Categories of Income Mobility

"Your grandfather scratched the mill out of the naked earth."
--Mary Rafferty (The Valley of Decision)

A common problem with income distribution studies is that they tend to be static in nature. They ignore income mobility--or the extent to which individuals move up or down the income ladder.

Markets that exhibit high degrees of income mobility are generally desireable because of their capacity for rewarding success and punishing failure.

Income mobility can be categorized according to the time horizon associated with moving significantly on the income ladder. Intergenerational mobility is the extent to which offspring move up or down the income ladder compared to their parents. Parents may not be mobile because they are busy working and saving in jobs that do not offer much advancement potential. They subsequently pass their savings down to their children who use those resources to advance their productivities and incomes.

This can work in reverse, of course. Parents can borrow and spend into oblivion, thereby leaving little inheritance for their children.

Income mobility can also be intertemporal. Intertemporal mobility refers to the extent to which individuals who start with low [high] income can move up [down] the ladder in their lifetimes.

An interesting finding of mobility research is that income mobility tends to be much greater during unstable economic periods. Those people concerned about income 'fairness' should therefore relish economic uncertainty because "deep recessions are the fairest years of all" in terms of the poor advancing and the wealthy getting crushed.

One technical note about mobility research that measures movement between fractional income groups (e.g., income 'quintiles') is that the middle income groups are more likely to experience mobility because, being in the middle, these groups can move in either direction. Those in the extreme buckets can only move up or down.

This measurement artifact sometimes leads to the faulty conclusion that the poor are stuck at the bottom and the rich are secure at the top when, in fact, it is a mathematical consequence of people in these groups only being able to move in one direction.