Politics

Some Cities with High Income Inequality Also See High Income Mobility

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The Brookings Institute is out with a new report identifying America's most unequal cities. Interestingly, many of these happen to be the same cities Harvard economists identified as having the highest income mobility. Surprised?

For instance, among Brooking's top ten unequal cities, half of them were also on Harvard's list of top 10 cities for highest income mobility: San Francisco, Washington DC, New York, Los Angeles, and Boston. [1]

This raises the question for whether income inequality signals something completely and unequivocally nefarious is afoot. Without question there are unfair and unjust practices artificially inflating income inequality that we must address (crony capitalism, racism, excessive regulation, among others). However, these data also prompt us to consider if the drivers of income mobility may also contribute to income inequality.

Perhaps more incredible is that despite rising income inequality in the United States, income mobility has remained constant since the post-war era (read more here and here). What this means is that despite the rungs on the economic ladder moving further apart, people are still grasping the next (even higher) rung at the same rate as before. This means higher lifetime incomes; this means a higher standard of living.

Credit: Keppler, Joseph Ferdinand, artist.'"Mark Twain," America's best humorist.' Keppler & Schwarzmann, 1885. Prints and Photographs Division, Library of Congress.

What might surprise some is that during the 19th century's so-called Gilded Age, the era of robber barons, economic mobility was even higher than it is today. Economist Joseph Ferrie has found that in the 19th century "the United States was in fact more mobile both socially and physically than other places, and this remarkable fluidly persisted at least through the 1920s." While correlation is not causation, it is remarkable that income mobility declined after the New Deal was implemented and during the post-war boom. Some point to the 1950s-1960s as exemplary because the bottom quintile's income grew at 2.5% a year; however, if Ferrie's analysis is correct then the rate of economic mobility for individuals declined also during this time period. In other words, as a group the lower income quintile's income grew, but the individual people in that group were less likely to break out of that group.

These data suggest that economic mobility is often a more important consideration than income inequality. As it turns out Paul Krugman partly agrees, and has said "there are some risks in drawing too many conclusions about the distribution of economic welfare from … the distribution of income." Moreover, he's pointed out that economic mobility can make the distribution of lifetime income more equal if it's high enough.

There are two ways one can look at income mobility. First is relative income mobility—how did an individual move relative to others along the income ladder. For instance, using that measure, the Treasury found that about 50-60% of Americans in the bottom quintile in 1995 had moved to a higher quintile by 2005. However, this measure assumes that if the tide lifts all boats an individual's "rank" along the income ladder stays the same.

Perhaps more illuminating is absolute income mobility, which measures how much each individual's wealth changed in real absolute dollars, regardless of everyone else. The Treasury found that households in the bottom quintile in 1995 experienced on average a 91% increase in real income. Breaking these numbers down: half experienced a doubling of their actual real incomes, another 15% experienced a 50-100% increase, and another 17% had up to a 50% increase, while 18 percent had their incomes go down. (I've pasted the charts below)

The persistent and often myopic focus on income inequality instead of income mobility has, perhaps unintentionally, misled people into believing that regular Americans' wealth has not improved since the "good years" of the 1950s-1970s. But for most Americans, this simply isn't true.

Relative Income Mobility

Absolute Income Mobility

[1] To be clear, not all highly mobile cities also had high income inequality and visa versa. For instance, Salt Lake City, Seattle, and San Diego were also in the top eight for income mobility but were not ranked as high on income inequality. Similarly, Atlanta and Chicago were also in the top most unequal cities and had some of the lowest rates of income mobility as well.