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

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.

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

  1. Well, this work certainly seemly likely to be true (meaning likely to be able to be repeatedly observed, in the way a wave in a rocky stream is repeatedly observable).

    I’m trying to think through the implications of what you’ve found. The part of the paper I was really looking forward to doesn’t exist! “TO BE WRITTEN” — sorry Kenworthy, this paper isn’t really ready to be shown, even here to a friendly audience, unless your blog post were to have a fair warning about the paper being an early draft.

    Other questions. What if the Gini of a country itself varies widely over time? What of changes in various country’s Gini’s are correlated? Are there in theory more sophisticated ways of accounting for income changes over time than just *averageing* over longer time periods? If in theory there are, do the data exist that you would need to reach meaningful conclusions?

    What about different countries’ *wealth* distribution and wealth inequality, not income distribution and income inequality? Are there (as I assume) persistent differences among the various developed countries? Do you expect that two countries that have persistent differences in income inequality over time have proportionate differences in wealth inequality — or are there any factors that would make Country A be very unequal in income but not in wealth, while Country B is the opposite?

    I’m wondering if you or the other contributors to the paper would that this paper-to-be, and the other work out there on income inequality and income mobility, support the notion that it is harder for a typical poor household to go from being poor to not being poor [however you would define that transition] in the U.S. than it is in other countries. Did it used to be easier a generation ago? Any references you could post to relevant literature would be most appreciated.

  2. I can tell you from experience that both, relative equality and intergenerational income mobility, in those places, are high because there’s simply no potential to earn any serious money. It’s especially true for the Nordics–Finland, Sweden, Denmark and Norway. Traditionally, they’ve lived off the consumer power and innovation of countries (like the USA) with free-er market economies than their own; if not directly, then indirectly. Furthermore, each of them has relatively low-potential for wealth accumulation.

    http://www.finlandforthought.net/2006/12/07/finlands-net-worth-per-capita-lowest-in-old-eu-by-alot/

    That means, if you (a hypothetical poor person) have a good business idea, then forget about finding a venture capitalist within your own country to provide you with funding. That’s because nobody there has any money to invest. And even if you were to find a money-partner from the outside, then you’d probably need to locate your new business outside of the Nordics, due to the ridiculously high-taxes and burdensome regulations. Ever hear of Skype? Hell, even ABBA left lol

    In fact, most enterprises that exist in the Nordics are either large, long-established, foreign-owned corporations (stock share holders reside in places like Switzerland or USA) or are comprised of ‘old’ money gained during and shortly after WW2 (e.g. significant parts of Sweden’s industry benefited immensely by selling material to the Nazis, all while hiding behind Finland’s back from the Soviets), but before becoming high-tax welfare states. And of course, they all have forestry resources and Norway even has oil. But there’s no new wealth being accumulating there.

    The result is that these un-dynamic economies don’t support real economic opportunity which would naturally translate into higher paying jobs. Hence, relative equality and intergenerational mobility. It especially doesn’t translate into jobs for immigrants, a common problem for high-tax welfare states like Sweden, Denmark, France…

    Generally, the racial/ethnic condition and related unemployment situation starkly contrasts with that of countries with more liberal economies, like Germany, Switzerland and even the USA.

    You can think of those Nordic countries’ economies as ‘pies’ with limited amounts of pieces. If someone gets too big a piece, then everyone else’s pieces can only get smaller. But the pie never grows. So their respective (incidentally homogeneous) societies agree to distribute resources relatively evenly, which results in low-wages at all levels; albeit the street sweeper’s wage is ‘sufficient.’

    Of course, those places had high rollers just like the US, but they’ve long since found better tax homes elsewhere. Based on that, perhaps one could say that countries with the most equality have simply exported their high earners and wealthy individuals to places with less equality. Here’s one, but there are plenty of other less-well-known examples…
    http://en.wikipedia.org/wiki/Ingvar_Kamprad

    By the way, I find lots of similarity between Kamprad and Buffett—in particular their “well crafted images.” I guess when you get that rich, then your full-time job becomes continually justifying to the world (and the tax man) why you should continue to be granted royalty status via your (cough cough) ‘charitable trusts’. LOL! But I digress…

    Seriously, speaking of forestry resources above, if the socioeconomic systems in the Nordics (and some others of Europe) were analogous to a forest, then ‘favorable’ intergenerational income mobility would be achieved by cutting the tops off of trees that grow too fast. And trees of different color or ethnic origin would be reviled and not be allowed to grow at all because they’d be seen as consuming too many of the forests limited resources, if you know what I mean ;-) Is that the kind of forest any society should strive to be?

