Some Cities with High Income Inequality Also See High Income Mobility

The Brookings Institute is out
with a new
report identifying America’s most unequal cities.
Interestingly, many of these happen to be the same cities Harvard
economists
identified as having the highest income mobility.
Surprised?

For instance, among Brooking’s
top ten unequal cities, half of them were also on Harvard’s
list of top 10 cities for highest income
mobility: San Francisco, Washington DC, New York, Los Angeles,
and Boston. [1]

This raises the question for whether income inequality signals
something completely and unequivocally nefarious is afoot. Without
question there are unfair and unjust practices artificially
inflating income inequality that we must address (crony capitalism,
racism, excessive regulation, among others). However, these data
also prompt us to consider if the drivers of income mobility may
also contribute to income inequality.

Perhaps more incredible is that despite rising income inequality
in the United States, income mobility has remained constant since
the post-war era (read more
here and here).
What this means is that despite the rungs on the economic ladder
moving further apart, people are still grasping the next (even
higher) rung at the same rate as before. This means higher lifetime
incomes; this means a higher standard of living.

What might surprise some is
that during the 19^th century’s so-called Gilded Age, the
era of robber barons, economic mobility was even higher than it is
today. Economist Joseph Ferrie has
found that in the 19^th century “the United States
was in fact more mobile both socially and physically than other
places, and this remarkable fluidly persisted at least through the
1920s.” While correlation is not causation, it is remarkable that
income mobility declined after the New Deal was
implemented and during the post-war boom. Some point to the
1950s-1960s as exemplary because the bottom quintile’s income

grew at 2.5% a year; however, if Ferrie’s analysis is correct
then the rate of economic mobility for individuals declined also
during this time period. In other words, as a group the lower
income quintile’s income grew, but the individual people in that
group were less likely to break out of that group.

These data suggest that economic mobility is often a more
important consideration than income inequality. As it turns out
Paul Krugman partly
agrees, and has said “there are some risks in drawing too many
conclusions about the distribution of economic welfare from … the
distribution of income.” Moreover, he’s pointed out that economic
mobility can make the distribution of lifetime income more
equal if it’s high enough.

There are two ways one can look at income mobility. First is
relative income mobility—how did an individual move
relative to others along the income ladder. For instance, using
that measure, the Treasury
found that about 50-60% of Americans in the bottom quintile in
1995 had moved to a higher quintile by 2005. However, this measure
assumes that if the tide lifts all boats an individual’s “rank”
along the income ladder stays the same.

Perhaps more illuminating is absolute income mobility,
which measures how much each individual’s wealth changed in real
absolute dollars, regardless of everyone else. The Treasury

found that households in the bottom quintile in 1995
experienced on average a 91% increase in real income. Breaking
these numbers down: half experienced a doubling of their actual
real incomes, another 15% experienced a 50-100% increase, and
another 17% had up to a 50% increase, while 18 percent had their
incomes go down. (I’ve pasted the charts below)

The persistent and often myopic focus on income inequality
instead of income mobility has, perhaps unintentionally, misled
people into believing that regular Americans’ wealth has not
improved since the “good years” of the 1950s-1970s. But for most
Americans, this simply isn’t true.

Relative Income Mobility

Absolute Income Mobility

[1] To be clear, not all highly mobile cities also had high
income inequality and visa versa. For instance, Salt Lake City,
Seattle, and San Diego were also in the top eight for income
mobility but were not ranked as high on income inequality.
Similarly, Atlanta and Chicago were also in the top most unequal
cities and had some of the
lowest rates of income mobility as well.