Archive for the 'Mobility' Category

Beyond the ‘fiscal cliff,’ America’s kids need more – not less – government spending

December 11, 2012

Early education would help.

America’s opportunity gap

November 1, 2012

This article appears in the November-December 2012 issue of Foreign Affairs magazine. Reprinted here by permission.

It’s Hard to Make It in America: How the United States Stopped Being the Land of Opportunity

by Lane Kenworthy

For all the differences between Democrats and Republicans that were laid bare during the 2012 U.S. presidential campaign, the parties’ standard-bearers, Barack Obama and Mitt Romney, do seem to have agreed on one thing: the importance of equal opportunity. In remarks in Chicago in August, Obama called for an “America where no matter who you are, no matter what you look like, no matter where you come from, no matter what your last name is, no matter who you love, you can make it here if you try.” The same month, he urged the Supreme Court to uphold affirmative action in public universities, putting his weight behind what has been a mainstay of U.S. equal opportunity legislation since the 1960s. Days later, the Republican vice presidential nominee, Paul Ryan, echoed Obama’s sentiment, saying, “We promise equal opportunity, not equal outcomes.” Romney, too, argued that whereas Obama “wants to turn America into a European-style entitlement society,” his administration would “ensure that we remain a free and prosperous land of opportunity.”

It is no accident that both campaigns chose to emphasize equality of opportunity. It has long been at the center of the American ethos. And one of the United States’ major successes in the last half century has been its progress toward ensuring that its citizens get roughly the same basic chances in life, regardless of gender or race. Today, women are more likely to graduate from college than men and are catching up in employment and earnings, too. The gap between whites and nonwhites has narrowed as well, albeit less dramatically.

Yet this achievement has been double edged. As gender and race have become less significant barriers to advancement, family background, an obstacle considered more relevant in earlier eras, has reemerged. Today, people who were born worse off tend to have fewer opportunities in life.

Of course, there is no perfect way to measure opportunities. The best method devised thus far is to look at outcomes: college completion, gainful employment, and sufficient income. If the average outcome for one group far outpaces that for another, social scientists conclude that the first group had greater opportunities. Comparing outcomes is not foolproof, as differences in outcomes can result from differences in effort. But a person’s effort is itself shaped by the circumstances he or she encounters.

To assess equality of opportunity among people from different family backgrounds, the measure of outcome that social scientists look at is relative intergenerational mobility — a person’s position on the income ladder relative to his or her parents’ position. Social scientists don’t have as much information as they would like about the extent of relative intergenerational mobility, its movement over time, and its causes. The data requirements are stiff; analysts need a survey that collects information about citizens’ incomes and other aspects of their life circumstances, then does the same for their children, and for their children’s children, and so on. The best assessment of this type in the United States, the Panel Study of Income Dynamics, has been around only since the late 1960s.

Even so, there is general consensus among social scientists on a few basic points. Continue reading

Inequality, mobility, opportunity

January 31, 2012

Alan Krueger, Chair of President Obama’s Council of Economic Advisers, gave a talk a few weeks ago on inequality. Krueger described the sharp increase in income inequality in the United States since the 1970s and discussed some undesirable consequences it may have. One of those consequences is reduced intergenerational mobility (relative intergenerational income mobility, to be more precise). Krueger provided a graph showing that nations with greater income inequality tend to have a stronger correlation between the earnings of parents and their children (less mobility). This has sparked a wide-ranging discussion about the link between income inequality and mobility (Winship, Corak, Winship, Corak, Cowen, Yglesias, Wolfers, Smith, Winship, Quiggin, Cowen, Quiggin, Bernstein).

Here’s what the pattern looks like according to Miles Corak, the source of Krueger’s data (enlarged version here). The vertical axis in the chart is immobility; lower means more mobility. The horizontal axis is income inequality a few decades earlier.