  3. Since the shapes of the curves are very similar for all the graphs in Fig. 3, is it reasonable to conclude that mobility in all 3 countries is very similar? Would this be supported by data on the correlation between fathers’ and sons’ incomes?

  4. Hexagonal: Too many questions to try to answer here, but let me mention that I haven’t seen a comparable study of wealth inequality across countries that averages wealth over a number of years.

    Libertarian Finlander: You and others might be interested in this paper by Anders Bjorklund and Richard Freeman: http://www.nber.org/papers/w14014.

    Gordon: Yes, the findings imply similar mobility in the three countries. But note that this is (relative) intragenerational mobility — mobility over the life course, rather than between generations.

    Lane

  5. Thanks, Prof. Kenworthy. I am now trying to understand the situation where there is more variability among international measures of intergenerational mobility than there is among measures of relative intragenerational mobility.

  6. Thanks, I read the abstract but will probably forgo the $5 fee for now :-) This topic is commonly discussed in Finland, a country which experienced a similar downturn in the ’90’s and perhaps shares many of the same core values as Sweden. After all, it was part of the Swedish empire for many hundreds-of-years. My own family tree originates in Sweden about 500-years-ago (when they started keeping records during Mikael Agricola’s time). Some of my family members migrated back to Sweden during the 1970’s when hard times had befallen Finland.

    Anywho, if you want to understand the underpinnings of Nordic egalitarianism, then it might be worthwhile to do a quick web search on Jante’s Law. It’ll give some insight into the mindset which drives such policies. It may also provide some insight into why marxist ideology resonated so strongly in the Nordics over the past century.

    One thing that you’ll notice, though, is that Jante’s Law in the strictest sense could only be transferable to a communalist and homogeneous society. Although Sweden has evolved beyond communalism, it’s still relatively homogeneous which makes it politically possible to keep the egalitarian system intact. Unfortunately, the exclusionary system makes it difficult to integrate the small amount of immigrants that Sweden has.

    Generally, having a compressed egalitarian system can only be achieved by an ultra-high income redistribution scheme. In Sweden’s case, it amounts to about 50% of GDP. Whereas large, established corporations can continue to function in that environment (as long as corp taxes stay low enough and somebody can provide capital funding) the local economy suffers. Very few thriving, small businesses exist because there’s neither, enough private capital to start them, nor a consumer base to support them. Needless to say, consumer goods and services are very expensive in the Nordics–restaurants are usually empty, except for Saturday nights.

    This non-vibrancy hurts immigrants the most, since they would normally work in the service sector. And that’s exactly what they do in other more economically liberal countries, like Germany, Switzerland, USA, etc. But in Sweden, Denmark, France, etc. immigrants are more likely to be on welfare and, not surprisingly, these are the countries where riots usually occur. Even the immigrant ghetto of Kreutzberg, Berlin doesn’t see any serious immigrant riots…so ethnic-Germans have to do the rioting themselves!

    Meanwhile, the immigrants would sooner be found busily working in their Kebap shops…and hoping that the anarchists don’t turn down their street and throw bottles at them for fun…or perhaps because they believe the Kebap guy represents the capitalist pig. Have you ever been inside a Kebap shop with anarchists throwing bottles against the facade? I have.

    So I guess I don’t really have a strong tolerance for ideological egalitarianism. I see its dark side very clearly; it’s rooted in class envy and entitlement. Not achievement. As I’m visiting here in the non-egalitarian United States, I’m enlightened by the friendly and helpful demeanor of people. And nobody is throwing bottles!

    Sure, the United States has problems; namely, it should stop using the prison system and military as a substitute for a welfare system. I mean, really, if you’re poor you have to wear green and kill people in other countries to fulfill some corporate imperialist agenda–all to get your education funded? And then there’s that failed drug war which keeps such a huge portion of the US population in jail? WTF!

