The Fading American Dream Trends in Absolute Income

The Fading American Dream Trends in Absolute Income

The Fading American Dream Trends in Absolute Income Mobility Since 1940 Raj Chetty, Stanford Economics David Grusky, Stanford Sociology Maximilian Hell, Stanford Sociology Nathan Hendren, Harvard Economics Robert Manduca, Harvard Sociology Jimmy Narang, UC-Berkeley Economics February 2017 Absolute Mobility and the American Dream Central feature of American Dream: aspiration that children have a higher standard of living than their parents [Samuel 2012] When asked to assess economic progress, children often compare their earnings to their parents [Goldthorpe 1987, Hoschschild 2016] Obama (2014): Peoples frustrations are partly rooted in the fear that their kids wont be better off than they were Longstanding interest in measuring absolute mobility: fraction of

children who have a higher standard of living than their parents Key problem for estimating absolute mobility: lack of large panel datasets linking parents and children This Paper We develop a method of estimating absolute mobility for the 1940-84 birth cohorts that can be implemented using existing data We estimate mobility by decomposing joint distribution of income into two components: 1. Marginal income distributions for parents and children, estimated using CPS and Census cross-sections 2. Joint distribution of parent and child ranks (copula) For recent cohorts, obtain copula from tax records, building on prior work showing stable relative mobility [Chetty et al. 2014]

For early cohorts, derive bounds to show that estimates of absolute mobility are insensitive to copula Outline 1. Data and methods 2. Baseline estimates under copula stability 3. Bounds under alternative copulas 4. Sensitivity to specification choices

5. Policy counterfactuals Data and Methods Methodology Baseline income measure: pre-tax family income at age 30, deflated using CPI-U-RS Estimate absolute mobility by combining three sets of inputs for each birth cohort c: 1. Childrens marginal income distributions 2. Parents marginal income distributions 3.

Copula: joint distribution of parent and child ranks Calculate absolute mobility for birth cohort c as: Childrens Income Distributions Estimate income distributions at age 30 for children in each birth cohort from 1940-84 using CPS data from 1970-2014 Sample: all non-institutionalized individuals born in the U.S. Income defined as sum of spouses personal pre-tax incomes Parents Income Distributions Constructing parents income distributions by childs birth cohort is more complicated because of lack of panel data Overcome this problem by pooling data from multiple Census cross-sections Parents Income Distributions Example: income distribution of parents of children in 1970 birth cohort Combine data from three Censuses (1% IPUMS): 1.

In 1970 Census, select parents aged 25-35 with children born in that year 2. In 1980 Census, select parents aged 25-35 with 10 year old children (parents who had children before age 25 in 1970) 3. In 1960 Census, select all individuals aged 25-35 Give this group weight equal to the fraction of individuals who have 1 year old children after age 35 in 1970 Census Assumption: income distribution of those who have kids after age 35 is representative of income distribution of general population Copula: Joint Distribution of Ranks For children born in 1980s, estimate copula using population tax data [Chetty, Hendren, Kline, Saez, Turner 2015] Income definition in tax records: pre-tax family income (AGI+SSDI) For non-filers, use W-2 wage earnings + SSDI + UI income

If no 1040 and no W-2, code income as 0 Incomes of children born in 1980s measured at age ~30 in 2012 Incomes of parents measured in 1996-2000 between ages 30-60 Copula (distribution of ranks) is stable after age 30 [Chetty et al. 2014] Copula: Joint Distribution of Ranks Estimate copula non-parametrically as a 100 x 100 percentile transition matrix for 1980-82 birth cohorts Rank children based on their incomes relative to other children in same birth cohort Rank parents of these children based on their incomes relative to other parents Compute joint probabilities of each rank pair Copula Stability Chetty et al. (2014) show that copula is very stable back to 1971 birth cohort using Statistics of Income 0.1% sample Constant relative mobility (in percentile ranks, not absolute dollars) Baseline: assume copula stability for all cohorts going back to 1940 Then derive bounds for absolute mobility with alternative copulas

Baseline Estimates Baseline Estimates of Absolute Mobility Consider children in 1940 birth cohort Estimate absolute mobility in four steps: 1. Estimate parent income distribution using Census data 2. Obtain distribution of child ranks for each parent rank using copula from tax data for 1980 cohort 3. Map childrens ranks to incomes at age 30 using 1970 CPS 4. Calculate fraction of children with incomes exceeding parents by parent income percentile

