Tuesday, November 13, 2007

Nowhere to go but up 

A new study from the U.S. Treasury highlights income mobility for various groups. As economists have long known, income increases more for the poor than the rich. Many times, a snapshot of rich and poor ends up capturing people who are temporarily rich.
Percentage increases in real income were the largest for taxpayers with the lowest incomes in 1996. Among those taxpayers in the lowest income quintile in 1996, median income increased by 90 percent by 2005. Real incomes increased over the period for 82 percent of these low-income taxpayers and at least doubled for nearly half of this group (49.4 percent).

Among taxpayers in the highest income quintile in 1996, real income increased for over half and doubled for only 8.5 percent. The median real income of taxpayers in the top quintile in 1996 rose by 10 percent, while the median income of those in the top 1 percent in 1996 declined by 25.8 percent. While this study does not examine these results in detail, the likely causes include the typical life cycle of income and �mean reversion� in which the incomes of taxpayers whose incomes were temporarily high in 1996 revert to a level closer to their long-run average.

Among households in the middle income quintile in 1996, median income increased by 23.3 percent. Real income increased for about two-thirds of taxpayers in this group and at least doubled for 14.5 percent. The results reported ... demonstrate that over the 1996 to 2005 period, incomes rose for the majority of households, and that upward income mobility was the greatest among those that began the period in the lowest income groups.
The WSJ calls this growth stunning, but it's no more or less than usual. Arnold Kling cites another source highlighting differences in income growth for black and white households. The WSJ blog has some of this too, including this rather stunning finding.
For white families, 90% of children born to parents in the bottom 20% earned more by adulthood; for black families, it was 73%. In the middle quintile, commonly referred to as the middle class, 68% of white children grew up to earn more than their parents, but just 31% of black children did.
It's that last number that has me floored. Income is not the issue there; those families have income over $50k/yr. So what is it?

UPDATE: Could be the observation unit. George Borjas notes that the Isaac study looks at families rather than individuals.