Questions about income mobility and inequality are much in the news. I’m pretty dissatisfied with what I’m seeing so far, so I thought I’d try to start getting straight on how to think about it.
(1) What is income mobility?
Income mobility is generally measured in terms of jumping quintiles, i.e., changing relative position in the income distribution.
(2) Why should we care?
Suppose, starting next year, that everyone’s real income would double every January forever. Suppose, however, that it turns out that nobody ever changes quintiles ever again. There’s no force keeping anyone from jumping quintiles, but it just never happens. Income mobility, change in relative position, has ground to a halt. But everyone now making $10,000 a year will be making over a million in eight years. Do you care that there is no income mobility? I don’t.
We do in fact care about mobility because we want to know that our system of institutions facilitates opportunity and rewards initiative and enterprise. A decent number of people changing relative position shows us that our system is amenable to upward aspirations.
(3) Is income mobility A LOT less important than high levels of economic growth that increase everyone’s absolute wealth.
(4) Should we expect less bottom to top, number one with a bullet, mobility as an economy grows wealthier overall?
Yes. People are constantly confused by the growing gap between the rich and poor. This is good thing, not a bad thing. If the bottom is fixed, at zero income, and the top keeps going higher, you’ve got a bigger gap. But lots of people are better off and nobody is worse off. Similarly, if the lowest quintile is anchored by a fixed bottom, and the top is untethered and rising, the distance from the bottom to the top will increase. The distance from the bottom to the middle will increase. So it will take longer to get there. If today’s middle is equivalent in real terms to yesteryear’s top, people who are going from the bottom to the middle are doing no worse than people of yore who went from the bottom to the top (even if we assume, counterfactually, that there has been no change in quality of life for people at the bottom.)
We should be AIMING at a system where the middle of the middle is, say $500,000 per annum, and so the trip from the bottom of the bottom to the top of the bottom, much less to the middle of middle, is a VERY BIG trip indeed.
This is a priori theorizing. So perhaps a real economist will pipe up.
(4) What don’t studies about income mobility tell you?
Among other things, they don’t tell you how many people really TRIED to improve their relative economic position but couldn’t. The relevant normative question about a system of institutions here is how easy it is to do well if one really TRIES to acquire human capital, takes initiative, exerts effort, etc.
We might assume that everyone tries equally hard across cultures, but I think this would be mistaken. I think it would also be mistaken to take widespread cultural beliefs about income mobility to predict effort. Salient cultural figures like pop stars and athletes often have rags-to-riches stories, and probably reinforce the sense that rags-to-riches is in principle possible, even if one has no athletic or musical ability, and does not believe in one’s particular case that effort is going to be very worthwhile.
And if you’re looking at things in terms of quintiles, you won’t be seeing significant movement within the quintile. As the economy grows, the range of each fifth should widen, and movement from the bottom to the top of a fifth becomes more significant. At a certain point, dividing things into fifths is going to mask a lot of dramatic income mobilitty, and so it becomes more useful to look at things at a finer grain of division. But this is trivially easy to do.
(4) Does the New York Times have an irrational fetish for ominous tales about relative position?
[Update: Ron Bailey has some good thoughts on the NYT series.]