Pct. of Children Earning more than their Parents Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 60 40 20 0 0 20 40

60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 1950 60 40

20 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80

1950 60 1960 40 20 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100

Pct. of Children Earning more than their Parents Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 1950 60 1960 1970 40 20 0

0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents Percent of Children Earning More than their Parents By Parent Income Percentile 100 1940 80 1950

60 1960 1970 40 1980 20 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents

Mean Rates of Absolute Mobility by Cohort 100 90 80 70 60 50 1940 1950 1960 Child's Birth Cohort 1970

1980 Bounds with Alternative Copulas Sensitivity to Copula: Bounds on Absolute Mobility Baseline estimates rely on assumption that copula remains stable back to 1940 cohort Now relax this assumption and derive bounds on absolute mobility under alternative copulas by birth cohort Consider all copulas under which childrens ranks increase with parent ranks (first-order stochastic dominance) Rules out negative intergenerational persistence High-dimensional (10,000-variable) maximization problem, but objective function and constraints are all linear Can be solved efficiently using linear programming Pct. of Children Earning more than their Parents Bounds on Absolute Mobility Across All Copulas 100 Upper Bound

80 60 Baseline Estimates 40 Lower Bound 20 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Bounds on Absolute Mobility Across All Copulas

100 80 Copula Observed 60 40 20 1940 1950 1960 1970 Child's Birth Cohort 1980

Density Household Income Distributions of Parents and Children at Age 30 For Children in 1940 Birth Cohort Parents 0 50k 100k Income (Measured in Real 2014$) Children 150k Household Income Distributions of Parents and Children at Age 30 For Children in 1940 Birth Cohort Density 80th percentile of parents distribution

14th percentile of children's distribution Parents 0 27k 50k 100k Income (Measured in Real 2014$) Children 150k Household Income Distributions of Parents and Children at Age 30 For Children in 1980 Birth Cohort Density 80th percentile of parents distribution

74th percentile of children's distribution Parents 0 50k 80k 100k 150k Income (Measured in Real 2014$) Children Child Rank Required to Earn More Than Parents Child Income Percentile 100

80 (80,74) 60 1980 40 20 (80,14) 1940 0 0 20 40 60

Parent Income Percentile 80 100 Child Rank Required to Earn More Than Parents with Copula for 1980 Cohort Child Income Percentile 100 80 (80,74) 60 1980 40

20 (80,14) 1940 0 0 20 40 60 Parent Income Percentile Note: Darker colors represent higher density in copula 80 100 Sensitivity Analysis Sensitivity Analysis

Assess sensitivity of results to key specification choices 1. Using alternative price deflators CPI-U-RS fails to account adequately for quality improvements and new products [Boskin et al. 1996, Broda and Weinstein 2009] Follow prior work by subtracting 0.8% from inflation rate implied by CPI-U-RS [Meyer and Sullivan 2009, Broda and Weinstein 2010] Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Alternative Price Deflators 100 Baseline: CPI-U-RS CPI-U-RS minus 0.8% 90 80 70

60 50 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Alternative Price Deflators 100 Baseline: CPI-U-RS CPI-U-RS minus 0.8% CPI-U-RS minus 2%

90 80 70 60 50 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents

Trends in Absolute Mobility: Alternative Price Deflators 100 Baseline: CPI-U-RS GDP Deflator PCEPI CPI-U 90 80 70 60 50 1940 1950 1960

1970 Child's Birth Cohort 1980 Sensitivity Analysis Assess sensitivity of results to key specification choices 1. Using alternative price deflators 2. Using post-tax and transfer incomes Conceptually, not clear whether earnings or consumption is the relevant metric for absolute mobility Assess whether distinction matters empirically Calculate tax rates using NBER TAXSIM since 1960 and using raw federal MTRs prior to 1960 Estimate cash and in-kind transfers (SNAP, WIC, housing assistance) since 1967 using CPS data from Fox et al. (2014)

Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Including Taxes and Transfers 100 Baseline: Pre-Tax Income 90 80 70 60 50 1940 1950 1960 1970

Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Including Taxes and Transfers 100 Baseline: Pre-Tax Income Including Taxes 90 80 70 60 50 1940

1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Including Taxes and Transfers 100 Baseline: Pre-Tax Income Including Taxes Including Taxes and Transfers 90 80

70 60 50 1940 1950 1960 1970 Child's Birth Cohort 1980 Sensitivity Analysis Assess sensitivity of results to key specification choices 1. Using alternative price deflators 2.

