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Inequality VI

Posted By Russ Roberts On May 25, 2005 @ 4:55 pm In Inequality | Comments Disabled

Some final thoughts, for now, on inequality.

(Interested readers can find the earlier posts here:

Inequality I [1]   Inequality II [2]   Inequality III [3]   Inequality IV [4]   Inequality V [5])

In an earlier post I showed some rosy numbers for family income over the last three decades.  Reader Spencer England points out that some of the good news I found there was due to an increase in two-worker families.  Absolutely true if you’re looking at all families.  That works in the opposite direction of the increase in the number of families headed by single women.  It makes family income growth look stronger.  My point was that any interpretation of family or household income numbers is contaminated by demographic changes in family structure and immigration. 

Even the fact that almost all types of families showed growth over time has to be qualified by worrying about whether hours of work rather than wages had grown over time.  And if it turned out that hours of work had increased, you’d want to know whether people were retiring earlier or later to control for lifetime hours.  My impression is that high income people, for example, work longer hours and retire earlier.

The bottom line is that it is extremely difficult to measure mobility and opportunity.  One way to avoid all of these structural changes that contaminate the numbers is to look at the same people over time, rather than looking at snapshots of different people over time. 

A recent study [6] by Katharine Bradford and Jane Katz at the Boston Fed, used the Michigan PSID survey, a survey that follows the same people over time.  Their findings were highlighted in the first installment of the New York Times series on class in America that I mentioned in the first post.  Here’s are the key findings, highlighted by the Times under the heading: Mobility Loses Steam.  What percentage of families during the ’70s, ’80s and ’90s stayed in the same quintile of the income distribution:

1970        36%
1980        37%
1990        40%

What percentage moved up or down one or more quintiles:

1970       38%
1980       39%
1990       39%

What percentage moved up or down two or more quintiles:

1970        26%
1980        24%
1990        21%

So is the glass half-full or half-empty?  Those numbers tell us there’s a little more stability in where you sit in the income distribution.  People still move up and down.  But changes are likely to be smaller than before.

What does that tell us?  I don’t know and neither do you.  There could be more stability because people are stuck where they are and the economy is stagnant.  Or there could be more stability because everyone is getting richer and it’s harder to increase your relative standing because even though you’re better off, people ahead of you are doing better, too.

A few more empirical results before closing:

You will sometimes read that the top quintiles share of the total pie is growing much faster than the bottom share.  Robert Rector at Heritage has done an amazing job analyzing the quintile numbers.  Read his analysis [7], it’s remarkable.  Incredibly, the top quintile has more people in it than the bottom quintile.  They work more hours and they receive fewer direct government welfare payments than people in the bottom.  When you correct for these factors, the gap between the top and bottom shrinks dramatically.

A study of estate tax returns [8] by Kupczuk and Saez finds that between 1916 and 1930 the top 1% of the wealthiest Americans owned between 35 and 40% of the nation’s wealth.  After 1940, that number fell to between 20 and 25% and is remarkably stable in that range.  Both the top 1% and the bottom 99% have gotten a lot wealthier over the twentieth century and the rate of growth is about the same.  The rich have gotten richer.  And so have the rest of us:

Figure_2 [9]

 

Figure_3 [10]

A tip of the hat to Paul McMahon for this reference.  And thank yous to Ken Maurer, Eric Robinson and Hugh B. Nicholas, Jr. for their help with the pics.

The bottom line is that for all the talk about mobility and opportunity and stalling and stagnating, the standard of living of the average and poorest Americans continues to improve.  And the opportunities for improvement are still there—education and entrepreneurship.  I do believe that is has gotten harder to do well in America without a high school diploma.  A different school system would go a long way toward fixing that problem.

It is important to remember that inequality in America, whatever its size or pattern over time, is inherently unobservable.  You may know how you’re doing relative to your brother or sister or your parents.  But you have no idea how you’re doing relative to the rest of the country.  To get depressed about the income distribution, you have to use government data, that as I have tried to point out in this series is easily prone to manipulation.  As my co-blogger, Don, has pointed out, the everyday perception of inequality has shrunk dramatically over time.  The average person and often even the poorest Americans today will have a car and a house that has air conditioning and a dishwasher and a washing machine and a color television.  The rich person will have a bigger house and a fancier car and a washing machine that has more cycles and a flat screen TV.  But most of these diffences are small compared to the past when the rich rode in carriages and had servants to do the menial tasks of life while the poor wore rags, trudged in the streets and went to bed hungry.

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URL to article: http://cafehayek.com/2005/05/inequality_vi.html

URLs in this post:

[1] Inequality I: http://cafehayek.com/2005/05/inequality_i.html

[2] Inequality II: http://cafehayek.com/2005/05/inequality_ii.html

[3] Inequality III: http://cafehayek.com/2005/05/inequality_iii.html

[4] Inequality IV: http://cafehayek.com/2005/05/inequality_iv.html

[5] Inequality V: http://cafehayek.com/2005/05/inequality_v.html

[6] A recent study: http://www.bos.frb.org/economic/nerr/rr2002/q4/issues.pdf

[7] his analysis: http://www.heritage.org/Research/Taxes/bg1791.cfm

[8] A study of estate tax returns: http://emlab.berkeley.edu/users/saez/estateshort.pdf

[9] Image: http://cafehayek.com/images/various/figure_2.gif

[10] Image: http://cafehayek.com/images/various/figure_3.gif

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