Nations with lower income inequality tend to have more intergenerational mobility, and the association is quite strong. There are concerns about the data. But suppose the data are accurate, and suitable for testing this link. What does the association depicted in this chart tell us about the magnitude of inequality’s impact? How much would reducing income inequality in the United States help?

For most, the aim isn’t high intergenerational mobility per se; it’s low inequality of opportunity. Mobility serves as an indicator (not perfect, but not bad) of equality of opportunity.

Money ought to be good for children’s opportunity. Kids growing up in households with higher incomes are more likely to have good health care, low stress, learning-centered preschools, good elementary and secondary schools, extracurricular activities that promote cognitive skills and earnings-enhancing noncognitive traits, and access to a strong university. It would be surprising, therefore, if inequality of parents’ incomes did not contribute to inequality of opportunity among their children.

But how large is the effect? After all, money isn’t the only thing that matters; a good bit of our abilities and motivations when we reach adulthood stem from nonmonetary influences such as genetics, in-utero developments, our parents’ habits and behaviors, and peers. Also, there are diminishing returns to money; beyond a certain point, more parental income probably helps only a little, if at all.

Yet the graph suggests a large impact. Apart from data concerns, is there any reason to question this? I think so. First, let’s set aside the low- and middle-income countries (Argentina, Brazil, Chile, China, Pakistan, Peru, Singapore). Mobility processes in these countries may or may not be comparable to those in the rich nations. Next, notice that inhabiting the lower-left corner of the chart are the four Nordic nations: Denmark, Finland, Norway, and Sweden. These countries have been providing affordable high-quality early education to a substantial portion of children age 1 to 5 for roughly a generation. James Heckman and Gøsta Esping-Andersen, among others, have argued that early education is perhaps the single most valuable thing a society can do to equalize opportunity. These countries also feature late tracking in elementary and secondary schools and heavy subsidies to ensure college is affordable for all. These public services, rather than low income inequality, might be the chief reason the Nordic countries have such high intergenerational mobility.

What would that imply for the cross-country association between income inequality and intergenerational mobility? As the following chart shows, if we leave out the Nordic nations the association is still there, but the countries are widely dispersed around the line, suggesting weaker grounds for confidence that the association is a strong one. (For the statistically inclined, the r-squared is .47 with the Nordics included and .16 without them.)

Is it possible, then, for a country to have high income inequality but also low inequality of opportunity? John Quiggin is skeptical. He suggests the UK experience has debunked this “third way” notion. I’m not so sure. Imagine a rich nation with America’s income inequality and Nordic public services: affordable high-quality early education, K-12 schooling with late tracking and equal funding, and widespread access to good-quality universities. And perhaps also comprehensive prenatal care. Would its opportunity (mobility) structure look more like America’s or more like Sweden’s?

But, some will respond, you can’t get those services if income inequality is high. The rich will block the heavy taxation needed to fund them. Maybe. But income inequality has been rising in Sweden. In fact, in the late 1990s and mid 2000s the top 1%’s share of income (including capital gains) in Sweden was about the same as in the 1970s United States (see figure 7 in this paper by Atkinson, Piketty, and Saez). So far this hasn’t undermined Swedish taxation, though it’s probably too soon to draw any firm conclusions.

Suppose income inequality continues to rise in Sweden but its public services hold up. Will Sweden’s intergenerational mobility a few decades from now look like ours does today? I’d predict no. I suspect opportunity-enhancing programs can overcome a good bit of the harm done by income inequality.

That’s not to say we shouldn’t also try to reduce income inequality. I think we should. The point is that if we want to reduce inequality of opportunity, reducing income inequality isn’t the only way, and perhaps not even the best way, to do it.

How rich countries lift up the poor

December 11, 2011

That’s the title of a short article of mine in the current Pathways magazine. Pathways ought to be on the reading list of anyone interested in living standards, poverty, inequality, and mobility. And it’s free.

