Economic Mobility: Steady Through Time, But Different by City

Income inequality is in the news again these days, in particular as President Obama has made it one of his policy concerns for this year and as New York City's new mayor ran on a platform that included actions to correct it.  The gap between rich and poor has indeed widened, and pretty consistently so, extending back as far as 35 years.  In the US income distribution in 2012 (latest available information), the average household income of those at the 90% level, $146,000, was almost 12 times the income of those at the 10% level, $12,236;  back in 1975, this multiple had been "just" 8-1/2.  Too, these income measures – both low and high – have  decreased since a peak in 2006, adding to concerns.[1]  Does the US still offer hope for gains, especially for low income people?  Are we still a "land of opportunity"?

Indeed, taken at face value, developments like the increase in the rich/poor income ratio might suggest that something is fundamentally wrong and requires any number of redistribution tactics to be taken as correctives.

Ah, well.  As with many issues we meet here at Ways of the World, the "face value" of this trend in a set of numbers turns out to tell only part of the story.  Two brand new reports from well-known economist scholars of the inequality situation bring out two very significant aspects that cast all this in a different light for the United States.

People's Probabilities for Moving Up Have Been Remarkably Steady

These reports are produced by The Equality of Opportunity Project, headquartered at Harvard University and including scholars from there and the University of California at Berkeley; see its website here: http://www.equality-of-opportunity.org.  The scholars, Raj Chetty of Harvard, Emmanuel Saez of Cal Berkeley, three other senior scholars and a research staff[2], have conducted massive analyses of IRS income tax data, using millions of individual returns, which have been "de-identified".  They are coded in such a way that a specific person's history can be followed through a lengthy span of years, beginning as a child-dependent of their parents and extending through their ultimate career situation at, say, age 30 or 40.  These authors can thus make the statement that if someone grew up during the 1970s as a child in a family in the lowest 20% of income earners, that person has an 8.4% chance of reaching the top 20% in their own adulthood.

The point Chetty, Saez and associates make in the first of their studies is that this probability did not change noticeably for kids born in the 1980s who are now in their late 20s.  Moreover, other writers who've analyzed earlier periods, covering kids born back as far as 1950, also find the same general probability relationship.  People's chances of moving up in the world have not measurably changed despite the fact that the top has gotten higher.  Here are two pictures from the Equality of Opportunity website: the rungs of the ladder are now farther apart, but the analytical work shows that our ability to climb the ladder is just as strong as when the ladder was shorter.

So, in one sense, this is a great statement about opportunity in America.  We have farther to move to catch up to the high-income group, but Chetty, Saez and their associates show that we still have as much expectation of being able to do that as older people did, and other authors carry this back even to our own parents' generation.

Other Countries Do Better at Lifting People Upward

Some argue – perhaps some of you – that other countries do a better job of lifting people up than the US does.  In international comparisons compiled by the OECD, the correlation of income brackets between generations is closer in the US than in most western European countries, Canada and Australia:  that is, whatever level your parents are in, you are more likely to be stuck there in the US than in nine of 11 other countries.  The correlation measures are in fact about three times lower in Denmark, Norway, Australia and Finland.  So children seem to have far better chances of moving ahead of their parents' economic position there than in the United States.[3]

But Some US Cities Are as Effective as Denmark

Chetty and Saez have a response to this seeming indictment of the US in their second study, "Where Is the Land of Opportunity?  The Geography of Intergenerational Mobility in the US".[4]  The US is, of course, a huge country with widely varying climates and cultures in its regions.  Because Chetty and Saez have examined millions of tax returns, they can break out their information by cities as well as for the nation as a whole.  In some pioneering work on these topics, they find great differences in mobility for people who grew up in the different cities: Salt Lake City and San Jose have populations as economically mobile as those of Denmark and its neighbors, while mobility is far lower in other places, including some in the South and the upper Midwest, lower even than in any developed nation for which such figures have been published.  New York and Boston rank sixth in rankings of the 50 largest metropolitan areas while Charlotte, NC, ranks 50^th.

These differences immediately beg the question: what on earth accounts for these positions?  Aren't New York and Boston places where classes are really well defined? and the opposite for Midwest and Southern locales?  So Chetty and Saez and their associates looked at some characteristics of the cities that might help explain.

Social Structures, Not Economic Ones Make the Main Differences

Surprisingly, at least to us, a city's economy has had little to do with the economic mobility of its residents.  The mix of industries and the concentration of managerial and professional occupations had such weak relationships with mobility measures that the authors didn't even bother listing any numbers about them.  There are just loose correlations with overall labor force participation and the role of manufacturing.  Two economic items do have noticeable effects, existing income inequality and the teen-age labor force.  The existing income distribution seems logical as a force for or against mobility.  We'll comment further below on the teen-age workforce.