Using post-tax and transfer incomes 3. Measuring incomes at age 40 instead of 30 Children today may take longer to reach peak earnings than those in earlier cohorts Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Income Measured at Age 40 100 Baseline: Children Age 30, Parents 25-35 Children Age 40, Parents 35-45 90 80 70

60 50 1940 1950 1960 1970 Child's Birth Cohort 1980 Sensitivity Analysis Assess sensitivity of results to key specification choices 1. Using alternative price deflators 2.

Using post-tax and transfer incomes 3. Measuring incomes at age 40 instead of 30 4. Using individual income instead of family income Fraction of individuals married at age 30 has fallen over time family income may be lower for recent cohorts Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Individual Income, Sons vs. Fathers 100 Baseline Son vs. Father Individual Income 90 80

70 60 50 40 1940 1950 1960 1970 Child's Birth Cohort 1980 Sensitivity Analysis Assess sensitivity of results to key specification choices 1. Using alternative price deflators 2.

Using post-tax and transfer incomes 3. Measuring incomes at age 40 instead of 30 4. Using individual income instead of family income 5. Adjusting for changes in household size Households have grown smaller over time consumption per person may not have fallen as much Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Adjusting for Family Size 100 90

80 70 60 Baseline: No Adjustment Divide by Family Size Divide by Sqrt(Family Size) 50 1940 1950 1960 1970 Child's Birth Cohort 1980

Sensitivity Analysis Assess sensitivity of results to key specification choices 1. Using alternative price deflators 2. Using post-tax and transfer incomes 3. Measuring incomes at age 40 instead of 30 4. Using individual income instead of family income 5. Adjusting for changes in household size

6. Accounting for fringe benefits and income under-reporting Divergence between income reported in CPS and total compensation has grown in recent years Pct. of Children Earning more than their Parents Effects of Uniform Increase in Childrens Income on Absolute Mobility for 1980 Cohort 100 90 80 70 60 50 0

10,000 20,000 30,000 40,000 Magnitude of Income Increase for Children in 2010 ($) 50,000 Sensitivity Analysis Result that absolute mobility has declined sharply since 1940 is robust to key specification choices 1. Using alternative price deflators 2.

Using post-tax and transfer incomes 3. Measuring incomes at age 40 instead of 30 4. Using individual income instead of family income 5. Adjusting for changes in household size 6. Accounting for fringe benefits and income under-reporting Counterfactuals Counterfactual Scenarios What policies can restore absolute mobility to historical levels?

Two key macroeconomic changes since 1940: lower GDP growth rates and less equal distribution of growth [e.g., Goldin and Katz 2009] Consider two counterfactual scenarios for children born in 1980: 1. Higher growth: GDP growth since birth matching experience of 1940 cohort, with GDP distributed across income percentiles as in 2010 2. More broadly shared growth: Same GDP growth rate, but distribute GDP across income percentiles as in 1940 cohort Pct. of Children Earning more than their Parents Counterfactual Rates of Absolute Mobility by Parent Income Percentile 100 Mean AM:91.5% 1940 Empirical 80 60 40

Mean AM:50.0% 1980 Empirical 20 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents Counterfactual Rates of Absolute Mobility by Parent Income Percentile 100

Mean AM:91.5% 1940 Empirical 80 60 Mean AM:61.9% 40 Mean AM:50.0% 1980 Empirical 20 Higher growth: 1940 GDP/family growth rate (2.5%), 1980 shares 0 0 20

40 60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents Counterfactual Rates of Absolute Mobility by Parent Income Percentile 100 Mean AM:91.5% 80 1940 Empirical Mean AM:79.6% 60 Mean AM:61.9%

40 Mean AM:50.0% 1980 Empirical 20 More broadly shared growth: 1980 GDP/family growth rate (1.5%), 1940 shares Higher growth: 1940 GDP/family growth rate (2.5%), 1980 shares 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents

Absolute Mobility Under Counterfactual Growth Rates Growth Distributed According to GDP Shares for 1980 Cohort 100 1940 Empirical 90 80 70 60 1980 Empirical 50 40 0 2 4 6 Real GDP/Family Growth Rate (%) 8