A few other worthwhile recent reads on these topics:

Jared Bernstein’s blog

CBO, Trends in the distribution of household income

Center on Budget and Policy Priorities, A guide to statistics on historical trends in income inequality

OECD, Divided we stand: why inequality keeps rising

Scott Winship, Mobility impaired

Miles Corak, The decline of the American dream

Reihan Salam, Understanding America’s income mobility problem

Mike Brewer and Liam Wren-Lewis, Why did Britain’s households get richer?

James Plunkett, The potential for female employment to raise living standards in low to middle income Britain

Inequality and mobility at the top

March 8, 2011

Income inequality in America has soared over the past generation. But some see little cause for concern. One reason is that our inequality statistics — Gini coefficient, share of income going to the top 1%, and so on — are calculated based on households’ income in a single year. This misses the fact that people move up and down over time. Our incomes in any given year may be more dispersed now than several decades ago, but if many of us are switching places from year to year, why the fuss?

Two claims need to be distinguished here. One says there’s enough movement up and down in the income distribution over time (in technical lingo, relative intragenerational income mobility) that we needn’t worry about single-year inequality at all. It doesn’t matter whether inequality is high or low; it doesn’t matter whether it’s rising or falling. Single-year income inequality is simply irrelevant, on this view, because there is a lot of mobility. Since “a lot” and “enough” are in the eye of the beholder, evidence can’t confirm or refute this claim.

A second claim says that the rise in income inequality has been offset by a rise in mobility. Here we can look to the data for a verdict. Has income mobility increased?

For the bulk of the population — everyone but the richest — we have multiple sources of mobility data. One is the Panel Study of Income Dynamics (PSID); another is earnings records from the Social Security Administration. Both indicate that there has been no increase in income mobility in recent decades (see also here).

What about at the top? A good bit of the past generation’s rise in inequality consists of growing separation between the rich, especially the top 1%, and the rest of America. But has this been accompanied by increased churn among those at the top? In 2007 the Treasury Department released a study based on analysis of tax records. It included data on movement out of the top 1% over two nine-year periods: 1987-1996 and 1996-2005.

Single-year income inequality rose sharply during these two periods. The share of income going to the top 1% of households jumped from 11% in 1987 to 14% in 1996 to 18% in 2005. The Treasury study found that mobility, by contrast, was essentially unchanged.

The large increase in income inequality has not been offset by a rise in mobility at the top.

Rising Inequality Hinders Upward Mobility

July 27, 2008

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).

Is the U.S. a High-Inequality Country if Mobility Is Taken into Account?

July 20, 2008

Here is the conventional wisdom about income inequality in the United States compared to other rich countries:

The U.S. is the most unequal.

However, these data are based on households’ income in a single year. Averaging income over multiple years tends to reduce measured inequality. This is because of mobility; some people move up and/or down in the distribution over time. If the United States has more such mobility (relative intragenerational mobility) than other countries, the conventional single-year measure shown in this chart may overstate U.S. inequality relative to other countries.

Does the U.S. improve if we measure inequality using income averaged over a longer period of time?

Markus Gangl (University of Wisconsin), Joakim Palme (Institute for Futures Studies in Stockholm), and I have a paper that averages income over 18 years in Germany, Sweden, and the United States. Eighteen years isn’t a full work life, but it’s the best we can do with existing panel data sets. The following chart shows the findings. As the number of years over which income is averaged increases, the amount of measured inequality decreases. But it decreases at the same rate in each of the three countries. America’s position does not improve.

The full paper is here.

__________

* These numbers are my calculations from the Luxembourg Income Study database. To make them as comparable as possible to the data in the second chart here, they’re for households with a head age 25 to 59. Income is with government transfers included and taxes subtracted.

Rising Inequality Has Not Been Offset by Mobility

July 13, 2008

Income inequality in the United States is typically measured with data from a survey that asks around 50,000 households what their income was in the previous year. According to these data, inequality has increased sharply since the 1970s (see the second chart here).

