Current Events > New studies show that the poorest workers accrue the largest economic gains

(+) Yeah! (+)

Most people believe that the middle class and the poor are stagnating, treading water, while the rich get all the goodies. Nobel Laureate Paul Krugman writes that Wages for ordinary workers have in fact been stagnant since the 1970s. Jared Bernstein writes in the New York Times, for middle-income households earnings have declined in real terms 7 percent from 1979 to 2010.

But these depressing conclusions rely on studies and data that are incomplete or flawed. They understate economic growth for the poor and the middle class because they use measures of prices that mis-measure inflation. Some studies leave out important components of compensation such as fringe benefits which have become increasingly important in recent years. And some studies include the elderly which lowers measured progress because the elderly are an increasing share of the population and they are less likely to be working full-time if at all.

And many of the most pessimistic studies about the fate of the American middle class ignore the fall in marriage and the increase in divorce since the 1970s and the effects that demographic change has had on the way we measure changes in household income.

But the biggest problem with the pessimistic studies is that they rarely follow the same people to see how they do over time. Instead, they rely on a snapshot at two points in time. So for example, researchers look at the median income of the middle quintile in 1975 and compare that to the median income of the median quintile in 2014, say. When they find little or no change, they conclude that the average American is making no progress.

But the people in the snapshots are not the same people. These snapshots fail to correct for changes in the composition of workers and changes in household structure that distort the measurement of economic progress. There is immigration. There are large changes in the marriage rate over the period being examined. And there is economic mobility as people move up and down the economic ladder as their luck and opportunities fluctuate.

How important are these effects? One way to find out is to follow the same people over time. When you follow the same people over time, you get very different results about the impact of the economy on the poor, the middle, and the rich.

Studies that use panel data data that is generated from following the same people over time consistently find that the largest gains over time accrue to the poorest workers and that the richest workers get very little of the gains. This is true in survey data. It is true in data gathered from tax returns.

Here are some of the studies that find a very different picture of the impact of the American economy on the economic well-being of the poor, middle, and the rich.

This first study, from the Pew Charitable Trusts, conducted by Leonard Lopoo and Thomas DeLeire uses the Panel Study of Income Dynamics (PSID) and compares the family incomes of children to the income of their parents. Parents income is taken from a series of years in the 1960s. Childrens income is taken from a series of years in the early 2000s. As shown in Figure 1, 84% earned more than their parents, corrected for inflation. But 93% of the children in the poorest households, the bottom 20% surpassed their parents. Only 70% of those raised in the top quintile exceeded their parents income.

https://medium.com/@russroberts/do-the-rich-capture-all-the-gains-from-economic-growth-c96d93101f9c
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Chetty et al find a similar pattern. In an otherwise gloomy assessment of American progress, they find that 70% of children born in 1980 into the bottom decile exceed their parents income in 2014. For those born in the top 10%, only 33% exceed their parents income.

The poor may find it easier to do better than their parents. But how much better off do they end up? Julia Isaacss study for the Pew Charitable Trusts finds that children raised in the poorest families made the largest gains as adults relative to children born into richer families.

The children from the poorest families ended up twice as well-off as their parents when they became adults. The children from the poorest families had the largest absolute gains as well. Children raised in the top quintile did no better or worse than their parents once those children became adults.

One explanation of these findings is there is regression to the mean if your parents are particularly unlucky, they may find themselves at the bottom of the economy. You, on the other hand, can expect to have average luck and will find it easier to do better than your parents. At the other end of the income distribution, one reason you might have very rich parents is that they have especially good luck. You are unlikely to repeat their good fortune, so you will struggle to do better than they did.

But that doesnt change what actually happened in the last three decades of the 20th century in the Isaacs study: the children from the poorest families added more to their income than children from the richest families. That reality isnt consistent with the standard pessimistic story that only the richest Americans have benefited from economic growth over the last 3040 years. Or that only the richest Americans have gotten raises. The pessimistic story based on comparing snapshots of the economy at two different points in time misses the underlying dynamism of the American economy and does not accurately measure how workers at different places in the income distribution are doing over time.

Gerald Auten, Geoffrey Gee, and Nicholas Turner of the Office of Tax Analysis in the Treasury Department used tax returns to see how rich and poor did between 1987 and 2007. They find the same encouraging pattern: poorer people had the largest percentage gains in income over time:

The study looks at people who were 3540 in 1987 and then looks at how they were doing 20 years later, when they are 5560. The median income of the people in the top 20% in 1987 ended up 5% lower twenty years later. The people in the middle 20% ended up with median income that was 27% higher. And if you started in the bottom 20%, your income doubled. If you were in the top 1% in 1987, 20 years later, median income was 29% lower.
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Damage control topic
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This fits in with the narrative I've seen that social mobility is extremely high in the US, so it's not really worth tracking the size of each income bracket to imply that the poor stay poor because that doesn't reflect the reality of people falling in and out of "poor" as circumstances change.
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those damn poor people, trying to get one over on the honest, hardworking folk! it was a scam all along!

Well if you give someone that has no money one dollar yeah the percentage increase is more than if you give someone a dollar that has a million dollars so
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s0nicfan posted...

This fits in with the narrative I've seen that social mobility is extremely high in the US, so it's not really worth tracking the size of each income bracket to imply that the poor stay poor because that doesn't reflect the reality of people falling in and out of "poor" as circumstances change.

Indeed. The brackets are always mentioned but what almost no one mentions is that most people in the bottom 50% move up into the top 10% (and top 1%) at some point in their life.

Kaiganeer posted...

those damn poor people, trying to get one over on the honest, hardworking folk! it was a scam all along!

There are certainly leftists who refuse to understand any nuance or all the relevant data points, because doing so would undermine their efforts to just get more government involved in everything.
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This is the change in the size of each economic group between 1979 and 2014 as a percent of the total population:

- Rich: 0.1% -> 1.8%

- Upper Middle Class: 12.9% -> 29.4%

- Middle Class: 38.8% -> 32%

- Lower Middle Class: 23.9% -> 17.1%

- Poor or Near-Poor: 24.3% -> 19.8%

@Godnorgosh

People that are poor and lower-middle class are vanishing into both the middle class and the upper middle class. We're doing something incredibly right since the 70s.
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FLUFFYGERM posted...

This is the change in the size of each economic group between 1979 and 2014 as a percent of the total population:

- Rich: 0.1% -> 1.8%

- Upper Middle Class: 12.9% -> 29.4%

- Middle Class: 38.8% -> 32%

- Lower Middle Class: 23.9% -> 17.1%

- Poor or Near-Poor: 24.3% -> 19.8%

@Godnorgosh

People that are poor and lower-middle class are vanishing into both the middle class and the upper middle class. We're doing something incredibly right since the 70s.

What are the levels of wealth that make up these percentages.
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I didn't read any of that, but I've reached the conclusion that tc loves communism and is a super-fan of marx
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What's fascinating about the study is how elementary it sounds when it's all broken down to basically, the poor have way more to gain than middle or high income population.

The problem is though, income growth stalls to next to nothing for lower-middle class Americans at a point due to career fields, education, and location. Meanwhile, our Socioeconomic system allows the only the rich to get richer regardless of how little their gains may appear in comparison.
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Jagr_68 posted...

What's fascinating about the study is how elementary it sounds when it's all broken down to basically, the poor have way more to gain than middle or high income population.

The problem is though, income growth stalls to next to nothing for lower-middle class Americans at a point due to career fields, education, and location. Meanwhile, the rich only get richer regardless of how little their gains are.

It's because the rich have money in the stock market / assets. When the value of those assets goes up, net worth goes up. When it goes down, like during bear markets (which we are close to entering) then their net worth goes down.

Ultimately the poor and middle class are still making huge gains when you consider all the nuances. That doesn't mean it can't get better. But if we look at the trend, it's not all doom and gloom like you'd expect from reading the common news.
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And they still can't afford healthcare.
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It would make sense the poor gets the highest percentage growth because minimum wage is way behind the standard and simply 1 dollar increase is a much larger percentage for poor people. That's makes sense right? I don't know if I actually know what I'm talking about though
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DepreceV2 posted...

It would make sense the poor gets the highest percentage growth because minimum wage is way behind the standard and simply 1 dollar increase is a much larger percentage for poor people. That's makes sense right? I don't know if I actually know what I'm talking about though

The shifts are much more substantial than someone making $1 ending up with $2 for a large percentage gain but a low absolute gain. The shifts represent actual movements into higher tax brackets, which is why looking at just the tax brackets is pointless. When you consider that the majority of people in the bottom 50% will at some point in their lifetime end up in the top 10% or even top 1%, it's clear that we are doing something right as a nation and that class mobility is real.
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FLUFFYGERM posted...

The brackets are always mentioned but what almost no one mentions is that most people in the bottom 50% move up into the top 10% (and top 1%) at some point in their life.

Can you specify what you mean by this?
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Anteaterking posted...

FLUFFYGERM posted...

The brackets are always mentioned but what almost no one mentions is that most people in the bottom 50% move up into the top 10% (and top 1%) at some point in their life.

Can you specify what you mean by this?

When pundits talk about how the poor get poorer and the rich get richer, they never mention that those brackets are not static groups of people. They're fluid. People move in and out of those brackets. If you actually follow people who start out in the bottom 50%, most of them move into the top 10% in their lifetime. (And certainly in the top 20% if not the top 10%)
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Percent gain is a stupid fucking measure here lol.
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COVxy posted...

Percent gain is a stupid fucking measure here lol.

Look who made the topic.
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FLUFFYGERM posted...

When pundits talk about how the poor get poorer and the rich get richer, they never mention that those brackets are not static groups of people. They're fluid. People move in and out of those brackets. If you actually follow people who start out in the bottom 50%, most of them move into the top 10% in their lifetime. (And certainly in the top 20% if not the top 10%)

I guess I should have been more specific. Top 10% of what? Most people at some point in their lives are in the top 10% of yearly income, top 10% of asset holders?
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Anteaterking posted...

FLUFFYGERM posted...

When pundits talk about how the poor get poorer and the rich get richer, they never mention that those brackets are not static groups of people. They're fluid. People move in and out of those brackets. If you actually follow people who start out in the bottom 50%, most of them move into the top 10% in their lifetime. (And certainly in the top 20% if not the top 10%)

I guess I should have been more specific. Top 10% of what? Most people at some point in their lives are in the top 10% of yearly income, top 10% of asset holders?

Top 1% or 10% of income earners. (Where the top 1% is defined as someone who makes something like $500,000 per year IIRC)
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https://cdn-images-1.medium.com/max/1000/1*Td28gng3bsi323fLxrwb5w.jpeg

imo this picture undermines the overall point that russ is trying to make here

median income among the top % falls even as mean income explodes; yes, the mean income still goes up more for the lowest quintile, but then the mean income for the top 1% increases more than for any other quintile which implies that even though most people lost income in that top 1%, a small number greatly increased their income. i think that is perfectly consistent with the idea that a smaller number of people capture a larger share of the gains over time if you disaggregate the data farther

but overall I do agree there should be nuance in the conversation about economic mobility in the usa
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bump
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Git gud, casuals
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