Income mobility- what are the chances of moving up the income ladder? Evidence from DC taxpayer data

It has long been a tenet of American society that income disparity is more acceptable provided that there is a reasonable chance that someone who starts poor can make their way up the economic ladder to at least middle class status through education and work. This is the premise of the American dream and of a society based on the principle of meritocracy.  In this post we use DC taxpayer data to analyze income mobility, the extent to which an individual’s income changes over time. This data allows us to determine the probability of an individual moving up the rungs of the economic ladder.  The analysis also determines how far up one is likely to move up the economic ladder, starting at the bottom.

We focus initially on singles since income mobility is easier to define for a single individual than for married couples, where income is defined on an aggregate basis.  For a married couple, upward mobility could be the result of various outcomes- both spouses moving up the ladder simultaneously, one spouse moving up the ladder and the other remaining steady, or some other combination.

We examined mobility for singles by looking at where individuals stood on the economic ladder in 2002 and compared this to where they ended up in 2012. The percentage of filers who changed positions on the ladder measures the probability of moving on the ladder.

Here’s how to interpret the results shown in the matrix below:

Reading across starting from the top row, 39 percent of individuals who were in the bottom 20 percent of the income distribution in 2002 remained in the bottom twenty percent in 2012, 28 percent moved up one rung of the ladder to the second quintile (20th to 40th percentile), 15 percent to the third quintile and so on for the other quintiles. Similarly for the second row, 18 percent of individuals who were in the second quintile in 2002 fell down the ladder ending up in the lowest quintile in 2012, 35 percent remained in the same quintile and so on. Shaded boxes in yellow denote no change in income status, blue shading denotes upward mobility and red denotes downwards mobility.

Income Mobility: Chances of Moving on the Economic Ladder by Income Range, 2002-2012

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Source: DC Income Tax Data 2002-2012, DISTRICTMEASURED.COM

Highlights

  • Thirty nine percent of singles who started poor (in the lowest quintile) remained poor after a decade.
  • The median age for filers stuck at the bottom was 49 years. Given that these individuals are well into their career paths, the chances of their income prospects improving in the next ten years are likely to be small.
  • Twenty eight percent who started at the bottom moved up one rung of the ladder, and 33 percent from the lowest quintile made it to middle class status or higher (40th percentile and higher).
  • For those starting in the second quintile in 2002, the chance of moving up to middle class status one decade later was 47 percent.
  • The likelihood of remaining in the middle class in 2012 for those already in the middle class in 2002 was greater than 25 percent.

What can we conclude from the data? In a society where income mobility mitigates some of the worst effects of an unequal distribution of income, an individual through increased work experience and skill acquisition, would likely experience at least one movement up the ladder over a ten year period, or stay steady if she or he is at the top rung (See further discussion below).  While the data indicates that this is the case for most filers who started in the top three quintiles, for those on the lowest rungs of the ladder (the lowest two quintiles) the chances of moving up are only about 50/50.

Various factors have been cited to explain the scarce mobility of individuals at the bottom of the income distribution.  In a previous post we explored whether career paths contributed to this lack of mobility and found that increasingly the occupation one is employed in influences this outcome.  An employee in retail or education will have a hard time moving up the ladder. Other studies have focused on other factors such as increasing cost of college education, the decline in unionization rates and free trade to explain this lack of mobility.

What exactly is the data?

Data is from the 2002 and 2012 DC income tax returns for single Individuals excluding senior filers. 22,742 single filers were in the data for both years.  Income quintiles represent the following income ranges.

Income Quintile  Income $
Lowest 20th Less than $20,000
20th to 40th $20,000-$35,000
40th to 60th $35,000-$50,000
60th  to 80th $50,000-$85,000
80th  to 100th Greater than $85,000

Is a ten year time frame sufficient to consider income mobility?

A simple framework to analyze this is to consider how a person’s income would progress over a typical career path of approximately 40 years (say from ages 25-65) in a world where there was mobility across a wide range of career opportunities and access to education. This individual would begin her/his career at age 25 at or near the low-end of the income scale.  Through increased work experience she/he would move up a rung on the ladder and by their mid-thirties be at or near middle class, and after another decade, in their 40’s, expect to move up to achieve upper middle class status. In this career path each rung of the income ladder can be thought of as about 8 years (40 years /5 quintiles), so that after a decade an individual should move up at least 1.25 rungs.

Other considerations- Because the data is limited to DC filers, the analysis provides a more limited view of income mobility for the nation as a whole, as individuals can move to other states to seek better economic opportunities. While this is a limitation of the analysis, it is important to note that during the 2002-2012 timeframe the DC economy was one of the strongest performing in the nation. The probability that an individual could move up the ladder by moving to a different state was not likely to be high during this timeframe.

Contributors to this post:

Betty Alleyne, Bob Zuraski

 

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