The Proverbial Ladder: A Two-Minute Primer on Inequality

It’s getting hard to sleep at night with rising inequality, stagnant income trends, and mountains of college debt. But wait, maybe if we take a deeper look at the longitudinal data, there might be hope. Read this or count sheep – your choice.

First, the ladder analogy. Rising inequality means that the socio-economic ladder is now taller. Is it too tall? Maybe, if you think the lifestyles of the top 1 percent set a depressing example for the rest of us. Or perhaps more importantly, they don’t reinvest their accumulated wealth in economic growth as much as they should. However, the entire ladder has stretched upward, not just the top 1 percent rung. Inequality is, therefore, not just about the incomes and accumulated assets at the top versus the middle. It’s about how to climb the ladder from any starting point given a fair shot. We’ll return to that point in thirty seconds.

Second, stagnant incomes? Yes, 2013 median household income adjusted for inflation is 8 percent below where it was prior to the Great Recession (2007). And, in real terms it’s still below its 1999 level. However, the median is just a measure of the middle. It’s a rung on the ladder, not the middle rung half way up, but the rung above which half of households are higher and half are lower. Paint it red to keep this analogy going. By the way, the red rung (median income) is way below the middle rung.

Why has the ladder stretched upward and why has the red rung not moved? You guessed it – structural reasons: an accelerating, multi-faceted technological revolution revamps the structure of opportunity, globalization expands competition, and aging populations struggle to remain innovative and healthy. In short, the forces of change outnumber the forces of tradition.

Economists will say that the red rung will only go up with real economic growth based on higher productivity. True enough, but the operative question is: Who benefits from higher productivity? Answer: People who are closest to the higher productivity either as “individual contributors” (don’t you love that term?) or their managers, owners, and stockholders. It’s not so much about the ladder after all; that’s just measuring “structural” change at different points in time. People “on the ladder” are more fun to watch! (That requires longitudinal methods.)

Mobility studies that follow people over time (longitudinal methods), like the Census Bureau’s SIPP program and the University of Michigan’s Panel Study of Income Dynamics, can tell us if it’s easier or harder to climb the ladder. Answer: Not much change to intergenerational mobility in the U.S. over decades, and the jury is still out as to whether there’s more mobility in countries with less inequality. Still, national mobility levels are pretty abstract, not boring, just abstract.

Here on earth, anyone can climb the socio-economic ladder if they understand that getting an education, being more productive, and adding value to whatever it is they do makes a difference. Middle class parents, by definition, should be able to communicate this message to their children. To the extent that they cannot, there is a problem in the middle class. The larger problem, however, resides “under” the middle class on the ladder.

Fully 70 percent of children raised in low income environments are unlikely to make it to the middle class. The higher up you go on the socio-economic ladder the better the odds of taking the next step. People know from personal experience that opportunities and incomes go up and down over the course of a lifetime. The drivers of upward mobility from the bottom are well known: safe communities, strong families, and access to effective education. Lower inequality? Don’t hold your breath. Focus on local and personal solutions to promote movement up the socio-economic ladder.

Tom ExterComment