Friday, January 24, 2014

Inter-generational mobility and economic growth in the U.S.

A group of economists has an NBER working paper that is receiving a lot of media attention right now. The link above is to the paper, which is quite technical. This link is to a NY Times article summing up the results.

The popularity of this paper is not surprising. There is a lot of talk in the news now about living wages, income inequality, etc. and inter-generational mobility is economic jargon for how well are children doing relative to their parents. Inequality is less of an issue (assuming it is at all, and I don't think it is) if people are able to rise up through the income ranks regardless of where they start.

The paper has a lot in it and I have not gotten through it all yet but I wanted to share one part now. I hope to have more to say on it in the near future, but for the time being here is a copy of Table 3 from the paper:

What the above table is showing is what percentage of children change income quintiles based on where their parents are. A quintile is just a bucket that includes 20% of the population being measured. So each quintile includes 20% of the people in the sample. The 5th quintile includes the 20% that have the highest incomes, and the 1st quintile includes the 20% with the lowest incomes. So a child who has parents that are in the 1st income quintile has a 33.7% change of being in the 1st income quintile himself at the time his income was measured for this paper. This is the number that is in the first row of the first column. A child with parents in the 1st income quintile has a 7.5% change of being in the 5th or top quintile. This is the number in the last row of the first column. The rest of the numbers work similarly.

People will point to this and say that a 7.5% chance is not very good. And perhaps it isn't. But notice that over 64% of children with parents in the 1st income quintile will reach a higher quintile than their parents (the sum of all of the rows in the 1st column other than the 1st row). So almost 2/3's of the children born into a low income household will do better than their parents relative to their peers. That is nothing to sneeze at. For children born to parents in the 2nd quintile only 24% will be relatively worse off than their parents while 52% will be better off. Mobility is not dead in this country, despite what people claim.

In fact, this table does not tell the whole story. This table tells us nothing about the actual change in dollars earned by children compared to their parents. It only tells us how the children are doing relative to their peers vs. how their parents were doing relative to their peers. In the meantime, real incomes, the thing that actually affects living standards, could be going up across the board. And it turns out they are. From the NY Times article linked to above:

"Absolute mobility has continued to improve in recent decades because incomes have risen; median family income is about 12 percent higher today than in 1980, adjusted for inflation. As a result, most adults today have more income at their disposal than their parents did at the same age."

So from a real income standpoint, and real income is the only thing that measures your ability to buy goods and services, most people are doing better than their parents. But you don't need statistics to see that. Just look around. Life is full of fantastic goods and services that didn't even exist 20 years ago. Smart phones, flat screen TV's, tablet computers, zip car, apartment sharing services, Chipotle, blue tooth, etc. Navigation systems are practically standard in cars today; how much time has society gained from rarely getting lost anymore? Real income is based on GDP which fails to measure home production, black market production, the increased quality of goods/services, and how much we value leisure. Real living standards, which include the stuff GDP leaves out, have increased even more than what is captured in the real income measure.

Focusing on what quintile people are in at a given point in time is a crude and I would argue misleading measure of progress. It ignores what really matters and fosters a "keeping up with the Jones'" mentality. There is no good reason for focusing on where people are relative to others and largely ignoring the overall economic gains that are all around us. Economic growth is the key to prosperity, not economic mobility in the sense that this new paper describes it. A rising tide lifts all boats; that's a fact. Our economic policies should focus on creating a rising tide, not removing water from the top quintile pool and putting it into the bottom quintile pool.

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