But this survey includes different households each year. It therefore misses any mobility — movement of households up and down in the distribution over time — that occurs. If mobility has increased, the conclusion that there is more inequality might be misleading. Even if the gap between the top and bottom increases over time, if households change places with greater frequency, the inequality of their average income — “true” inequality — may have stayed more or less the same. Rising mobility can offset rising single-point-in-time inequality.

The type of mobility at issue here is relative intragenerational income mobility. Has it increased in recent decades?

To find out, we need panel data — data for the same households (or individuals) over a number of years. There are three main sources of such data. Each suggests the same conclusion: relative intragenerational income mobility in the United States has not increased.

A standard way to assess mobility is to divide households into quintiles (five equally-sized groups) based on their income at the starting time point. Then we look at the share of each of these groups that moves up (or down) in the distribution between time 1 and time 2. More movement indicates more mobility.

One source of data is the Panel Study of Income Dynamics (PSID), a panel survey of nearly 8,000 households begun in 1969. The following chart shows the share in each of the bottom four quintiles that moved up over three successive decades beginning in 1969. (There’s no significance to the choice to show movement up; the graph could just as well show the share moving down. The point is whether the shares increase over time.) The shares were calculated by Katharine Bradbury and Jane Katz. (See also this earlier analysis by Peter Gottschalk and Sheldon Danziger.) There is no indication of an increase in mobility from the 1970s to the 1980s to the 1990s.

A second data source is income tax returns, which are analyzed in a U.S. Treasury Department report (see table A-5). The data are from a sample of returns filed by taxpayers age 25 or older in the initial year. Here too the period examined is roughly a decade. In this study there are two periods: 1987-96 and 1996-2005. The next chart shows the shares moving up in each of the two periods. Again the data do not indicate an increase in mobility.

A third data source is Social Security earnings records. These records are available since 1937. Wojciech Kopczuk, Emmanuel Saez, and Jae Song have used them to study changes in earnings mobility. They conclude that “short-term and long-term mobility among all workers has been quite stable since 1951.”

The fact that all three data sources suggest the same conclusion doesn’t necessarily mean it’s correct, but it offers good reason to favor that conclusion. Rising income and earnings inequality in the United States does not appear to have been offset by increased mobility.

Can Mobility Offset an Increase in Inequality?

July 6, 2008

Income inequality in the United States has increased since the 1970s. Has that increase been offset by mobility?

It could be. Half a century ago Milton Friedman (in Capitalism and Freedom) suggested sensibly that a proper understanding of inequality requires taking mobility into account:

“A major problem in interpreting evidence on the distribution of income is the need to distinguish two basically different kinds of inequality: temporary, short-run differences in income, and differences in long-run income status. Consider two societies that have the same distribution of annual income. In one there is great mobility and change so that the position of particular families in the income hierarchy varies widely from year to year. In the other, there is great rigidity so that each family stays in the same position year after year. Clearly, in any meaningful sense, the second would be the more unequal society.”

Some find the following metaphor (originally from Joseph Schumpeter) helpful. Think of an apartment building with units of varying size and quality. It has a few penthouse suites that are large and feature lots of amenities, a multitude of modest two-bedroom units, and a number of barebones single-room units. This is inequality. Suppose, however, that the residents regularly switch units. Most people live much of the time in the low- or mid-level units, but they go back and forth between these, and many occasionally get to live in a penthouse suite. This is mobility. (Specifically, it’s relative intragenerational mobility.) This mobility reduces the amount of inequality — true, genuine, long-run inequality — among the residents.

Income mobility does reduce income inequality. When inequality increases, however, mobility has to also increase if it is to offset that rise in inequality.

This is a simple, perhaps obvious point. But it’s an important one. The rest of this post illustrates it with the aid of some graphs.

To begin, imagine 100 households at two points in time. Suppose, for simplicity, that there are five different incomes in the society at time 1 and one fifth of the households have each of these incomes. (It’s not important for the illustration, but the incomes I use in these charts are the average after-tax incomes of the five quintiles of the U.S. income distribution in 1979 and 2005. The data are here.)

In one scenario, shown in the first chart, no household’s income changes from time 1 to time 2. Each household’s average income is therefore the same as its income at each point in time. “True” inequality — inequality when income is averaged over time 1 and time 2 — is the same as single-point-in-time inequality.

In another scenario, depicted in the second chart, the income levels stay the same at the second point in time. The level of single-point-in-time inequality is thus the same at time 2 as at time 1. But some of the households switch places. Some that start with the lowest income move up to the lower-middle, others to the middle, and a few to the top two incomes. Similarly, some that begin at the top stay there, while others move down.

For each household, the plus (+) and hollow circle (o) indicate its income at time 1 and time 2, respectively, while the solid marker (♦) is its average income. The pattern of the solid markers makes it clear that inequality of average income is lower in this scenario than in the first chart; lots of households’ average income is in between the five levels of the first chart. The Gini coefficient confirms this. The Gini is a standard measure of inequality; it ranges from zero to one, with larger numbers indicating greater inequality. The Gini for average income in the mobility scenario is .286 (second chart), compared to .320 in the no-mobility scenario (first chart).

Now consider what happens when single-point-in-time inequality increases from time 1 to time 2, as has happened in the United States since the 1970s.

The third chart shows a society in which inequality increases from time 1 to time 2 and there is no relative mobility. With the rise in single-point-in-time inequality, inequality of average income is greater than in the first chart. The Gini is .373 in the third chart, compared to .320 in the first chart.

Can mobility offset this rise in inequality? The fourth (and last) chart shows a scenario in which single-point-in-time inequality increases exactly as it did in the third chart but there is relative mobility. The amount of mobility is the same as in the second chart; the same number of households move up or down among the quintiles and by the same (relative) amount.

Mobility does reduce “true” inequality compared to the no-mobility scenario depicted in the third chart. But the Gini coefficient for the fourth chart is much larger than for the second chart. These two scenarios have the same amount of relative mobility. But with single-point-in-time inequality having risen in the fourth scenario between time 1 and time 2, the same degree of relative mobility does not produce the same amount of “true” inequality (inequality of average income).

The bottom line: Income mobility helps to reduce income inequality. But if single-point-in-time inequality rises, mobility can only offset that rise if it too increases.

Single-point-in-time income inequality has risen sharply in the United States since the 1970s. Has mobility increased too? Stay tuned.

Types of Mobility

July 4, 2008

Has income inequality increased? Is inequality greater in the United States than in other affluent countries? Answering these questions requires taking mobility into account. Over the next few weeks I’ll put up several posts on this.

When social scientists or policy makers talk about mobility, they often mean different things. Here are a few key distinctions:

1. Income or occupation?

Traditionally, sociologists have tended to examine occupational mobility while economists have been more interested in mobility of earnings and income. In recent years this distinction has faded somewhat, with scholars in both disciplines concentrating mainly on income and earnings.

2. Intergenerational or intragenerational?

Intergenerational mobility refers to movement between generations. The question is typically something like: How does a person’s income compare to that of her/his parents? Intragenerational mobility, in contrast, refers to movement up or down within generations — over the life course. Research on intragenerational mobility examines how people fare during their working career compared to how they were doing at, say, age 18 or 25 or 30.

3. Absolute or relative?

Absolute intragenerational mobility refers to changes in income compared to the income one started with. Suppose a person begins her working career with an income of $25,000. If a decade later her income is $30,000 (adjusting for inflation), she has experienced upward absolute intragenerational income mobility.

Relative intragenerational mobility refers to the degree to which individuals move up or down compared to others in their cohort. Suppose a person’s income increases from $25,000 at the start of his working career to $30,000 a decade later, but most people who began their work life around the same time experience a larger increase. The person has experienced upward absolute mobility but downward relative mobility.