Otherwise, the really significant forces pushing on mobility are social ones.  And they come into play early in people's lives, not just when they are graduating school and doing entry-level career planning.

1.  Race.  Areas with large shares of African-Americans have weaker mobility.  Please note that this is a numerical fact, not a subjective comment.  Also, it reflects more than skin color, since whites in those regions also have weaker mobility than in other areas.  Greater degrees of segregation of races and of groupings of affluent and impoverished populations also exacerbate mobility. 

2.  K-12 school systems.  Elementary school test scores and the high school drop-out rate are highly significant.  Teacher-student ratios and spending per student in a city have only a mild impact.  The point this suggests is that it's the results of primary education, not just inputs to education that are important.  Also, while college attendance has an obvious and structural influence, the presence of colleges right in a given city doesn't noticeably help or hinder mobility in that city.

3.  Social capital.  This jargony term calls attention to people's participation in society besides their jobs.  Do they vote?  Do they return Census forms?  Do they belong to local civic associations?  These items constitute a social capital index.  Important separately in its own right, do people belong to religious groups?

4.  Family structure.  The factor with the closest relationship to economic mobility is family structure.  Specifically, children born to single mothers face the biggest odds against moving ahead later in their own lives.  In general, on the contrasting side, cities with the largest proportions of parents who are married and with the lowest divorce rates provide more support to children moving ahead.

These social factors, education, socialization and family structure, all impact young people.  Again, that's "young" people, in childhood and the teen years.  As we noted above, teen-age labor force participation is also important in helping set people up to move ahead into and through adulthood.  Learning work skills, routines and disciplines gives a measurable boost toward a better future as well as an introduction to financial responsibility.  There is an additional aspect to the segregation issue, and that is commuting distance to work.  Cities with a preponderance of short commutes are more supportive of mobility.  A concentration of corporate parks in suburbs or the need to take a train and a bus to work put added barriers in the way of lower income families.

Ideas about Policies That Might Help

The factors that show as most closely related to mobility point to some public policies that might be more supportive.  Working with single mothers and encouragement of marriage would help.  The need for strong public education comes up time and time again, and the statistical results we cite here add to that emphasis; in particular, "teaching to the test" would seem to be effective as well as encouraging teen-agers to stay in school and also to get jobs.  Perhaps many city governments have policies that might shorten commutes by encouraging businesses to install facilities in low-income neighborhoods, but more could clearly be done.  Making commuting easier also argues for upgrading transportation systems and city infrastructure.

We knew there was no simple answer to inequality issues, but some of the inputs we learned about here are not necessarily the ones we'd have thought of first.  Supposedly simple approaches, such as raising taxes on the rich may help on the surface, but those funds shouldn't automatically just be distributed through low-income family welfare programs.   Instead, more structural qualitative policies and attitudes are needed for the long-run changes and real shifts in inequality relationships that are desired.  Not all of this comes from governments.  Even, we see, churches have an identifiable role as they support the dignity of every human being, promote community participation by low-income people and mix low, middle and upper income people in common settings and organizations.

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[1] Household income data and ranking from US Census Bureau, Income, Poverty, and Health Insurance Coverage: 2012.  September 2013.  http://www.census.gov/prod/2013pubs/p60-245.pdf.

[2] Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez and Nicholas Turner.  "Is the United States Still a Land of Opportunity?  Recent Trends in Intergenerational Mobility".  National Bureau of Economic Research Working Paper 19844, January 2014.  Available without cost on http://www.equality-of-opportunity.org.

[3] Organization for Economic Cooperation and Development (OECD).  Economic Policy Reforms 2010: Going for Growth. Page 185.  http://www.oecd-ilibrary.org/economics/economic-policy-reforms-2010_growth-2010-en

[4] Raj Chetty, Nathaniel Hendren, Patrick Kline and Emmanuel Saez.  "Where Is the Land of Opportunity?  The Geography of Intergenerational Mobility in the US".  National Bureau of Economic Research Working Paper 19843, January 2014.  Available without cost on http://www.equality-of-opportunity.org.  Ratios and numerical factors for the cities covered in this study are available for download without charge from the website, as the authors encourage further analysis by anyone interested in these issues.

Other recent discussions of this material:

Damian Paletta.  "New Data Muddle Debate on Economic Mobility".  The Wall Street Journal. January 23, 2014.  http://online.wsj.com/news/articles/SB10001424052702304856504579337150671408032.

and

Emily Badger.  "The U.S. Has a Social Mobility Problem, But Not the One You Think."  The Atlantic Cities.  January 23, 2014.  http://www.theatlanticcities.com/jobs-and-economy/2014/01/us-has-social-mobility-problem-not-one-you-think/8188.