Trading Places: Measuring Income Mobility

• Author: Prakash Loungani
• Position: Assistant to the Director of the IMF's External Relations Department
• Pages: 26-27

Page 26

How Much income mobility is there in today's economies? A high degree of mobility would imply, in the words of Columbia University's Jagdish Bhagwati, that capitalism's "inequalities then become tolerable, not because the rich deny themselves self-indulgence but because the poor fancy that these prizes may come to them someday too."

Much of the evidence on income mobility is for the United States. In the State of Working America, researchers at the Economic Policy Institute conclude that while the U.S. evidence "does not reveal a great deal of income mobility, the data do show that mobility exists and that families move up and down as their relative fortunes change."

The basis for their conclusion is shown in the chart. Individuals are grouped into quintiles based on their family income in 1969; then their position is observed again in 1994. This provides "before" and "after" snapshots that can reveal whether they have traded places with others in the income distribution or stayed put. Keep in mind that if the rankings in 1994 bore no resemblance to incomes in 1969, the number that stayed put in each quintile of the income distribution would be 20 percent, while the remainder would be dispersed equally among the other quintiles. This would correspond to what economists label "perfect mobility" because it indicates that the deck of cards of people's incomes has been so thoroughly reshuffled that people are placed in income quintiles as if by pure chance.

How far is actual mobility from this state of perfect mobility? Quite far at the extremes, less so in the middle. About 40 percent of those who were in the bottom quintile of the income distribution in 1969 were still in that quintile 25 years later. Likewise, nearly 40 percent of those who were in the top quintile maintained their relative position at the top 25 years later. These numbers are twice as large as those that would be indicated by a state of perfect mobility. In the intermediate quintiles, mobility is much greater. Only 24 percent of those in the middle quintile stayed put, and those who moved out were just as likely to move up in the income distribution as to move down. The other two intermediate quintiles also come close to what would be expected if perfect mobility held.

How much income inequality is erased because people move around in the income distribution over time? Boston College's Peter Gottschalk...