A few weeks ago, renowned Stanford economist Raj Chetty released a sweeping study of panel data on the “absolute income mobility,” or ability to out-earn the income bracket of one’s parents, of Americans born in the 1940s versus those born in the 1980s. In sum, the punchline goes something like this: Where nearly 90% of Americans born in the 1940s could outearn their parents, only about 50% of Americans born in the 1980s can.
After running the “as is” numbers and some sensitivity and robustness tests to account for technological advances and possible measurement errors, Chetty et. al. played with the data to see which macroeconomic trends contributed most heavily to the severe drop in absolute income mobility. First, the team toyed with the growth rate of GDP, since over the course of the panel study, the rate of growth dropped. In the study, this raised the mobility of the 1980s cohort up to about 60%. Then, the team toyed with the distribution of economic prosperity, as innumerable studies have demonstrated that economic growth increasingly benefits the wealthiest people and does not benefit the middle class nearly as much as it once did. In this alternate universe, the mobility rose up to nearly 80%.
Not all are 100% on board with this income inequality theory to explain the change in income mobility. Forbes contributor Tim Worstall contends that the researchers may have overlooked two important factors that would contribute to the coin-flip probability of today’s 30-year-olds out-earning their parents. For one, the researchers didn’t account for the 2008 recession, which hit young professionals worse than anyone and which was arguably the worst economic downturn since the 1930s. Secondly, Worstall posits that the structure of the workforce changed significantly and could easily contribute to the asymmetrical earning prospects. For example, whereas the 1940s cohort entered workforces with only 10% of men and 6% of women holding college degrees, the 1980s cohort saw degree rates jump to 30% and 25%, respectively. As a result, the potential income peak comes later in one’s career, but also higher, than in blue-collar professions.
A New York Times article also explored the role of income inequality in income mobility. Harvard economists Lawrence Katz and Claudia Goldin blamed the acceleration of technological advances, saying that such developments drive down wages at the bottom. They also noted that the marginal benefits of education have increased dramatically, but that the education system itself has stagnated to the detriment of young people’s career prospects. On the contrary, though, economists such as Edward Conard and N. Gregory Mankiw think that today’s income inequality accurately reflects people’s contribution to the workforce.
It’ll be interesting to watch how this detailed study affects the policies that the new administration will usher in and how such policies will affect young people’s abilities to out-earn their parents.