You may be better off than you think.
It has become an article of faith that the American middle class is shrinking and it’s getting harder for most people to get ahead. But the data aren’t completely cooperating with that storyline.
An authoritative new study by five prominent economists finds the ability to get ahead is roughly the same for a 20-year-old today as it was 20 years ago, despite all the financial stress politicians, pundits and, ahem, journalists squawk about on a routine basis. President Obama has repeatedly stressed the need to improve “economic mobility” and give hard-working Americans a better shot at success, a theme he’s likely to revisit in next week's State of the Union address. Yet, by some measures, the underprivileged today have a bit more opportunity than they did a generation ago: The college-attendance gap between high-income and low-income families has shrunk, for example, meaning low-income kids now have a better chance than before of obtaining the same key credentials as their wealthier peers.
In the study, economists Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez and Nicholas Turner analyzed thousands of tax records from 1996 to 2012 to determine the percentages of children who stayed in the same income bracket they were born into, or moved into a different income bracket, which is typically known as social or economic mobility.
“Children entering the labor market today," they concluded, "have the same chances of moving up in the income distribution relative to their parents as children born in the 1970s.” Prior research shows similar stability from 1950 to 1970, which means “measures of social mobility have remained remarkably stable over the second half of the twentieth century in the United States,” according to the study. Since the data go through 2012, the findings are as up-to-date as possible given the focus on intergenerational mobility.
As always, there are caveats. Social mobility varies considerably from city to city, so Americans living amid a battered local economy may rightfully feel claims of stability don’t apply to them. And even if social mobility has been stable within the United States, it's still generally lower than in most other developed nations, which tend to have more protections for workers and a broader social safety net. And other data paint a more troubling picture of middle-class fortunes. Median household income, for example, began to stagnate around 2001, then fell sharply during the recession that hit in 2007. Today it’s stuck at around 1995 levels, after adjusting for inflation.
Americans, for their part, seem to disagree with the idea that the ability to get ahead has held steady. Just 54% of Americans say they’re satisfied with the opportunities they see, down from 76% in 2001, according to Gallup. In Pew Research polls, 60% of Americans say hard work leads to success, which doesn’t sound bad, except that it's down from a peak of 74% in 1999. In many other polls, it’s clear Americans feel opportunity is becoming more scarce, the nation is on the wrong track and perhaps even in a state of long-term decline.
It’s possible, however, some people feel they’re falling behind simply because they see others getting so far ahead. While there are differing views on mobility, there’s widespread agreement that income inequality — the gap in incomes from the bottom to the top — has gotten worse. CEO pay has skyrocketed, for instance, while worker pay has barely budged. Research by economists Thomas Piketty and Emmanuel Saez shows incomes of the top 1% of earners grew by 86.1% from 1993 to 2012, while incomes for the other 99% grew by just 6.6%. Since the latest recession ended in 2009, incomes for the top 1% have grown by 31.4%, which is a rather handsome recovery. For the 99%, however, incomes have grown just 0.4%, which is hard to characterize as a recovery at all.
In the new research, Raj and his co-authors describe the dichotomy between rising inequality and steady mobility as a ladder being stretched: People still climb from one rung to another, they just have to cover more distance to ascend from one rung to another:
(Source: Raj Chetty, Nathaniel Hendren, Patrick Kline, Emmanuel Saez, and Nicholas Turner)
Most ordinary people probably don’t draw a clear distinction between income inequality and social mobility, and the politicians and other public figures spouting about the economy often don’t either. So the two concepts tend to get conflated when they’re actually quite different.
In plain English, growing income inequality means people at the top get ahead faster than everybody else — much faster, during recent years. But they’re not necessarily getting ahead at the expense of everybody else, and if the total amount of wealth is growing — as it did for most of the past 60 years — it’s possible for lower- and middle-income groups to get ahead by comfortable margins, even if the wealthy get ahead by more.
When lower- and middle-income wealth barely grows, however, it exaggerates the gains of those at the top, and makes it feel like the slower-moving of two escalators is actually moving backwards. In the real world, here’s how that plays out: Ordinary Americans suffered a huge loss of financial assets and home equity during the recession, which they’re only now beginning to recover. At the same time, upstart twentysomething Mark Zuckerberg became a multibillionaire, Oracle CEO Larry Ellison bought an entire island in Hawaii, and glorified frat boy Evan Spiegel had the gall to thumb his nose at a $3 billion offer for his company, Snapchat.
Who can keep up with that? Practically nobody, but we’ve all been programmed to try — and feel disillusioned if we fail. Keeping up with the Zuckerbergs is a whole lot harder than keeping up with the Joneses. Maybe lowering our sights wouldn’t be such a bad thing.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
- Personal Finance - Career & Education
- Banking & Budgeting
- Emmanuel Saez
- Raj Chetty