For intergenerational mobility, the distinction between absolute and relative is analogous. If a person’s inflation-adjusted income is $30,000 and her parents’ was $25,000 at a comparable point in life, she has experienced upward absolute intergenerational income mobility. Because of economic growth, we expect that such upward mobility will be the norm. The interesting question concerns the degree of upward absolute mobility and how it changes over time.

Relative intergenerational mobility depends on one’s place in the distribution. If a person’s income puts him at the 75th percentile of the distribution and his parents were at the 50th at a comparable point in their lives, he has experienced upward relative intergenerational mobility.

Relative mobility is a zero-sum phenomenon. If one person moves up in relative terms, another by definition must have moved down. Absolute mobility is not zero-sum. Both are of interest.

Promoting Mobility

February 24, 2008

Opportunity for upward mobility is key to the American dream. What does our government do to assist it?

A recent report (pdf) by the Economic Mobility Project attempts to answer this question. The report groups federal government spending into three broad categories: (1) expenditures aimed, at least in part, at promoting mobility; (2) expenditures on income maintenance, such as social security, health care, welfare, and housing support; (3) expenditures on public goods such as defense, environment, and transportation. As of 2006 about one fifth of federal spending — $740 billion, or 6% of GDP — was in the mobility-promotion category. Most of this takes the form of tax subsidies rather than direct expenditures.

The most striking of the report’s findings is how little of the federal government’s mobility expenditure goes to those with low incomes. This chart shows the estimated amounts that go to lower-income households (bottom two quintiles of the income distribution) versus middle-and-upper-income households (top three quintiles). In total, only about a quarter goes to the former group.

This seemingly-perverse distribution is not surprising. Spending decisions aren’t made by an omniscient policy czar seeking to maximize opportunity for upward mobility. They are a product of a political system characterized by clashing interests, ideologies, motives, and means.

Imagine, though, that we could move money around within the broad category of mobility-promoting expenditures — not increase spending, not take money from other areas of the federal budget, just shift funds from one type of (ostensibly) mobility-promoting program to another. What would help the most?

Let’s start with where to take the money from. By far the largest amount, about $240 billion, currently goes to employer-related work subsidies for pensions, health insurance, life insurance, and other fringe benefits. Surely some of this money could be better spent elsewhere, but I’m not sure it would be much.

A better target would be the $100 billion that goes to saving and investment incentives. The Economic Mobility Project report points out that almost all of this goes to households in the top fifth of the income distribution, and there is little evidence that it boosts saving.

I would favor also taking a large chunk from the roughly $160 billion currently spent on homeownership subsidies (after the current housing downturn abates). There is little indication that reducing or even fully removing the tax deduction for mortgage interest and property tax payments would lower the rate of homeownership in the United States. As the report notes, more than 80% of this tax break goes to the top quintile of households. And homeownership rates in several other rich countries are similar to ours despite the absence of a homeownership subsidy. Furthermore, homeownership’s contribution to upward mobility is ambiguous. On the one hand, it can help people accumulate assets. On the other hand, for those with low income it can be a risky and ineffective way of doing so, as this piece (written long before the recent downturn) rightly emphasizes. Moreover, homeownership discourages geographic mobility; it’s easier to pick up and move in search of better job opportunity if you don’t have to sell your home.

What would be more effective at fostering mobility?

1. Universal preschool for 4-year-olds and subsidized high-quality care for under-4s. Evidence is mounting that much of the inequality in cognitive skills and noncognitive abilities that exists when Americans finish formal schooling is there when they enter kindergarten (see here and here). The better we do at stimulating and supporting development in the early years, the greater the opportunity for mobility later on among those in the lower portion of the income and wealth distributions.

2. Improve K-12 public schooling by increasing teacher pay. How to improve elementary and secondary schools is one of the policy issues on which there is least agreement among analysts. My view is that the key deficit is in teacher pay. Higher pay will attract better teachers and help keep them in teaching for longer. In his book The Two-Percent Solution, Matt Miller offers useful suggestions for how to make this politically feasible.

