A new report by the Congressional Budget Office (CBO) offers new
proof that many of America's poorest citizens are doing better than
they were 14 years ago. Between 1991 and 2005, the average annual
income of the poorest households with children increased by 35
percent, adjusted for inflation--a bit over 2 percent per year.
This flies in the face of other income measures, such as
declining median income, that suggest widening inequality and
raises questions about how best to measure economic inequality and
mobility. This matters because the development of public policy
addressing inequality and mobility requires nuance.
Economists analyze inequality and mobility primarily by
calculating income, earnings, or wealth holdings across the
population. Each measurement allows individuals to be compared to
their peers (relative inequality or mobility) and tracked over time
(absolute inequality or mobility). Although these three
measurements are highly related, an individual's position within
the three distributions is not necessarily the same. No single
measure presents an accurate picture of overall inequality or
Who Are the Rich and Poor?
Labeling the rich and the poor is not straightforward.
Distributions of income, earnings, and wealth--the major indicators
of economic status--are correlated but do not mirror one
According to a research paper published by the Federal Reserve
Bank of Minneapolis, age is one of the principal factors in
determining a person's earnings, wealth, and income relative to
others in the income distribution. In this paper, earnings
include wages, salaries, and most business income; wealth is net
worth, including financial and real assets, savings, and income
from investments; and income is all before-tax revenue, including
The average age of those in the bottom 20 percent of the
earnings distribution (or bottom quintile) is 66.4 years,
suggesting that many in this quintile are retired. Similarly, in
the bottom quintile of income, the average age is 52.8 years, old
enough to indicate that many are retired, which affects the
quintile's average income and hours worked per person. The average
age of people in the bottom quintile of wealth, however, is 39.5
years, an age when individuals are typically still acquiring
assets. Further supporting the argument that age is an important
contributor to inequality, the average ages of those in the top
quintiles of earnings, income, and wealth are 45.3, 48, and 56.3,
respectively. Average earnings and income tend to peak
while people are in their forties, while people accumulate wealth
throughout their lives.
Additional differences between earnings, income, and wealth
become apparent when comparing the locations of individuals across
the three distributions. Households at the bottom of the earnings
quintile account for a large share of wealth (18.8 percent).
Another way of looking at this is to compare where a person would
be when ranked by income and by wealth. If we ranked this same
low-income "average" person by this person's wealth holdings, it
would easily put him in the top of the fourth quintile of wealth.
Similarly, a household with the average wealth of those in the
bottom 1 percent of the earnings distribution (comprised primarily
of negative earnings) would be located near the very top (90th to
95th percentile) of the wealth distribution.
The large wealth holdings of the income- and earnings-poor
suggest that a single measure of inequality or mobility does not
tell the whole story.
Mobility Depends on the Measurement
Economic mobility is a dynamic process. As people move from one
rung of economic achievement to another, their earnings, income,
and wealth do not necessarily hold constant. Thus, the three
measures of economic mobility must be analyzed together to explain
an individual's economic condition.
This dynamic characteristic of economic mobility prevents the
use of a single indicator or metric of economic mobility to measure
economic changes during a worker's life and between generations of
workers. Changes in the amount of relative mobility vary according
to the measurement used and are usually expressed as the percentage
of people who move to a different earnings, income, or wealth
quintile during a time period--two years in the Federal Reserve
paper. Few people moving to a different quintile define low
mobility, while many people moving to different quintiles reflects
Overall, the measurements ranked from lowest to highest in terms
of mobility are earnings, wealth, and income. However, mobility is
not constant along the distributions of these measurements. For
example, earnings mobility is very low for those at the very bottom
of the quintile, but mobility increases steadily starting at the
beginning of the next quintile. This could be because individuals
at the very bottom of the earnings quintile are business owners in
financial distress or households that hold tremendous amounts of
wealth and choose to substitute capital earnings for labor
earnings. Earnings mobility remains very high until
the middle of the second quintile, though income mobility becomes
greater at that point. Chart 1 illustrates the levels of earnings,
wealth, and income mobility at each quintile.
Contrary to popular expectation, earnings, income, and wealth
mobility are lowest for the top quintile, even lower than income
and wealth mobility in the very bottom quintile. This may be
because individuals in the top and bottom quintiles have only one
direction in which to move. This is not the same, however, as
saying that those in the bottom and top quintiles have an economic
condition that is more persistent. Moreover, income mobility
reaches its peak in the middle of the third quintile, while wealth
mobility remains constant from the beginning of the second quintile
to the end of the fourth quintile. Earnings mobility is the lowest
of all three measures and continues to fall after reaching its peak
at the beginning of the second quintile.
Measurements of mobility, like those for inequality, are
sensitive to where one falls along a distribution. By income or
wealth, persistence is the norm within the bottom and top
quintiles, but mobility is higher for the middle quintiles.
Earnings tell a different story: Mobility is low in the bottom
quintile and high in the second quintile, but lower for the rest of
the distribution. In order to grasp the totality of mobility, all
three dimensions should be incorporated. The proper mobility
measurement depends on the subgroup being analyzed.
Why Earnings and Not Income?
The CBO's economists chose to measure income mobility using
earnings plus additional forms of earned and unearned income.
Because they looked at households with children, which are more
likely to be younger than the norm, earnings or income were more
appropriate than wealth in studying these households' absolute
mobility. Furthermore, because the majority of those within this
group rely on labor earnings (e.g., wages and salaries) and
unearned income--often various kinds of welfare benefits such as
the Earned Income Tax Credit and Temporary Assistance for Needy
Families--not income from investments, earnings is preferable to
income in determining absolute mobility. (See Chart 2.)
Among this demographic, earnings have steadily increased since
1991. Most of this growth occurred during the late 1990s; increases
have since slowed but remain high. Since 1991, unearned income has
remained relatively stable.
There is no comprehensive measure of economic inequality and
mobility, but several metrics, used together, can give a more
complete picture. Looking exclusively at income inequality or
mobility is not enough. Income, earnings, and wealth all contribute
to an accurate assessment of inequality and mobility in
Paul Winfree is Policy Analyst in the
Center for Data Analysis at The Heritage Foundation.
study categorizes households within the lowest quintile of the
income distribution as being the nation's poorest. See
Congressional Budget Office, "Changes in the Economic Resources of
Low-Income Households with Children," Economic and Budget Issue
Brief, May 2007, p. 1.
Santiago Budria Rodriguez, Javier Diaz-Gimenez,
Vincenzo Quadirni, and Jose-Victor Rios Rull, "Updated Facts on the
U.S. Distributions of Earnings, Income, and Wealth," Federal
Reserve Bank of Minneapolis, Quarterly Review 25, no. 3
(2002), p. 3.
amount of wealth held by the bottom quintile is more than any other
quintile except the top quintile, which holds just over half of the
total wealth. Ibid., pp. 6 and 19.
Ibid., pp. 6 and 19-22.
The CBO's additional sources of income
include Aid to Families with Disabilities (AFDC), Temporary
Assistance for Needy Families (TANF), Earned Income Tax Credit
(EITC), Social Security, Supplemental Security Income, child
support, unemployment compensation, workers' compensation,
disability benefits, pension or retirement income, educational
assistance, financial assistance from outside the household, and
other forms of cash income. Congressional Budget Office, "Changes
in the Economic Resources," p. 2.
"As importance of AFDC or TANF payments was
declining, the importance of the EITC was increasing."
Congressional Budget Office, "Changes in the Economic Resources,"