[Excerpt] Income inequality has been increasing in the United States over the past 25 years. Several factors have been identified as possibly contributing to increasing income inequality. Some researchers have suggested the decline in unionization and a falling real minimum wage as the primary causes. Others have argued that rising returns to education and skill-biased technological change are the important factors explaining rising inequality. Most analysts agree that the likely explanation for rising income inequality is due to skill-biased technological changes combined with a change in institutions and norms, of which a falling minimum wage and declining unionization are a part.
Since most people are concerned with upward mobility, and given the central importance of income mobility to the debate over income inequality, this report examines the relation between income mobility and inequality. Income mobility studies are an important complement to income inequality studies — income inequality does not address the issue of whether or not the poor are getting poorer, whereas income mobility does.
While there appears to be considerable relative income mobility (about 60% of individuals change income quintiles over 10 years), it is not far — about 60% of those individuals who changed income quintile in the 1980s or 1990s only moved to the next quintile. But most individuals in the poorest quintile in 1980 experienced an increase in their real income between 1980 and 1989 — half saw their real income increase by more than 36%. Of those in the richest quintile, almost half saw their real income fall by 10% or more during the 1980s. But there are differences in income changes between the 1980s and the 1990s: those in the poorest income quintile may have done slightly better in the 1990s than in the 1980s, while individuals higher up in the income distribution (quintiles 2-5) appear to have done better in the 1980s than in the 1990s.
In both the 1980s and 1990s, income growth was progressive and had an equalizing effect on the income distribution, but the equalizing effect had a larger absolute value in the 1990s than in the 1980s. Mobility, however, had a disequalizing effect and, in fact, outweighed the progressivity effect, thus increasing the annual inequality. In both decades, the long-term income inequality is lower than the income inequality in the first year of the decade. The results suggest that mobility had a greater equalizing effect on long-term inequality in the 1990s than in the 1980s.
Three broad types of government economic policy affect income growth and mobility, and hence income inequality: (1) regulation, (2) the tax system, and (3) government transfers. Economic policies to reduce the growth of income inequality may work, in part, through their effects on income mobility. Reducing income mobility (that is, stabilizing incomes) may reduce the rising trend in income inequality, but it could also increase inequality of longer-term income.