Authored by: Matt Palumbo
Is the American dream dead? The late George Carlin once quipped that they call it the American dream because you’d have to be asleep to still believe in it, but contrary to popular belief, reports of the American dream’s demise have been greatly exaggerated.
The American dream is formally defined as “the ideal that every US citizen should have an equal opportunity to achieve success and prosperity through hard work, determination, and initiative.” Or in other words, the ability for one to rise out of whatever dire economic situation they’re currently in, or were born into, by their own efforts.
How Mobile is the US?
There are a handful of ways to measure economic mobility; but the simplest would be to look at movement of individuals among income quintiles over time.
Overall, 73 percent of all Americans will earn income that puts them in the top 20% for at least one year. Fifty-six percent will reach the top 10% for at least one year, 39% will reach the top 5%, and 12% will reach the top 1%. Of course, this doesn’t give us any context on movement between quintiles just yet, or how those born into the poorest 20% in particular fare. As Thomas Sowell reminds us:
A University of Michigan study showed that most of the working people who were in the bottom 20 percent of income earners in 1975 were also in the top 40 percent at some point by 1991. Only 5 percent of those in the bottom quintile in 1975 were still there in 1991, while 29 percent of them were now in the top quintile.
In other words, after less than two decades, there were nearly six times as many workers who moved from the bottom 20% to the top 20% than remained in the bottom 20%.
Is the US Less Mobile Than Europe?
The US does appear to have less mobility than our European counterparts at first glance, but this is the result of some statistical trickery. A study led by economist Markus Jantti found that 42 percent of men in the US. raised in the bottom 20% stay there as adults, compared to 25 percent in Denmark, and 30 percent in Britain. Note that the statistics here differ from Sowell’s, because Sowell’s were looking at workers in the bottom 20%, while these are looking at individuals raised in households in the bottom 20%.
This apparent lack of relative mobility looks damning, but you have to consider the fact that America has wider income quintiles.
The average person in the bottom quintile of households in Britain earns 7,383 pounds ($9,672 USD), and would need to earn 15,245 pounds ($19,970) to earn what the average person in the second lowest income quintile did, or an extra $10,300. In the U.S., the average earner in the bottom quintile would need to go from earning $12,457 to $32,631 to accomplish the same feat, or an extra $20,174. When you need to earn nearly twice as much to move up an income quintile, its no surprise we appear less mobile at face value, but that’s because our income quintiles are wider, not because it’s harder to rise up (in terms of total income earned).
The same is true to a more dramatic extent when it comes from the liklihood someone born in the bottom will rise to the top. A Danish family can move from the bottom 10% to the top 10% with $45,000 of additional earnings, while a U.S. family would need an additional $93,000.
Part of the reason our income quintiles are so wide is because we’re such a wealthy nation, so less mobility between quintiles relative to certain European nations does not indicate less relative mobility. Someone who goes from earning $9,672 in the US to earning $19,970 may not move into a different quintile like they would in Britain, but they’re still just as well off, and can accomplish such a feat with more ease in the U.S.
Is Mobility On The Decline?
Another common myth about income mobility is that it’s a thing of the past. That our parents’ generation may have been able to earn more than their parents’ generation – but long gone as those days.
A batch of economists from Harvard University and the University of California Berkeley aggregated data from over 40 million tax returns of those born between 1971 and 1993, and there’s no decline in mobility (in this case, the study looked at itnergenerational mobility, focusing on the correlation between a parents’ and child’s income, and the odds that someone born into the bottom 20% will climb to the top 20%).
According to their findings, a child born into the bottom 20% in 1971 had a 8.4% of reaching the top 20%, and that actually increased to 9% for those born in 1986. The statistics for other quintiles can be gleaned from the chart below:
I’m not pretending that there aren’t people struggling, or denying unique struggles this current generation faces that prior generations did not (such as egregious levels of student debt), but the American dream is hardly on life support despite that. When we live in a country where a worker in the bottom 20% has a greater chance of reaching the top 20% than remaining in the bottom 20%, economic mobility, and the American dream, can indeed be pronounced alive.