This is my favorite topic I’ve studied in the last few months. I’m still learning about it, but I’ve learned enough to make it into a College of Weakonomics post.
What is economic mobility?
Economic mobility is something we all strive for without really knowing what it is. Economic mobility is the ability of someone to elevate or demote their economic status in the world. You’ve heard it thousands of times on TV and movies (and maybe in real life) where the parents wants the child to have a better life than they did. In the United States we really like to fake economic mobility by purchasing luxury goods to make it seem like we’re doing better than we are. This obsession with economic mobility actually make us worse off than we were if we’d never tried to fake it and didn’t make it.
Economic mobility is commonly measured in terms of income. This is counterintuitive to what personal finance usually cares about, which is wealth. But in economics we’re more concerned with one’s ability to generate value, which is better measured in income than true wealth. And since wealth can be inherited, it’s not an accurate picture of an individual’s economic status. The mobility is usually measured in income quintiles. So if you divide all the family incomes in the US into 5 equal groups, you’ve got your quintiles. This way you have an equal set of the population making an income that fits in each quintile. To explain it better, if the US population was 10 people, each quintile would have 2 people in it.
What are some trends in economic mobility?
Even though wealth can be inherited, it would appear that your income potential is also inherited. If you were born into the 3rd quintile, you’re most likely going to end up there as well*. This is because we tend to do what our parents did. If your mom had you when she was 16, you have a much higher probability of doing the same thing than I would. If your parents went to grad school, there’s pretty good chance you’ll go to grad school compared to someone whose parents did not. Since we mimic the choices (good or bad) of our parents, we naturally end up in similar income classes. That isn’t to say you can’t move up or down. There’s representation of each quintile moving into every other quintile. The rich become poor, the poor become rich. But your biggest probability is staying in your quintile, with the next best chances of moving up or down a quintile. And it’s not always bad to move down a quintile. Many wealthy parents have kids that going into teaching or public service, where they don’t make much.
Intergenerational Economic Mobility
Intergenerational economic mobility is the specific reference to one’s ability to move to a different economic quintile as they go from being a child to an adult. Let’s look at an example: my dad. By no measure did he grow up in a wealthy home. I have no idea what his parents made, but let’s just say he grew up in the 3rd quintile (the middle one). He was most likely going to end up in the 3rd quintile too. But that wasn’t enough for him. He studied hard in school and one a full academic scholarship to a prestigious university. But he didn’t stop there, he also went on to get a master’s and PhD from an Ivy League school (on the school’s dime) and became a professor. Considering neither of his parents went to college this is an enormous feat. Now look at my mother. She grew up in probably the 4th or 5th quintile (the highest). Her dad worked in the medical field as a doctor (but that’s all I’ll say for privacy reasons) and her mom carries a college degree and split her adult life between teaching and raising a hoard of children. So it’s no surprise my mom has a master’s degree. Collectively, my parents are probably in the 5th quintile, which represents intense mobility for my dad and maintenance of the status quo for my mom. And considering my parents’ education levels and income, I’m well aware of what I must do.
And what are the income quintiles in the US?
The NY Times has a great resource for understanding economic mobility. They define each quintile as bottom fifth, lower middle, middle, upper middle, and highest fifth. They also use the quintiles to define your “class”. I was a bit surprised by the results, people I consider to be upper middle class are actually in the highest fifth. The Census Bureau cuts off each quintile at their lower bound. So the lowest is $0, followed by $18.5k, $34.7k, $55.3k, and $88k as you move through the quintiles. $88k doesn’t really sound like a lot to some people, but that’s all you need (as of 2005) to get into the fifth quintile.
Problems with economic mobility measurement
But don’t let that $88k number trick you, since it is the lower bound. All the other quintiles probably have fairly even distributions since they have a range of salaries (for example: 3rd quintile would be $34.7k-$55.2k). But the fifth quintile has to include everyone making more than $88k. So I probably painted the wrong picture of my parent’s income. Thankfully, the Census has me covered by giving data on the highest 5% as well. That bound is $157k. So that means of the 20% of the population in the fifth quintile 75% of them make between $88k and $157k. Only 25% of the fifth quintile (or 5% of the entire population) make more than $157k.
*Income Mobility tab, how mobility works.
 By The Weakonomist |
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