The Milken Institute Review

Reaching for the Prize: The Limits On Economic Mobility

INTRODUCTION

It’s hardly news that the American economy has performed reasonably well in recent decades. Productivity growth has averaged just a shade less than 2 percent annually since 1970, doubling total output. Nor is it news that most of the gain has gone to Americans at the very top of the ladder, leaving us with more inequality in both income and wealth than we have seen since the late 1920s. What should surprise, though, is that the public has hardly blinked at the dramatic widening of the gap between middle- and upper-income groups. Even liberal politicians who identify with the aspirations of Americans in the bottom half seem unwilling to call for serious redistribution measures.

One reason, we suspect, is the widespread belief in America that what matters is not equality of outcomes but the opportunity to move up the ladder based on one’s own talents and hard work. And by this yardstick, the argument goes, the system is working. If you are rich, it is because you deserve to be rich; if you are poor, the fault probably lies in your failure to take advantage of abundant opportunities for self-improvement. Moreover, any attempt to redistribute income by taxing the rich and providing benefits to the poor or the middle class would undermine people’s incentives to reach for the brass ring.

Does this faith bear scrutiny? Are we the land of opportunity celebrated in a thousand grade-school textbooks, or have we become a more-stratified society than many would find acceptable? The answer is less clear than either critics or true believers have been willing to acknowledge.

Faith In The Dream

Americans are believers. In a 1999 survey of 27 middle- and high-income countries, some 69 percent of Americans agreed with the statement that “people get rewarded for intelligence and skill,” compared with a typical response of just 39 percent from all the countries. What’s more, just 18 percent of Americans think that being born to wealth is very important in getting ahead, compared with 28 percent among all nationalities polled. It follows that Americans are more accepting of economic inequality: just one-third believe that the government should take responsibility for reducing income disparities, compared with more than two-thirds in the other countries surveyed.

Just The Facts

Americans would rather talk about sex than about money, and they would much rather talk about money than class. Yet economic success is partly determined by the socioeconomic circumstances of the family in which one is born. For example, 42 percent of the children of families in the bottom fifth of the distribution end up in the bottom fifth as adults – twice as many as would be expected by chance alone. And it’s no fun getting stuck in the lower rung: incomes in this group were not much higher in the late 1990s (below $40,300 in 2006 dollars) than they were in the late 1960s (below $33,800 in 2006 dollars).

The data also show that rags-to-riches outcomes are uncommon. Just 6 percent of poor Americans move from the bottom fifth to the top fifth of the income distribution (above $116,700 in 2006 dollars) in one generation. Individuals born to middle-income parents have decent prospects: 19 percent climb from the middle-fifth (between $48,800 and $65,100 in 2006 dollars) to the top fifth. But to paraphrase Billie Holiday, America still blesses the child that’s got his own: individuals whose parents were in the top fifth have a 39 percent chance of staying there.

America, then, is not a rigidly class-stratified society, but neither is it immune to the influences of class. As noted above, 42 percent of those born into the bottom fifth of the income distribution stay put. Still, the remaining 58 percent move to a higher income quintile. Thus, there is significant mobility. The more-relevant question is whether there should be even more mobility.

These statistics do not tell us why mobility is less than perfectly random, with each child throwing the metaphoric dice. Parents at the top may buy success for their children through their command of economic resources – access to good schools, safe neighborhoods and old-boy-network job referrals. Or the underlying personal characteristics shared between successful parents and their children (like strong verbal or mathematical skills, a winning smile or a strong work ethic) may be at work. Or, more likely, both. Whatever the explanation, though, some relationship between the economic circumstances of parents and their children is inevitable.

It is thus difficult to say whether the mobility glass is half full or half empty. But one can ask how the American experience compares with other affluent democracies.