Politicians have been talking about income inequality and upward mobility for the last two months. Unfortunately, their sound bites confuse the issues more than they clarify them.
President Obama recently stated, "The problem is that alongside increased inequality, we've seen diminished levels of upward mobility in recent years." His proposed remedies? "Investments in education... and a minimum wage -- these all contributed to rising standards of living for massive numbers of Americans."
The President misstated the situation and proposed misguided solutions.
Income mobility can be measured over the course of an individual's life or by the mobility between generations in the same family. Most people start their adult lives with relatively low earnings, because they have few job skills, little work experience, and incomplete education. As they build skills, gain experience, and complete their education, their earnings rise through their 20s, 30s, and 40s, and they typically achieve their maximum earnings in their 50s or 60s before they retire.
Historically, this "lifecycle" of earnings has created a great deal of income mobility. Data from the University of Michigan Panel Survey on Income Dynamics show that, of people who were in the lowest fifth of income earners in 1975, only 5.1 percent of them were still in the lowest fifth 16 years later and 29 percent had actually risen all the way to the top fifth of income earners.
Mobility between generations is less dramatic. A recent study from the National Bureau of Economic Research examined how children born in the 1980s did relative to their peers compared to how their parents did relative to their peers. It found that 8 percent of children born into families in the bottom fifth of income earners made it to the top fifth of income earners of their own age by the time they were 30. For children born in the middle fifth, 20 percent made the top by age 30.
Contrary to the claims of the President, the study also found that the rate of intergenerational mobility was largely unchanged over the last 50 years. Yet, this does not mean that there are not barriers to upward mobility. The study found significant local and regional variations in mobility across the country. Neighborhoods with large densities of African-American populations tended to demonstrate lower relative income mobility.
Unfortunately, President Obama's proposals are unlikely to help increase income mobility in the lower-mobility segments of the U.S. population. The greatest barrier to income mobility for some workers is their ability to get up onto the first rung or two of the economic ladder that will allow them to build the skills in order to achieve a normal lifecycle of earnings.
The minimum wage is one policy that prevents workers from stepping onto the first rung of the ladder. Some workers' hourly productivity is below the federal minimum of $7.25 per hour. These workers are prevented from getting their first job and beginning the process of acquiring the skills that would lead to higher incomes in the future. Young African-Americans are disproportionately harmed. Nearly half of the workers earning the minimum wage are under 25, and unemployment among 16 to 24 year old African Americans remains at more than 23 percent. It is likely that an increase in the federal minimum wage would prevent even more workers from getting their first job that allows them to start climbing the economic ladder.
Poor education is another barrier to income mobility that disproportionately harms young African-Americans. But throwing more money at failing school districts with unionized teachers and local monopolies is unlikely to help the situation. Instead, greater competition is needed to spur better education.
Unmentioned by politicians on either side of the income-mobility debate is the devastating effect that the unwinnable war on drugs has on youth incarceration and how that impedes employment. An arrest record can be a barrier to getting a good first job and time imprisoned is time lost for acquiring the skills and education that improve earnings over time. Again, young African-Americans are disproportionately harmed. Nearly 50 percent of African-American men have been arrested at least once before they reach the age of 23.
Income mobility in the United States is much the same as it has been. More importantly, regardless of one's relative standing, the way we live has improved a great deal since the "golden years" of the 1960s. A thirty-year-old man today, who finds himself in the same income group as his parents were when they were younger, has a better and flatter television, and a phone that's not bolted to the wall and that contains a computer that is vastly more powerful than his parents' desktop computers were.
Barriers to mobility remain. But those barriers are more a product of government interference in our lives than an inherent feature of a market economy.