer away at their ideological themes. Which then tend to get repeated in the echo chamber.

It really is best ignored.

Punditus Maximus writes:

GS: Anybody who reads the WSJ editorial page at this point after both the Clinton and Bush 43 years has kind of made a decision to be misinformed. There's only so much that can be done.

polecolaw writes:

Dear Fly Fisher:

The Treasury Report referred to is extremely poor in my opinion. It makes no adjustment for retirement from the higher income levels nor for the lower earners who mature over the 10 year period. It is also worded in some instances in ways that make it misleading when quoted. For example, the quote about the 24% gain for all tax filers is all tax filers in the study (which you would expect as they age). In a footnote, the report notes the average increase for all families in the US over the time period was closer to 5%. You can get additional details at my blog if you like.

howard writes:

Reply to Trent McBride comment 1: low income households file tax returns to obtain the Low Income Tax Credit (negative income tax).

Reply to everyone else: The treasury report does contain useful information and does report evidence of the escalator effect. The report only includes people who filed tax returns in both the beginning and ending years. But if we look at the ending year (table 4 for example), 28% of people are in the top quintile. Your first reaction is to say, "that's a mighty funny definition of quintile," but the point is that people were evenly spread across the quintiles in the beginning year, but by the ending year had moved up the distribution.

The treasury study should force serious people to be more explicit about what they mean when they say "income inequality is getting worse over time." For example, the treasury report shows the following: imagine we are in 1987 and choose a random sample of 40,000 in the bottom 40% of income distribution. If we fast forward a decade to 1996 to see how these people are doing, we discover that 23,040 are still in the bottom 40% of the income distribution, but 8,720 have moved into the top 40% of the income distribution. Now let's repeat the experiment starting in 1996 -- choose a random 40,000 in the bottom 40% of the income distribution, and see where they are in 2005. Fewer stay in the bottom -- 22,160 are in the bottom 40% -- and more rise to the top -- 9,040 are in the top 40%. So, although you may want to hang on to the belief that "income distribution has gotten worse" in some sense, you have to accept the fact that it has gotten easier to move up the distribution.

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