Mobility and Inequality

In Seattle, San Francisco and Salt Lake City, a child raised in the poorest 20 percent of families has more than a one in ten chance of ending up in the top 20 percent of earners as an adult. In the Atlanta area, by contrast, only one poor child in 25 will make it to that top quintile during adulthood.

Why does geography matter so much to your odds of moving up the economic ladder? One reason may lie in differences in state and local policies. In a new study, which is being presented this week at a conference of the National Bureau of Economic Research, four economists explore the link between intergenerational income mobility, and a particular subset of such policies, tax expenditures. In Monday’s New York Times, David Leonhardt used the authors’ dataset to produce a fantastic interactive piece, painting a picture of economic mobility (and immobility) across America.

The study’s authors—Raj Chetty and Nathaniel Hendren of Harvard, and Patrick Kline and Emmanuel Saez of Berkeley—find that the level and progressivity of tax expenditures are associated with increased economic mobility between generations. Even when controlling for a broad range of local characteristics, the authors find that local and state tax expenditures contribute significantly to the likelihood that a child who grows up poor will experience significant upward mobility as an adult. The economists also identify particular state-level tax expenditures (such as the earned income tax credit) that are associated with greater economic mobility. “Overall,” they conclude, “these results suggest that tax expenditures aimed at low-income taxpayers can have significant impacts on economic opportunity.”

The research of Emmanuel Saez, in particular, has elucidated trends in the distribution of income, and helped bring rising inequality to Americans’ attention in recent years. Of course, income inequality itself is not inherently negative. In fact, in a market economy, some degree of inequality is inevitable—and could even be desirable if it occurs when hard work and innovation are rewarded with an income premium. Problems arise, however, when such rewards for hard work are not available to everyone—that is, when society lacks equality of opportunity. There is strong evidence throughout the income distribution that compensation today is not proportionate to hard work—from astronomical CEO pay at the top of the income distribution, to wages that have failed to keep pace with productivity for the typical American worker, to a minimum wage that is too low to keep a full-time worker’s family out of poverty. The growing inequality that has resulted has not been offset by greater economic mobility—and the Chetty, et al, study underscores that the disparities in economic opportunity are greatly exacerbated in certain areas of our nation.

EPI recently launched, which shows how income inequality is not a natural consequence of a market economy. Rather, inequality was created—and is perpetuated—by the policies, laws, and practices that we espouse as a nation. The bad news is that these policy choices have led to unprecedented economic disparities and immobility. But the good news is that any problem that can be created by policy can also be fixed by policy. Chetty, et al, offer evidence that progressive policies can and do help to break intergenerational cycles of poverty.