Data on income mobility suggest a modest level of movement by households through the income distribution, particularly across generations; but the income quintile of one’s parents still has a sizeable effect on just how high one is likely to rise, say Cleveland Fed researchers
Given the high and rising levels of income inequality, the distribution of income has received considerable attention in recent years. But of equal importance, according to Federal Reserve Bank of Cleveland researchers Daniel Carroll and Anne Chen, is income mobility, or how frequently households change places within the distribution.
Income inequality compares the position of one household to another household at the same point in time, while income mobility compares the position of one household to itself at different points in time. The mobility of a household through the income distribution is affected by many factors: level of education and career choice; the accumulation of job experience (resulting in different earnings as people age); and the formation and dissolution of households.
Constructing a “transition matrix” of household income, Carroll and Chen find that the bottom and top quintiles maintain approximately 70 percent of their occupants even after ten years.
Another aspect of mobility is how frequently a household moves up to a higher quintile. Looking at the fraction of households that move up after 10 years, the researchers find that “while there has been a small increase in movement for the poorest groups over time, for most income quintiles, the fraction is roughly flat.”
Intergenerational mobility concerns how likely it is for a household’s children to move out of their parents’ income quintile. “Beyond just inheritable traits which may affect income, intergenerational mobility embeds factors such as parents’ input to education (both pecuniary and nonpecuniary), residential choice (which affects public school quality and crime), social connections, and income from inherited wealth,” say the researchers. Citing a study which suggests that children are likely to belong to a different income quintile than their parents did, Carroll and Chen note that they are unlikely to move very far away. “For the children of parents in the first (lowest) quintile of income, only about 25 percent end up in the fourth or fifth quintiles. Contrast that with children of fifth-quintile parents, where the same statistic is 60 percent,” say the researchers.
Read Income Inequality Matters, but Mobility Is Just as Important.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479