    But hey, unlike in those so-called egalitarian countries, in the US at least it seems like anyone of any skin color can succeed–although Blacks are coming along a bit late, which probably explains much of that lack of mobility on the chart. You know, Milton Friedman was once presented with a comment to which he gave an answer that could handily be applied to the topic of mobility.

    He was informed that “there’s very little poverty in Sweden.”

    To which he replied, “That’s interesting, because there’s even less poverty among ethnic-Swedes in the US.”

    Gotta love olde Milt LOL!

  7. “Income is with government transfers included and taxes subtracted.”

    What happens if income is calculated without taxes and government transfers? Is the US still a high-inequality country?

  8. alex – check out the draft publication linked in the post. The answer is yes.

  9. Liberrtarian Finlander said: “Milton Friedman was once presented with a comment to which he gave an answer that could handily be applied to the topic of mobility.

    He was informed that ‘there’s very little poverty in Sweden.’

    To which he replied, ‘That’s interesting, because there’s even less poverty among ethnic-Swedes in the US.’”

    That must mean Swedes are raised well and/or enjoy a better educational system, or both. The country apparently is doing something that should be emulated.

    No country is obliged to welcome immigrants, so their condition is irrelevant from a purely economic viewpoint unless they burden government.

  10. I will give several examples of high wage Germany and low wage America:
    BMW Factory Workers in Germany make $73,000 Euros yearly including benefits($50,000 Euros wages and $23,000 in benefits)working 38 hours weekly and they receive 8 weeks vacation time.
    The same BMW Factory Worker in South Carolina receives $14 U.S. Dollars per hour and including benefits about $18.00 U.S. Dollars per hour with 2 weeks vacation which equates to $36,000 U.S. dollar benefit/wage package yealy versus the German Benefit/wage package of $73,000 Euros yearly or $103,000 U.S. dollar package.
    By the way the tax-payers of South Carolina ponied up 1 billion dollars to lure the BMW assembly factory with 2000 jobs. Most of the car parts are still made in Europe and shipped to be assembled in the US bypassing Tariffs and so forth with profits going back to Germany and severely damaging Ford and General Moters.
    A typical Medical Student in Germany can go to College Tuition Free while the Typical US Medical Student may have $300,000 in debts after Medical School is completed.
    German Students also can receive $600 Euros Monthly for living expenses if from a low wage family with Health Insurance also covered, cheap housing($180.00 Euro student apartments monthly including heat and electricity),1 Euro meals and cheap passes for Transportation(buses and subways).
    Also German Malpractice insurance is about 1/3rd American Malpractice insurance.
    Germany is a huge Creditor Nation with a yearly 300 billion dollar trade surplus, the largest Exporter in the world and falling unemployment since 2005.
    Germany is also the world’s Renewable Energy Leader and Environmental leader.
    Iter, Cern, The European Space Agency, High Speed Maglav Rail,etc they also have top notch Research and Developement.
    World’s best logistic infrustructure(roads, airports, rail, waterways, pipelines) and a top notch education system where 85% of Germany’s Citizens either have a University Diploma or a Vocational/Tech Diploma.
    The Eurozone Exported 2.7 Trillion dollars worth of Goods and Services in 2007 by far the world’s leader and with continued Growth.
    Germany’s Gini Index is about 27 while in the USA it approaches 50 now(2008).
    THe USA has 53 Trillion in Debts(Trade, Governmental, State,Corporate,Consumer)adding 3.5 Trillion more yearly.
    The US economy is adding 7 dollars of debt for every new Dollar of GDP Growth with little Job Growth and high population Growth so over the past 8 years the US Job Growth has not kept up with Population Growth and over the past 10 months the USA has been shedding large numbers of jobs with huge job losses in many areas.
    The only Area in the US Economy that has been adding jobs is Healthcare and Government and with the Financial Crisis Government can nolonger hire new workers.
    The USA has 8 million in Corrections(1 million in 1980)probation,jail,federal prison,etc.
    USA life expectence is now ranked 42nd, it was 5th in the early 1980’s.
    USA Healthcare system is ranked 37th
    The USA average wages/benefits were ranked 20th by Mercer in 2005.
    Driving around my area of Florida it hits close to the mark since stores and Restaurants line the roads with little else.
    Same goes for much of America!!

  11. Pingback: Is the U.S. a High-Inequality Country if Mobility Is Taken into … | Sweden

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