The State of American Opportunity

A new study (free link here) by Wojciech Kupczuk, Emmanuel Saez, and Jae Song says that social mobility has been stable since the 1950s (specifically, that mobility for men has decreased, but mobility for women has increased, and the two are relatively self-canceling in the aggregate; a causal relationship was not tested.). I haven't read the whole thing because I don't have NBER clearance and I haven't seen an ungated link, but here's the abstract:

This paper uses Social Security Administration longitudinal earnings micro data since 1937 to analyze the evolution of inequality and mobility in the United States. Earnings inequality follows a U-shape pattern, decreasing sharply up to 1953 and increasing steadily afterwards. We find that short-term and long-term (rank based) mobility among all workers has been quite stable since 1950 (after a temporary surge during World War II). Therefore, the pattern of annual earnings inequality is very close to the pattern of inequality of longer term earnings. Mobility at the top has also been very stable and has not mitigated the dramatic increase in annual earnings concentration since the 1970s. However, the stability in long-term earnings mobility among all workers masks substantial heterogeneity across demographic groups. The decrease in the gender earnings gap and the substantial increase in upward mobility over a career for women is the driving force behind the relative stability of overall mobility measures which mask declines in mobility among men. In contrast, overall inequality and mobility patterns are not significantly influenced by the changing size and structure of immigration nor by changes in the black/white earnings gaps.

It's interesting to note that immigration doesn't affect mobility (so those damn dirty Mexicans aren't stealing all our good jobs after all). Kopczuk and Saez published an earlier study showing that wealth inequality (as measured by estate tax returns) is unchanged since World War II, and Saez co-authored (with Thomas Piketty) the biggest study on income inequality (as measured by income tax returns) in the United States, concluding that income inequality has risen dramatically since 1973, and continues to rise.

What does all this mean? Saez would probably say that progressive taxation and inheritance taxes have kept wealth inequality consistent, and that is a good thing. But he would say that income inequality has been rising, and that is a bad thing. He would say that this increase in income inequality has not been matched by increased social mobility, and that is a bad thing.

I would say that progressive taxation, inheritance taxes, and a more open economy (caused by increased education, technological advance, and greater egalitarianism in labor markets -- esp. w/r/t women and minorities -- as well as greater investment opportunities in financial markets for middle and lower classes, and more common retirement plans) have kept wealth inequality consistent, and that is a good thing. I would say that measured income inequality is increased, but that the measurements aren't always measuring the appropriate things, so some studies aren't painting an appropriate picture of reality, and that I care rather less about income inequality than about absolute gains in real wages across society and social mobility, so the inequality studies are a mixed bag. I would say that the fact that mobility has remained unchanged since 1950 is a good thing, and that we seem to be assimilating immigrants and minorities into the economy is a good thing, but with a caveat: male mobility has decreased, and this could be cause for concern.

This part of the abstract is also very interesting: "Mobility at the top has also been very stable...". I'd taken it as something of a given that mobility at the top of the distribution was higher than in other slices of the distribution. I thought that for obvious reasons:

1. Depending on how you define it, "the top" of the income distribution is a pretty small sample, and superstar theories, lucky breaks, and creative destruction should play a much heavier role there. For example, the Youtube guys made a bunch of money when they sold out to Google, but relatively little money in the year before and year after. So, for one year (and, presumably, only one year), they fit in to the top of the distribution. A similar story might be told of athletes who make a lot of money over their careers, but almost all of it is in a handful of years. Or singers who have a multi-platinum album one year, but don't release anything in the next.

2. CEO compensation is often centered around stock option packages, which are usually exercised all at once. True, these guys make decent salaries in every year, but only the year with exercised options should propel most of them into the top 1% (or so) of the distribution.

Now, the study doesn't say that mobility for the top of the distribution is at the same levels as the rest of the population; only that it has been stable relative to itself. But I would've assumed that the composition of the top of the income distribution would have become more volatile over the past five decades, as technology provided more opportunities to get rich quickly, and as CEO compensation changed. Also, incomes for athletes and entertainers increased a lot in those five decades (and inequality, especially, increased within those occupations). Dr. Galbraith's "five counties" study -- in which almost all of the increase in inequality disappears when controlled for Silicon Valley, Microsoft, and investment bankers in Manhattan -- was evidence in support of my intuition. According to this study, however, I'm wrong.

Tyler Cowen says this:

It should be noted that Saez is the leading measurer of income inequality and also a critic of such inequality. In his view a constant level of mobility means that no force is offsetting ongoing inequality. I believe he would likely read his own paper as support for a left-wing view of the world and as support for concern with income inequality. He would not read his work as reason to dismiss the mobility issue. My view differs, as I worry about mobility -- can a hard-working person get ahead? -- but I do not worry about inequality per se, nor do I require of mobility that it overturn a particular level of inequality.

I'm waiting for commentary from Megan McArdle. I'm sure it will be forthcoming.