3. Encourage lifelong learning. Just 28% of 25- to 29-year-olds have a four-year college degree. That percentage has increased over time, but at a relatively slow pace; it was 8% in 1950 and 19% in 1973. We need to accept that for the foreseeable future, a very large share of American adults will continue to have less than a college degree. They could benefit from assistance with learning new skills or upgrading existing ones. The Lifetime Learning Credit, enacted by the Clinton administration, gives Americans a 20% credit on learning and training expenditures up to $10,000 per year. I like Gene Sperling’s proposal (in his book The Pro-Growth Progressive) for a more generous credit of 50% of qualified education and training expenses up to $15,000 per decade.

4. Make college more affordable. The earnings of those with a four-year college degree tend to be substantially higher than of those without one, and a college education sharply increases the odds of economic success for persons from disadvantaged backgrounds (see here). College should be a financially viable option for all Americans.

Why isn’t this at the top of my list? While affordability certainly matters, it appears that the main obstacle to increasing the share of Americans with a college degree is the low rate of high school completion. James Heckman and Paul LaFontaine estimate the current rate of high school completion to be around 75% — considerably lower than the official figure and down by about 5 percentage points from a generation ago. And this is among non-immigrants. Drawing on their own research and that of others, Heckman and LaFontaine suggest that “The slowdown in the high school graduation rate accounts for a substantial portion of the recent slowdown in the growth of college educated workers in the U.S. workforce. This slowdown is not due to a decline in rates of college attendance among those who graduate from high school.”

5. Universal health care. The principal rationale for extending health insurance to all Americans is fairness. But doing so would aid economic mobility too — for some by eliminating the fear of losing Medicaid if earnings are too high and for others by removing the worry about losing health insurance or facing non-covered preexisting conditions when switching employers (see this, for example).

6. Expand the Earned Income Tax Credit. The Economic Mobility Project report rightly includes the EITC in the mobility-promoting category of government expenditures. By subsidizing earnings, the EITC increases the incentive for employment among those likely to earn relatively low wages. It is a very good policy. It would be even better if it were somewhat more generous, particularly for adults with no children.

7. Wage insurance. Proposals for wage insurance (such as this and this) have in mind the same type of incentive as that created by the EITC. Imagine a program that provides a subsidy of 50% of the drop in hourly wage experienced by a person who loses her or his job and then takes a new one that pays less. This would increase the financial incentive to return to work even when, as is often the case, doing so means accepting a pay cut. It also would reduce insecurity and stress among those who fear their current job is at risk.

8. Boost income maintenance. The Mobility Project report does not count most income maintenance programs as part of the mobility budget. This is because those programs “are not aimed at increasing the private ownership of assets, the acquisition of additional ability or education, or additional work or saving.” But researchers have identified low income during childhood as an impediment to cognitive development and later economic opportunity (see here, here, and here). Thus, even if income support programs such as TANF, Food Stamps, and unemployment insurance are not mobility-enhancing for their adult recipients, they may improve opportunity for upward mobility among their children.

With the imposition of time limits on TANF receipt beginning in 1997, the danger of long-term benefit dependence has been substantially lessened. Thus, TANF benefit levels could be increased with little or no adverse employment effect. The same is true of unemployment benefits, which are limited to 26 weeks.

9. Job placement assistance and public employment as a last resort. The mid-1990s welfare reform signified a policy choice to emphasize employment as the chief route out of poverty. Yet compared to countries such as Denmark and Sweden, whose policies also express a societal preference for employment, we do relatively little to help people find jobs. Public job placement programs have tended to be underfunded and not well coordinated with employers in local labor markets. Placement assistance is no panacea, but we could do better. Beyond this, anyone jobless for more than a year should be offered a temporary “public works” position assisting with neighborhood beautification or performing other socially useful tasks. To encourage recipients to move on to private-sector or regular public-sector employment, the wage level could be set at or just below the minimum wage. Neither of these programs would cost a lot of money. Both would enhance upward mobility among the most needy.

