As in the other panel studies, when you follow the same people, the biggest gains go to the poorest people. The richest people in 1980 actually ended up poorer, on average, in 2014. Like the top 20%, the top 1% in 1980 were also poorer on average 34 years later in 2014.

Splinter reminds readers that the pattern here is more important than the size of the changes — he points out that tax returns grossly understate actual income, capturing only about 60% of the total in recent decades. And some of what he is capturing may be life-cycle effects that differ by quintile. But his findings are a dramatic example of the potential of cross-sections — two snapshots in time — to mislead compared to a panel approach where the same people are followed over time.

Splinter’s numbers don’t control for age. Presumably the lowest quintile workers in 1980 are going to be younger so perhaps the growth we see is just normal raises as workers gain experience. So I asked Yonatan Berman⁸ who has been working with the same data to do a similar calculation but restricting the sample to workers who start out 25–30 in 1980. Here is what he finds:

Change in Median Real Income for Workers 25–30, 1980–2012

The starting level of income — the solid bars — is the median for workers centered in 1980 — it averages data from 1978, 1980, and 1982 and then puts people into quintiles based on those averages. Using data across four years reduces measurement error and transitory effects. The shaded bars are centered on 2012 averaging from 2010, 2012, and 2014. So these data cover most of a person’s working life from young ages to near-retirement. The time period is roughly the same as Piketty, Saez, and Zucman which covered 1980 to 2014. It uses the same deflator to correct for inflation as they do — the national income deflator.

Using four years of data biases growth downward. To show up in the bottom quintile you have to be there over a four year period. But the results are still pretty cheerful. All groups, and not just the richest, gain over their lifetime. The poorest workers make the largest percentage gains. The two lowest quintiles see their incomes more than double over their working life. The absolute gains for the three lowest quintiles are $18,800, $22,300, and $23,800. While the rich have larger absolute gains, the variance is much larger.

Finally, this is labor income. It does not include any measures of fringe benefits, benefits that became larger part of compensation over this period. No government transfers. No capital gains. And I would argue that the national income deflator imperfectly controls for improved quality of the goods we consume. This biases it upward meaning real growth is understated for all groups. Going in the other direction — these numbers are for workers — people who had earnings at both the beginning and the end of the period, so this probably overstates the increase in labor income of people at the bottom.

The American economy isn’t just helping the richest Americans. Prosperity is being enjoyed widely. Here is the third episode of the Numbers Game that looks at some of the cheerier evidence I’ve mentioned above and gives more of the intuition for what is going on:

The Numbers Game: Episode Three

There is one study of progress over time that follows parents and children that is gloomy and that is “The Fading American Dream: Trends in Absolute Mobility Since 1940” by Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, Jimmy Narang (Chetty et al)⁹ They find that if you were born in 1940, you had a 92% chance of surpassing your parents income. But if you were born in 1984, the number is a depressing 50%. Chetty et al control for age — this is for parents and children when they are both 30. This does suggest that the American dream is dead or at least dying — half of the children do better than their parents but half do worse, suggesting no progress over time. And because the data are from more recent years, they cast doubt on the cheerier results I reported at the top of this essay which looked at older data and may not apply to more recent times.

But Chetty et al’s estimate of 50% is quite sensitive to various assumptions they make as they report. (And they are to be saluted for reporting these results which is rarely done.) For example, the 50% measure does not correct for changes in household size over time, the issue that I mentioned above that distorts progress over time. When Chetty et al correct for household size, the proportion of children who as adults are better off than their parents is between 60% and 67% depending on how you choose to correct for family size. Many economists believe that the CPI-U-RS, the inflation measure used by Chetty et al in their gloomy 50% number, overstates inflation. If the overstatement is .8% percentage points annually, Chetty et al report that 59% of children born in 1984 are better off than their parents. If CPI-U-RS is off by 2% points annually, then 69% of children do better than their parents.

Or what if you correct for family size, assume CPI-U-RS is overstated by .8% per year and correct for taxes and transfers?

