The Alarming State of Income Mobility

According to a new report by the Federal Reserve Bank of Cleveland, Americans’ income mobility has declined after reaching an all-time high just before the Great Recession in 2007. Worse, this is a long-term trend that shows no signs of slowing down.

What is income mobility and why should I care?

The distribution of income (otherwise known as income inequality) has received considerable attention in recent years, but of equal importance is how frequently households change places within the distribution (what is called income mobility). Income mobility answers questions such as the likelihood that a poor family can rise to the middle class, or how likely it is for one’s children to achieve a higher income bracket than their parents (and presumably, a more comfortable lifestyle).

As Economist Daniel Carroll notes in the report: the distribution of income could be very unequal, but if people move throughout that distribution over their lifetime, then income inequality may be less of a societal problem as one would be much more likely to start out poor but become wealthier as they age (the old adage of achieving the ‘American Dream’). Conversely, if children of poor households have little prospect of ever lifting themselves out of poverty, then the very real possibility exists that multiple generations of families will be relegated to exist in a permanent underclass. The data clearly suggest that the income quintile of one’s parents has a sizeable effect on just how high one is likely to rise or how low one may fall in regards to income brackets.

But is income mobility worse today, or is this just a blip on the radar?

Income mobility was at its highest from 1968 to 1978 and its lowest from 1983 to 1993. While there have been historical ebbs and flows, there is irrefutable evidence that inequality is getting worse over time. Look no further then the Gini Coefficient, which has substantially widened from 1968 until 2005. The Census Bureau compiles this index as a way to measure income inequality among households. What does this mean? Probably that the working poor better hope for a genie in the bottle.