Income Mobility: the Schumpeter Hotel or Monopoly? In the news today another study that claims that since 1970 the Rich have gotten richer than the Poor, and this is BAD. This time it was the Center for Budget and Policy Priorities that "discovered" this. The quintiles, which before the 1980's showed a "picket fence" pattern now show a "stair step" pattern. [>> Percent change in mean real family income ] [>> by quintile from 1970 to 1995. ] [>> | 42% ] [>> | ______ ] [>> | | | ] [>> | | | ] [>> | 22% | | ] [>> PERCENT | ______+ | ] [>> INCREASE | 12% | | | ] [>> | ______+ | | ] [>> | 3.8% | | | | ] [>> | 1st +------| | | | ] [>> |______|______+______+______+______+ ] [>> ------+ 2nd 3rd 4th 5th ] [>> -0.4% ] [>> QUINTILE ] [>> [...] one would find the corresponding graph for ] [>> the period from 1945 to 1970 looks something like the following: ] [>> Percent change in mean real family income ] [>> by quintile from 1945 to 1970: ] [>> | ] [>> | ] [>> | ] [>> | ] [>> |------+ +------+ +------+ ] [>> PERCENT | +------+ +------+ | ] [>> INCREASE | | | | | | ] [>> | | | | | | ] [>> | | | | | | ] [>> | | | | | | ] [>> |______|______+______+______+______+ ] [>> 1st 2nd 3rd 4th 5th ] [>> ] [>> QUINTILE ] All of their data is about those "quintiles" that the families are divided onto, from high to low income, and the comparison is with the corresponding "quintile" in the past. Corresponding "quintile", not "same family". Joseph Schumpeter tried to explain the difference between how "quintiles" are doing, and how families and people are doing, by using the analogy of a hotel. Quintiles are the rooms, and the people/families move between rooms. In the Schumpeter Hotel model, the change is from having all of the rooms improved to about the same extent, (picket fence) to having the 5 star rooms improved the most, the one star rooms the least. (stairs) This has happened in the US over the past 25 years. It is not a statistical artifact. I don't see it as a serious problem. (note that I don't say it is GOOD, just not BAD). This is because income mobility has remained both high and constant during this time (the past 25 years). For a review of studies on this, see Sawhill and McMurre: http://www.urban.org/oppor/opp_031.htm and also my web page files INCOME MOBILITY in the economics section. Income mobility is different from income distribution: it is the RATE that the people move between rooms. It is harder to picture, and the data is usually presented in a table, or in a percent of the people in an income quintile (class of room in the hotel) who leave for another (typically better) room each year. Or decade. Or other time period. If the spread between the 5 classes of rooms has INCREASED (the 5 star have become much better than the one star), this corresponds to the highest income quintile now having an even higher income relative to the bottom income quintile than before. Someone in the bottom quintile now must earn an even higher income to become a member of the top quintile than before. But the rate at which people move up is about the same now as before, even though the steps are bigger. So people are taking bigger steps now, and thus keep the rate constant. In hotel terms, if people move to a room with more stars now as often as then, but the rooms with more stars are now MUCH nicer than they were then, I claim that overall, the people in the hotel are better off now than they were then. They are moving up to MUCH nicer rooms as often as they used to move up to SLIGHTLY nicer rooms. In a thread on this topic, Robert Vienneau suggested an even better way to picture this than the Schumpeter Hotel. People typically don't move around between the rooms in a hotel, and there is no reason for a progression even if they did, So Vienneau suggested the board game of Monopoly. Before 1970 the various locations in the game had a certain difference in quality: Boardwalk was maybe ten times nicer than Baltic Avenue. Now it is 20 times better, and likewise the locations inbetween: the nicer the place, the more it has improved. But people don't stay in the same place, they move around the board. The fact that income mobility has remained unchanged during the past 25 years (while Boarkwalk has improved a lot and Baltic Avenue has improved little or none), means that the dice is cast as often now as then. So all the players benefit from the improvements. Well life is not exactly like Monopoly. Most people only go around once in life, (but some people have made and lost a fortune, or made and lost and made again, or have been around the board several times). Not everyone starts in the same place: some are born on the Boardwalk and some get stuck in Baltic Avenue for their entire life. Some people live their entire life in Illinois or Kentucky. But most people do start somewhere around Vermont or St. Charles and end up in Marvin Gardens or Pacific. The Vienneau Monopoly Board is better than the Schumpeter Hotel. It is not everyday that somebody has a better explanation of something than Joseph Schumpeter. I wish that I had been clever enough to think of that, but it would be unfair for me to take the credit. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. Mobility example Units can be kilobucks of income or assets in any units or whatever. Consider 5 quintiles. Time 1 (1990) Top =50 units Second=40 " Third =30 " 4th =20 " Bottom=10 " Time 2 (2000) Top =100 units Second=60 Third =45 4th =25 Bottom=8 Q Did the "rich get richer"? A In some sense. Q Did the "poor get poorer"? A In some sense. Q What does this say about "mobility"? A Nothing To make things easy, say each quintile contains only one member. Time 1 (1990) Top =Adam (50) Second=Bob (40) Third =Chuck(30) 4th =Don (20) Bottom=Fred (10) Time 2 (2000) Top =Fred (100) Second=Chuck(60) Third =Bob (45) 4th =Don (25) Bottom=Miguel(8) Note that no one got poorer in absolue terms (units). Bob dropped only relative to the group because he gained only 5 units, the same as Don. Q What happened to Adam? A He died. People do. Especially old rich people. Q Where did Miguel come from? A Mexico, and his 8 units is 4 times what he had there. He gained a higher percentage than anyone except Fred. Note that everyone got richer with the possible exception of Adam.