Traditional wisdom refers to America as the land of opportunity. The question on many people’s mind: Does the reality match this rhetoric?
Recent groundbreaking studies by economists from Harvard and UC Berkeley take a closer look at this claim.
These economists use comprehensive anonymous tax records for about 50 million people born since 1971 and match the data between parents and children across years to study income mobility in the U.S. Their studies document the intergenerational income mobility over time and across areas within the U.S.
Surprisingly, economists find that upward income mobility has stayed roughly the same over the past 50 years.
The relationship between ranks of child income and parent income across different cohorts shows clearly that the three slopes are almost identical (see figure below).
Simply, a child born in the bottom income group has the essentially the same income ranking in adulthood today as a child born a generation earlier. Combining these results with earlier research, it appears as if prospects for social mobility in America have remained relatively unchanged for fifty years.
How can we interpret this finding? A positive view is that despite rising inequality people at the bottom of the income ladder are just as likely to move up as their grandparents.
Dr. Raj Chetty noted in a recent PBS interview that we could think of income distribution as a ladder with each rung representinga different percentile. The rungs of the ladder grow further apart with more income inequality, but a child’s chance of climbing from the lowest to highest rungs have not changed, meaning that income mobility has stagnated.
While social mobility may not vary much over time, it does vary widely by geography.
A concept of the American dream whereby an individual is able to move up the income ladder is still vibrant in many areas (see map below). The different colors represent the average percentile rank of children from low-income families. So darker colors, with lower values, mean there is less mobility, and lighter colors indicate higher mobility.
Children born into the bottom fifth families, for example, have an 11.2 percent chance of reaching the top fifth if they live in San Jose, California; however, children born in Charlotte, North Carolina only have a 4.3 percent chance of moving to the top 20 percent.
An interactive map is also available to look up statistics for a specific city. For example, the chance a child raised in the bottom fifth rose to the top fifth is 8.4 percent for children in the Houston area and 6.4 percent in the Dallas area.
Factors that might drive the substantial variations in income mobility include level of local income and racial segregation, the extent of sprawl, quality of local schools, and family structure.
Although the latest studies provide evidence for us to pursue answers and evaluate the reality of the American dream, these studies do not provide conclusive evidence that income inequality is necessarily bad. In fact, many of the places with the highest income inequalities and lowest income mobility have the fastest growing economies and job creation.
If an economy is growing, jobs are being added, and people from different income groups can purchase similar goods (i.e. consumption equality), does income inequality or income mobility matter? Better yet, will redistributing income through higher tax rates on those with upper incomes make this situation better? The evidence indicates they do not.