The Inverse Relationship between Inequality and Economic Mobility Threatens the American Dream

Americans have traditionally tolerated economic inequality as long as they perceived a fair opportunity to move up the economic ladder.  One of the key questions of our time is whether well-documented rising economic inequality has adversely impacted economic mobility.

To answer this question I developed a dataset from three sources. The following table depicts the variables in this analysis and the sources of the data.

Variable Name

Description

Data Source

pct_chg_gini

Percent changes in Gini coefficient at the State level from 1978 – 2005. The Gini coefficient is a measure of inequality varying between 0, complete equality, and 1, complete inequality.

Calculated from raw data from U.S. State-Level
Income Inequality Data

n_abs_mob

National absolute mobility at the state level, 1978-2007. Absolute mobility measures state residents’ average earnings growth over time

 

Pew
Center on the States

n_relu_mob

National relative upward mobility at the state level, 1978-2007. Relative upward mobility captures residents’ upward rank on the earnings ladder relative to their peers.

 

Pew
Center on the States

n_reld_mob

National relative downward mobility at the state level, 1978-2007. Relative downward mobility captures residents’ downward rank on the earnings ladder relative to their peers.

Pew
Center on the States

Data for all states and the District of Columbia was available. The three measures of economic mobility — absolute mobility, relative upward mobility and relative downward mobility — were regressed on the percent change in the Gini coefficient from 1978 to 2005. Our research hypotheses expect an inverse relationship between economic inequality with both absolute mobility and relative upward mobility. On the other hand, it’s hypothesized that a direct relationship exists between economic inequality and relative downward mobility.

Findings

1) Regression of absolute mobility on percent change in the Gini coefficient, a measure of inequality

The following scatter plot  with the regression line of best fit summarizes the inverse relationship between absolute mobility and economic inequality, measured by percent change in the Gini coefficient.

Inequality and Economic Mobility - Absolute Mobility

R2 = .20, Prob > F = 0.0009; b = -.21, p = 0.001

As observed, the higher economic inequality, measured by the percent change in the Gini coefficient,  the lower absolute mobility, signaling lower economic mobility opportunities. A 1 percent increase in the Gini coefficient is associated with a -.21 percent decrease in absolute economic mobility.

Some people, namely economists, prefer the interpretation of marginal elasticity coefficients, which is equal to -.34, meaning a 1 percent change in the Gini coefficient is associated with -.34 percent change in absolute mobility.  The following graph captures the conditional marginal elasticity effects of inequality on absolute mobility throughout the observed distribution of percent changes in Gini coefficients in the states (.14 to .40)Conditional Marginal Elasticity Effects of Percent Change in Gini on Absolute MobilityClearly, an inverse relationship exists between inequality, measured by percentage change in the Gini coefficient, and absolute mobility.

2) Regression of relative upward mobility on percent change in the Gini coefficient, a measure of inequality

What about the relationship between economic inequality and relative upward mobility? Again, we observe an inverse relationship between economic inequality and economic mobility.

Inequality and Economic Mobility - Relative Upward Mobility

R2 = .16, Prob >F = 0.003; b = -.37, p = 0.003

The higher the percent change in the Gini coefficient, measuring greater levels of inequality, the lower the relative upward mobility, signaling lower economic mobility opportunities. A 1 percent increase in the Gini coefficient is associated with a -.37 percent decrease in relative upward economic mobility. The conditional marginal elasticity equals -.30, meaning a 1 percent change in economic inequality is associated with -.30 percent change in relative upward mobility. Here’s the conditional marginal elasticity effects of inequality on relative upward mobility

Conditional Marginal Elasticity Effects of Percent Change in Gini on Relative Upward Mobility3) Regression of relative downward mobility on percent change in the Gini coefficient, a measure of inequality

Finally, the following graph depicts the direct relationship between economic inequality and downward economic mobility. As inequality increases in a state downward economic mobility increases.

Inequality and Economic Mobility - Relative Downward Mobility

R2 = .13, Prob > F = 0.0101; b = .27, p = 0.010

The conditional marginal elasticity equals .24, meaning a 1 percent change in economic inequality is associated with .24 percent increase in relative downward mobility. Here’s the conditional marginal elasticity effects of inequality on relative downward mobility.

Conditional Marginal Elasticity Effects of Percent Change in Gini on Relative Downward MobilityConclusion

All three measures of economic mobility are adversely associated with economic inequality. Our research hypotheses were supported: an inverse relationship between economic inequality with both absolute mobility and relative upward mobility was observed as well as a direct relationship between economic inequality and relative downward mobility.

The reasons for these relationships are not totally clear but there’s some new research pointing to some possible reasons accounting for the relationship. Christopher Jencks of Harvard University links income inequality to a widening gap in college attendance. Isabel Sawhill suggests that a stagnant society is associated with rising correlation between income levels, likelihood of marriage and level of education. Others argue that the decline in unionization, changes in tax policies and transfer payments, as well access impediments to higher education are increasing economic inequality, as well as economic mobility.

Whatever the causes, the unfortunate relationship between inequality and economic mobility threatens the American Dream, making it a delusion for far too many people. The risks associated with losing the American Dream of upward mobility weakens the social bonds that hold us together and exacerbates social ills associated with increasing inequality and concomitant lower economic mobility. It calls into question, “Is this the America we want?”

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