The Left, the Right, and Income Growth

February 17, 2008

Which political party is better at improving living standards?

A commonplace view is that Democrats favor policies that boost the well-being of the poor while Republicans’ policy preferences are more conducive to economic growth and rising incomes. Debates about high vs. low taxes, generous vs. stingy social programs, and heavy vs. light regulation of business often are framed in terms of a tradeoff between compassion and growth. Should government do more to assist the poor? Or should it intervene less, thereby helping the economy to grow more rapidly?

For the most part this debate is a battle of rhetoric and assumptions. Many on the right assume that lower taxes, less regulation, and less generous social policies must be good for economic growth. Some on the left accept this assumption but argue that growth will fail to trickle down to the poor. Others dispute the assumption.

Evidence can help. There is a great deal of it that is potentially relevant. Here is one piece. Using tax records and surveys, the Congressional Budget Office has compiled good data on household incomes from 1979 through 2005 (here). The presidency was held by a Republican from 1981 to 1992, by a Democrat from 1993 to 2000, and by a Republican since 2000. The following chart shows average rates of income growth (adjusted for inflation and with taxes subtracted) for each of the five quintiles (fifths) of households during these three periods.

Income growth for each of these groups, from the poorest to the middle to the richest, has been faster during Democratic administrations than Republican ones.

Does this prove that Democrats are more effective than Republicans at promoting income growth? No. A government’s ability to affect income growth is limited, Democrats controlled one or both houses of Congress during Republican presidencies and vice-versa, and each of these periods has idiosyncratic features (see here, here, and here, for instance). Still, the data offer reason for skepticism about the notion that policies favored by the right are better at raising living standards.

Nor is this peculiar to the American context. Here is a counterpart chart showing income growth in the United Kingdom over the same period. The Conservative party held the government from 1979 to 1997; the Labour party has held it since. The data are from the Institute for Fiscal Studies (here).

Incomes of the richest fifth increased slightly more rapidly during the years of Conservative government, but most British households have fared as well or better under (New) Labour.

Size of the Pie, Distribution of the Pie

January 22, 2008

“Today’s problems have less to do with the size of the economic pie than the way it is divided.” This, according to a New York Times article, is what Hillary Clinton’s economic advisers believe. I’m certain John Edwards’ economic team would agree with the statement, and I suspect Barack Obama’s would too.

Is this a sensible view? That’s a large question, but here is one way to think about it. The solid lines in the following chart show trends since World War II in inflation-adjusted incomes of families at the 60th, 40th, and 20th percentiles of the income distribution. The data are from the Census Bureau (here).

From 1947 to 1973, incomes at each of these three levels grew at an annual rate of about 2.7%. That was approximately the same as — actually slightly faster than — the rate of growth of the economy as a whole; GDP per capita during that period grew at a rate of 2.5% per year.

Since 1973 incomes in the middle and lower portion of the distribution have increased much less rapidly: 0.8% per year at the 60th percentile, 0.5% per year at the 40th, and just 0.3% per year at the 20th. Is this because the economy as a whole has failed to grow? No. The annual growth rate of per capita GDP since 1973 has been 1.9%. Instead, it’s because most of that economic growth has gone to those at the top of the distribution.

The dashed lines in the chart show what incomes at the 60th, 40th, and 20th percentiles would have looked like had they grown at the same 1.9%-per-year pace as the economy since 1973. The difference is striking. Incomes for a very large swath of the American population would be much higher — $15,000 to $30,000 higher — if economic growth since the mid-1970s had been distributed more equally.

Some will respond that the heavily skewed distribution of post-1973 economic growth contributed to that growth. In other words, the pie would now be smaller if those below the top had gotten more of it during the past generation. If you believe that, see this post.

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