We expect that each generation of Americans will have higher incomes than preceding ones — that, in other words, there will be upward absolute intergenerational mobility. Data from a report by the Economic Mobility Project suggest some reason for concern.
The data are for various generations of families with a man in his thirties, thereby holding stage of the work career constant. The question is how much family income (adjusted for inflation) increases across generations, with a generation defined as 30 years. As the following chart shows, the median income of these families increased by about $12,000 between 1964 and 1994. Between 1974 and 2004, in contrast, it increased by only $4,500. The gain from generation to generation declined. And this is despite the fact that a growing share of these families have two earners rather than just one.
This could be because economic growth slowed. Or it could be due to rising inequality; a larger and larger share of the economy’s growth has gone to families at the high end of the distribution and less and less of it to the rest.
The second chart here suggests that rising inequality may have been more important than slow economic growth. From 1964 to 1994, the average annual growth rate of GDP per capita was 2.2% and the growth rate of median income for families with a man in his thirties was 0.9%. From 1974 to 2004, GDP per capita grew at an annual rate of 2.0% while median income for families with a man in his thirties grew at 0.3%. The drop in income growth across generations was much sharper than the drop in growth of the economy.
Upward mobility is a key element of the American ethos. Slowing inequality’s march would help (more here and here).
The average 35 year old today is has spent much more time in school than a 35 year old 40 years ago. High school completion has gone up from about 50% to about 90%. The percentage of people that spent some time in college went from about 20% to about 50% and the number of college grads went from below 10% to nearly 25%. I’m guessing this is an average of a half decade more schooling per person than 40 years ago.
This would mean the older generation had a third more experience in the labor market by the time they were in there 30’s and more experienced people get paid more.
Of course, this effect has to reverse some time latter in the career or it wouldn’t have been profitable for people to get so much education. This is the case. As that chart shows, folks later in the careers saw much higher increases in their incomes (about a 5x increase) than folks early in their careers (“only” a 4x increase).
Also, I think you should correct for the decreasing size of families over this period. I think you’ve explained this before, but why do you use family income and not individual incomes in your analysis?
The people in their thirties from 1964 to 1974 would often have been people with high school diplomas, but without college degrees. The value of college degrees rose way more during the period from 1974-2004 than from 1964-1994. Indeed, if you read Katz 2006, 2007 and 2008 papers on the college premium, it was falling until around 1980, while that for high school diplomas had actually stabilized after a sharp decline from 1920-1950.
So, the story here is the value of the education premium. It should also be pointed out that work experience has declined in value as well. I think Katz also has data on this. The declining premium to work experience and high school diplomas would easily bring down the median income for male heads in their thirties, given that the experience of such a worker would be at least 10-15 years or so, since they would not have gone to college, but graduated from high school at around 18.
Productivity probably is not a culprit here. Productivity was better from 1964 to 1974 than afterwards, but the same applies for 1994 to 2004, so it cancels out, I think.
Alex, the evidence from Katz et al is on total returns to education, not returns to education for those in their thirties.
It could be the case that early in careers the experience effect outweighs the human capital effect. In other words, people trade off income early in their careers for higher incomes later and more and more people are making this trade-off over time.
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I think we have to be careful here not to misidentify the problem. What we’re concerned about here is the standard of living of the median family, not inequality per se. The question is, what can be done to increase the incomes of the median family (and presumably others in the bottom half of the income distribution)? The answer may or may not have anything to do with explicity addressing inequality. After all, the median family can benefit just as much from rapid growth with high inequality as it can from slower growth with less inequality. Framing the issue in terms of inequality biases us towards a particular set of solutions that may not be the most effective in terms of real objective.
ben, I think you are right. IMO, framing solutions in terms of inequality isn’t the right approach. At best, it can serve as a rough indicator and prompt us to look further. My contention has always been that America’s tax system is ‘upside-down.’ For example, you have a mortgage deduction that can only be described as regressive. A person who has a $500,000 mortgage benefits far more than someone with a mere $125,000. We can also assume that the former has a much higher income than the latter in most cases, which only exacerbates that regressiveness.
Arguably, the tax savings of a mortgage deduction also entices people to use their (big as possible) homes as investments, which probably contributed heavily to the subprime crisis.
Instead, you should eliminate the mortgage interest deduction and replace it with a large general exclusion that everyone can claim, regardless of whether or not they own a house. It might encourage buying a slightly smaller house, but free-up funds for starting business, paying for education, etc. The new ‘stimulus payment’ plan is also a good step. You know, it’s Milton Friedman idea :-)
http://economistsview.typepad.com/economistsview/2006/11/milton_friedman_1.html
On the other side of the subprime mess is the bank bailout situation. Essentially you are ‘printing’ extra money to fund the bailout. There’s nothing that hurts inequality more than inflating the value of a low-earning person’s currency in order to, let’s see…. bail out banks, fund wars, channel profits to the war industry. Did I miss anything?
You might take note that the EU is following a rather strict form of Monetarism (formulated by none other than Milt himself :-) ) as specified in the Maastricht Treaty. Hence, inflation has been kept low in the EU. Perhaps the United States could follow suit and reform its own monetary system?
So you see, you don’t need a bunch of socialistic-style social progams to enhance equality or mobility. Even the EU is moving away from that direction and toward a more market oriented approach. But the EU isn’t doing it in the American neoliberal fashion- You Americans can do much better than what you’ve got, but don’t change the wonderful foundation. :-)
Libertarian Finlander,
Don’t you guys ( I assume your from Finland) have a national healthcare policy that covers all your citizens, no matter what their income level. Aren’t there some rather clear labor income equality laws in your country? Sounds like a heck-of-a-lot of “social programs.” I believe the success of the EU is due to the wedding of social programs WITH Friedman-style market economies. :)