The big news in the policy world on Thursday was the release of a new paper by Harvard economist Raj Chetty and four other authors on economic mobility.
The study found that, contrary to popular belief, economic mobility has remained stable over the past few decades.
Economic mobility is the ability of individuals to move up or down the income distribution ladder. This is a fundamental feature of the American Dream.
Politicians on both sides of the aisle have worried in recent years that economic mobility has been decreasing — meaning that a person has less ability to make a better life for themselves.
Though this study suggest they're wrong on that point, they are not wrong about income inequality. Income inequality has grown in recent decades.
Here's how the authors describe these dueling trends:
"A useful visual analogy is to envision the income distribution as a ladder, with each percentile representing a different rung. The rungs of the ladder have grown further apart (inequality has increased), but children's chances of climbing from lower to higher rungs have not changed (rank-based mobility has remained stable)."
As BI's Steven Perlberg pointed out this morning, here's the visual representation of that:
This begs the question: If the rungs have grown further apart, why isn't economic mobility decreasing? Why isn't it harder for an individual to move up the income distribution as the gaps grow farther apart?
One reason is because the rungs of the ladders are not all moving apart. It's only the top rung — and more like a sliver of the top rung — that has separated from the rest of the pack.
Here's the graph of the change in income for different groups from the Economic Policy Institute's project, the State of Working America:
As you can see, the middle- and bottom-fifths groups saw minimal real income growth from 1979-2007. Those in the middle saw a slightly higher rate, but not by much. On the other hand, those in the top fifth saw a much higher rate of growth, particularly those in the Top 1%.
The rise in income inequality is not driven by each income quintile moving away from one another as the ladder image above indicates. It's driven by the Top 1% skyrocketing away from everyone else. That means that moving up and down the income distribution hasn't grown more difficult - except for people trying to reach the very top. For everyone else, the distance between the bottom rung and middle rung has stayed the same.
In fact, the authors point this out in the study.
"One explanation for why this prediction [of reduced economic mobility] was not borne out is that much of the increase in inequality has been driven by the extreme upper tail," they write.
Here's a better representation of the ladder analogy that Chetty et al. used earlier: