In Defence of Liberty

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Zeniths and Valleys of Income

There is a common trend amongst journalists on economic matters to speak about the brackets of income and wealth, and to relay the successes and troubles of those brackets. This nomenclature is often used by political movements, such as the Occupy movement, who claim to act on behalf of ‘the 99%’ against the cruel machinations of ‘the 1%’. The focus often glares on very small groups, such as the top 0.01%. Zanny Minton Beddoes wrote in The Economist:

Including capital gains, the share of national income going to the richest 1% of Americans has doubled since 1980, from 10% to 20%, roughly where it was a century ago. Even more striking, the share going to the top 0.01%—some 16,000 families with an average income of $24m—has quadrupled, from just over 1% to almost 5%.

Statistical Categories and Actual People

Statistical categories, such as the top 1% of incomes or the poorest 50% in a country, are not equivalent to actual human beings. Widening disparities between income divisions do not necessarily imply that there is a widening disparity between actual individuals and households, as these individuals and households are transient between the separate income brackets. This is especially true of households, the size and composition of which varies throughout time. Also, a statistical category having a smaller share of national income does not mean that people in that income group are absolutely poorer.

Income mobility comes in two forms: relative and absolute. Relative income mobility considers the movement between different partitions of the income scale, usually into quintiles (fifths) or deciles (tenths). Absolute income mobility tracks changes in income over time, adjusted for inflation. The reasons for income mobility are clear. According to the HMRC, the bottom 10% of income earners all had an annual income of less than £11,070, which is less than the full-time minimum wage. This means that everyone in the bottom decile worked partially throughout the year, either with a year-round part-time job, or being temporarily unemployed. People do not stay in such modes of employment forever. When a student working part-time finally graduates, they may experience a huge increase in income, both absolutely and relatively. Over the course of one year, a person in work gets one year’s more experience, or a year’s vocational training, or progression through a degree. People may have downward travels of income, but in general, a person at the end of their career will command a higher wage than they did at the start of it.

Graduates may work part-time, and then experience a huge increase in income when they begin full-time work. (Photo thanks to Sakeeb Sabakka, found here: http://www.fotopedia.com/items/flickr-4647211575)

Students may work part-time, and then experience a huge increase in income when they graduate and begin full-time work. (Photo thanks to Sakeeb Sabakka, found here: http://www.fotopedia.com/items/flickr-4647211575)

The Joseph Rowntree Foundation published researched by Sarah Jarvis and Stephen Jenkins, which studied households between the years 1991 and 1994, using data from the British Household Panel Survey. The research found that about 40% of households remained in the same tenth of the income scale, whilst over 70% of households do not move far, either being in the same income decile as before, one above or one below. This pattern was consistent throughout the years being studied. Importantly, income inequality in each of the four years was greater than the cumulative income inequality over the four years. The Gini coefficient was 0.31 in wave one (1991), but the four-year average Gini coefficient was only 0.28.

The Institute for Fiscal Studies also looked at the dynamics of households on low income, by the same researchers. It looked at income dynamics for the low-paid, both absolutely and relatively. For the first study, an income was deemed ‘low’ if it was lower than half the 1991 (wave one) mean income, adjusted for inflation. Only 4.3% households were had a low income in all four years, from 1991 to 1994. 32.3% of households experienced a low income for at least one year out of four. Alternately, the relative cut-off was being in the bottom income quintile, of which only 7% of households had a low income for all four years, and 36.1% of surveyed households experienced low income in one of the four years.

Income Mobility in the United States

Similar patterns can be seen in the United States. The report entitled Income Mobility in the U.S. from 1996 to 2005 by the Department of the Treasury, looking at changes in income over the given years. For people in the bottom quintile in 1996, only 42.4% were still there in 2005. There were significant movements up the income scale from this bottom quintile, as 15.2% of taxpayers reached the top 40% by 2005, 5.3% climbed to the upper quintile, and 0.2% of people were in the top 1%. Far from being a malevolent and enduring class of people, the top 1% of income earners in the United States is a highly unstable group. 3.9% of people in the top 1% in 1996 had plummeted to the bottom quintile in 2005, whilst only 40.3% remained in the top 1% between the two years. The top 0.01% of taxpayers is even more insecure, as 25.3% was in that group in both 1996 and 2005. This instability becomes more dramatic when considering absolute income changes. For the top 0.01% in 1996, 59.1% of these people’s incomes had plunged by more than half by 2005, whilst it had doubled for 12.4% of this group.

The United States has significant income mobility. (Photo thanks to WalkingGeek, found here: http://www.flickr.com/photos/wengs/3391060006/sizes/o/in/photostream/)

The United States has significant income mobility. (Photo thanks to WalkingGeek, found here: http://www.flickr.com/photos/wengs/3391060006/sizes/o/in/photostream/)

Absolute income changes were also dramatic down the income scale. For the surveyed taxpayers in the bottom quintile in 1996, their median income had increased by 108.7%, that is, more than doubled, and their mean income had more than tripled, as it was amplified by 247.5%. The median income of the top 1% in 1996 fell by 23.4%, whilst their mean income had grown by 13.6%.

Whilst ‘the rich get richer, and the poor get poorer’ is a tired political refrain, the reality is that the rich in one year may even get poorer; but the poor from that same year get richer. The problem of quoting snap-shot statistics for income inequality is that they inherently compare someone studying and training, with another person at the zenith of their career.  Whilst it may not ameliorate every person’s concern with income inequality, the consideration of income mobility may shine new light on these statistics.

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One comment on “Zeniths and Valleys of Income

  1. Pingback: The Rich Get Richer | In Defence of Liberty

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This entry was posted on January 27, 2013 by in Economics and tagged , , , .
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