10 Conclusions 1. Rates of absolute mobility have fallen from ~90% for 1940 birth cohort to ~50% for children entering labor market today 2. Absolute mobility has fallen primarily because of growing inequality in distribution of economic growth Inequality and absolute mobility are tightly linked Those who are interested in reviving absolute mobility must be interested in more broadly shared economic growth Appendix Slides Pct. of Children Earning more than their Parents Trends in Absolute Mobility

with CPI Adjustment, Including Taxes and Transfers, and Adjusting for Family Size 100 90 80 70 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning 20% More/Less than Parents Trends in Absolute Mobility: Alternative Income Thresholds 100

Baseline 20% Less 20% More 90 80 70 60 50 40 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents

Trends in Absolute Mobility: Selected States by Decade 100 Massachusetts New York Ohio Michigan 90 80 70 60 50 40 1940 1950 1960 Child's Birth Cohort

1970 1980 Trends in Absolute Mobility by State: Change from 1940-1980 Decline in Abs. Mob. from 1940-80 Child Rank Required to Earn More than Parents Upper Bound Copula for 1980 Birth Cohort Child Income Percentile 100 80 60 40

20 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Child Rank Required to Earn More than Parents Lower Bound Copula for 1980 Birth Cohort Child Income Percentile 100 80

60 40 20 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Median Kid Income / Parent Income Median Ratio of Childs Income to Parents Income by Birth Cohort 3

2.5 2 1.5 1 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Wage vs Family Income 100

Baseline Wage Income Only Family Income 90 80 70 60 50 1940 1950 1960 1970 Child's Birth Cohort

1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Including Immigrants 100 Baseline Including Immigrants 90 80 70 60 50 1940

1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility: Robustness to Parent Age 100 Baseline Child Income at 30 Parents Matched at 25-35 90 80 70

60 50 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility: CPS vs Census 100 Baseline CPS Only Census Only

90 80 70 60 50 40 1940 1950 1960 1970 Child's Birth Cohort 1980 Pct. of Children Earning more than their Parents Trends in Absolute Mobility by Gender 100

Baseline Son vs. Parents' Family Income Daughter vs. Parents' Family Income Son vs. Father Individual Income Daughter vs. Father Individual Income 90 80 70 60 50 40 30 20 1940 1950 1960 1970 Child's Birth Cohort

1980 Median Individual Income Among Working Individuals Ages 25-34 by Year Income (Real 2014$) 50000 40000 30000 20000 Our Sample - Males CPS Historical Income Tables - Males Our Sample - Females CPS Historical Income Tables - Females 10000 1970

1980 1990 Year 2000 2010 Pct. of Children Earning more than their Parents Counterfactual Rates of Absolute Mobility by Parent Income Percentile Income Measured at Age 40 100 Mean AM:85.8% 1940 Empirical 80 Mean AM:73.6% Mean AM:67.5%

60 Mean AM:55.8% 40 1970 Empirical 20 1970 GDP/family growth rate (1.5%), 1940 income shares 1940 GDP/family growth rate (2.5%), 1970 income shares 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100

Pct. of Children Earning more than their Parents Counterfactual Rates of Absolute Mobility by Parent Income Percentile Age 30, GDP Growth Shares 100 Mean AM:91.5% 80 1940 Empirical Mean AM:79.7% 60 Mean AM:50.0% 40 Mean AM:46.5% 1980 Empirical

20 1980 GDP/family growth rate (1.5%), 1940 income growth shares 1940 GDP/family growth rate (2.5%), 1980 income growth shares 0 0 20 40 60 80 Parent Income Percentile (conditional on positive income) 100 Pct. of Children Earning more than their Parents Counterfactual Rates of Absolute Mobility by Parent Income Percentile Age 40, GDP Growth Shares 100 Mean AM:85.8%

1940 Empirical 80 Mean AM:74.4% Mean AM:57.1% 60 Mean AM:55.8% 40 1970 Empirical 20 1970 GDP/family growth rate (1.5%), 1940 income growth shares 1940 GDP/family growth rate (2.5%), 1970 income growth shares 0 0 20

40 60 80 Parent Income Percentile (conditional on positive income) 100 Probability Child in Top Fifth of Income Distribution 0% 10% 20% 30% 40% Probability of Reaching Top Quintile by Birth Cohort 1971 1974 1977

1980 1983 1986 Child's Birth Cohort Parent Quintile Q1 Q3 Q5 Return

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