Then 72% of children born in 1984 do better than their parents. [Thanks to author Maximilian Hell for pointing this chart out to me from the appendix to their Science article.] I’d like to see the number when inflation is overstated by 2% and without taxes and transfers to isolate market effects only, but still, you can see that perhaps the glass is closer to half-full than half-empty when looking at intergenerational mobility.

And even under the gloomiest assumptions that leads to the 50% figure, Chetty et al find that the children growing up in the poorest part of the income distribution have a better chance of surpassing their parents than children growing up with rich parents: 70% of children born in 1984 into the bottom decile exceed their parents’ income in 2014. For those born in the top 10%, only 33% exceed their parents’ income.

All of the studies I have mentioned in this essay are about absolute mobility — how much income people gain over time. Relative mobility is much less dramatic — the richest people have an easier time staying in the top quintile than others have of getting there. While rich people in 1980 actually lost in some of the studies I’ve discussed, they still have a much higher income on average than the people who were poor in 1980.

There’s a lot more to study and understand. But what the studies above show is that the economic growth of the last 30–40 years has been shared much more widely than is generally found in the cross-section studies that compare snapshots at two different times, following quintiles rather than people. No one of these studies is decisive. They each make different assumptions about income (see the footnotes below), which people to include, how to handle inflation. Together they suggest the glass isn’t as empty as we’ve been led to believe. It’s at least half-full.

Of course, the fact that people across the income distribution make progress over time doesn’t change the fact that people at the top today make more than the people at the bottom. Income inequality is larger than it once was. The snapshot approach captures that. But it does not capture the impact of economic growth on people’s material well-being or provide evidence that the rich or the poor are static categories no one ever escapes. That the rich today are richer than the rich of yesterday is a very different finding than that the rich are getting all the gains. Too many economists have treated these as identical.

This does not mean that everything is fine in the American economy. There are special privileges reserved for the rich that help them reduce their risk of downward mobility — financial bailouts are the most egregious example. There are too many barriers like occupational licensing and the minimum wage that handicap the disadvantaged desperately trying to succeed in the workplace. And the American public school system is an utter failure for too many children who need to acquire the skills needed for the 21st century. But the glass is at least half-full. If we want to give all Americans a chance to thrive, we should understand that the standard story is more complicated than we’ve been hearing.

Acknowledgments

The videos embedded in this series are a creative partnership I have been privileged to share with Shana Farley, Chris Dauer, and Tom Church. Working with them has been such a pleasure. Their help and insights have been invaluable. I am grateful to Alicia Reece of Motion 504, the chief animator on the three episodes to date for her creativity and superb work. I want to thank David Splinter and Yonatan Berman for conversations and their work presented here.

POSTSCRIPT I

One of the reactions to this essay is that of course household income has gone up — that’s because there are so many more households where both the husband and wife is working. Another version of this is that in the old days, one person working could support a family, now you need two, so we’re falling behind. Actually, the cheerier studies I’ve mentioned above look at individuals, not households. But it is worth noting that the proportion of households with two earners has actually decreased since 1980. (See Table H-12 here from the Census Bureau.) That’s because while more married couples are households where both spouses are working, the marriage rate has fallen. So in 1980 (when the Census data starts), 33% of households had two earners but in 2017 it is only 31%. Since 1980, the number of households with zero or only one earner has risen from 56% to 60%.

Postscript 2

Some readers of this essay have asked why in Splinter’s work, the poorest and middle quintile is worse off in 2014 than in 1980. Doesn’t that mean the economy is hurting the poor? That depends. As Splinter points out, income based on tax returns leaves a lot of income unreported, maybe 40%. A surprising amount of that unreported income did not go to the rich. Piketty, Saez, and Zucman assume that unreported income is a proportion of reported income. Auten and Splinter use tax audit data to get what they hope is a better measure of where the unreported income shows up. That has a huge effect on measured inequality:

I suspect there is more unreported income in 2014 than in 1980. Another possibility is that 2014 was just an unrepresentative year as 1980 was, as a measure of lifetime prospects.