Does Rising Income Inequality Justify Class Warfare?

Meanwhile U.S. intergenerational income mobility has not slowed.


Class Warfare

In his State of the Union message last January, President Barack Obama declared, "Inequality has deepened. Upward mobility has stalled." The president believes that rising income inequality in the United States has slowed intergenerational income mobility, the movement of individuals and families up or down the income ladder over time. The implication is that not only are the rich and their children getting richer, the poor and their children are staying poorer. But the evidence does not support the president's assertion.

The president's view was most likely informed by the analyses of his former chairman of the Council of Economic Advisors, labor economist Alan Krueger. In January, 2012, Krueger gave a talk at the Center for American Progress in which he asserted that "as inequality has increased, evidence suggests that year-to-year or generation-to-generation economic mobility has decreased."

Krueger began his analysis by comparing the industrial countries' Gini coefficients that measure income inequality with each country's degree of income mobility. A Gini coefficient of 0 indicates that family incomes are perfectly equal and a coefficient of 1 would mean that one family has all of the income. Krueger reported that countries with higher Gini coefficients tended to have lower income mobility. From this observation, Krueger concluded, "If the cross-sectional relationship [between higher Gini coefficients and lower income mobility] holds in the future, we would expect to see a rise in the persistence in income across generations in the U.S. as well." By persistence in income, Krueger means that children are likely to earn about what their parents earned.  If there is no intergenerational mobility at all, i.e., all rich children would become rich adults and all poor children would grow up to be poor adults.   

Why might growing family income inequality diminish the ability of poor children to rise and rich children to fall through the income brackets? Krueger suggests that "families with higher incomes can pass on more advantages to their children through providing more educational opportunities, and the reward to education and skills has increased." As the rich get richer they can afford ever better schooling for the children, which then enables rich kids to even more consistently outcompete poor kids whose parents could not pay for math tutors and summer camps.

One common measure of income mobility is intergenerational income elasticity (IGE). Intergenerational income elasticity measures the influence of parents' incomes on their children's incomes. If every child ended up earning what his or her parents earned, then IGE would equal 1. If there was no relationship between family income and the adult incomes of children, the IGE would equal 0. Krueger observed that IGE in the U.S. is around 0.4. "This means that if someone's parents earned 50 percent more than the average, their child can be expected to earn 20 percent above the average in their generation," he added. Conversely, children of parents earning 50 percent below the average would be expected to earn 20 percent below the average when they become adults. A lower elasticity means a society with more mobility both up and down the income brackets.

Krueger further suggested that if income inequality continued to increase in the U.S., then intergenerational income elasticity would increase, i.e, the tendency for the rich to stay rich and the poor to stay poor would intensify. Krueger added, "We will not know for sure whether, and how much, income mobility across generations has been exacerbated by the rise in inequality in the U.S. until today's children have grown up." But Krueger doesn't want to wait to see if he is right about his extrapolations; he wants to wage a bit of class warfare now. "We can't go back to tax policies that didn't generate faster economic growth or jobs, but rather increased inequality," he asserted. "Instead of going backwards, we should adhere to principles like the Buffett Rule, which states that those making more than $1 million should not pay a lower share of their income in taxes than middle class families. We should also end unnecessary tax cuts for the wealthy, and return the estate tax to what it was in 2009."

But do we really have to wait to see if increasing income inequality reduces income mobility in the U.S.?  After all, U.S. income inequality has definitely been increasing over the past four decades. The U.S. Census Bureau reports that the pre-tax and pre-transfer Gini coefficient for U.S. families has increased from 0.353 in 1970 to 0.448 in 2013. If Krueger is right, then this increase in income inequality should have already resulted in a decline in U.S. income mobility. Did it? No, says a new study (working paper available here) in the journal Social Forces by University of Michigan sociologist Deirdre Bloome.

Bloome traces the intergenerational income mobility of Americans using data from the Panel Study of Income Dynamics (PSID) which has followed the lives of 18,000 individuals from 5,000 families since 1968 and the National Longitudinal Survey of Youth 1979 (NSLY79) which is a nationally representative sample of 12,686 young men and women who were 14-22 years old when they were first surveyed in 1979.  She also compares income mobility trends between states that have greater income inequality and those with less inequality. Noting that U.S. family income inequality increased dramatically since 1968, Bloome argues that "if inequality hampered mobility, we would expect income elasticities to increase across cohorts."

Using PSID data she traces the income trajectories of 20 cohorts of children born between 1954 and 1974 to the incomes they are earning at age 30. She found "no systematic variation in cohorts growing up through a period of rising inequality at the national level." She further reports, "When incorporating information on state inequality levels and trends, I still find no strong link between inequality and mobility." Eyeballing her data, it appears that individuals born in the 1950s experienced a bit less income mobility than those born later.

Bloome also reports that the inequality that children experienced in their states both as primary school students and as teenagers did not predict their income mobility. "Suprisingly, NLSY79 results suggest that, if anything, children exposed to higher income inequality in their states at birth experienced significantly more intergenerational mobility than children from lower-inequality states," Bloome notes. She cites other studies that found when comparing U.S. states that there is no significant relationship between lower teacher-student ratios and higher per pupil spending and income mobility.

While rising income inequality may not be slowing intergenerational income mobility, it has not bolstered mobility either. Bloome observes that "as the distance between rungs on the economic ladder grows, movement between rungs may not get harder, but it also does not get easier. Thus, the economic consequences of growing up rich or poor have risen, simply because the distance between rich and poor has increased." In any case, Bloome concludes, "Currently available data provide reason to question the rhetoric linking US income inequality and income mobility."

That is to say, President Obama and Krueger are wrong: Rising income inequality does not lead to decreased income mobility. They will have to concoct another justification for waging class warfare.