FRBSF Economic Letter
2003-28; September 26, 2003
Earnings Inequality and Earnings Mobility in the U.S.
Rising inequality in individual earnings has been an important feature
of the economic landscape in the United States in recent decades. The
increased dispersion in yearly earnings has caused some to worry that
a more permanent widening of the distribution has occurred. To determine
whether this concern is justified, it is necessary to look beyond yearly
differences in earnings and examine the paths of individuals' earnings
over time. Specifically, we must know the degree to which individuals
are mobile—able to move freely up (or down) the earnings distribution.
If individuals are able to climb up the earnings ladder, then changes
in the dispersion of annual earnings are less informative. If individuals
are not mobile, then yearly inequality may be a good proxy for lifetime
inequality.
In this Economic Letter, we review trends in earnings inequality
and mobility for the years 1967-2000. Accurate assessment of these patterns
is important for crafting and evaluating national economic policies.
A recent example is the impact of federal tax cuts, which Hubbard (2003)
argued depends on individuals' lifetime incomes and, hence, their earnings
mobility.
Inequality in yearly earnings
To investigate the evolution of the distribution
of individual earnings, we use data from the Panel Study of Income Dynamics
(PSID), developed
and administered by the Survey Research Center at the University of Michigan.
The PSID began with a representative sample of about 3,000 U.S. families
in 1968 (excluding the low-income supplemental sample). By following
the individuals from these families over time as they formed and dissolved
their own families, the PSID has remained largely representative of the
U.S. population. The survey was administered yearly until 1997, and thereafter
has been administered every other year.
We restrict our analysis to male
household heads in their prime earnings years (age 25-59). This group
has been the focus of much previous research
on the distribution of earnings, due in large part to its high degree
of labor force participation. We include men who worked approximately
full time for the entire year (at least 1,750 hours), so that our analysis
focuses directly on the trends in rewards to market work and is relatively
unaffected by cyclical variation in job availability. Our measure of
earnings is total labor earnings (paid and self-employment) in the year
prior to the survey, adjusted for inflation using the GDP deflator for
personal consumption expenditures and 1996 as the base year.
 Figure 1
displays several key measures of the distribution of yearly earnings.
We provide two measures of the midpoint of the earnings distribution:
the mean is the simple average of earnings in the sample, and the median
represents earnings of the individual for whom half the sample earns
more and the other half earns less. The mean and median differ if there
is a disproportionate number of high-wage or low-wage individuals.
The
figure indicates that, for the most part, real median earnings have been
flat since the mid-1970s. In 1996 dollars, median yearly earnings
were $37,700 in 1973, dropped down to $35,900 in 1991, and were back
up to $39,100 in 2000. By contrast, mean earnings have risen almost continuously
since 1967. This pattern of flat median earnings and rising mean earnings
suggests that earnings gains have been disproportionately concentrated
among high earners.
This pattern of rising inequality also is reflected
in the standard deviation of earnings (measured in natural logarithms
and displayed as the dotted
line), which indicates the extent of "typical" earnings dispersion
measured in percentage terms. The standard deviation was largely unchanged
between 1967 and 1979, increased substantially in the early 1980s and
early 1990s, and then exhibited an up-and-down pattern later in the 1990s.
The pattern in the standard deviation is similar to that found by Card
and DiNardo (2002), using data from the Current Population Survey (CPS),
the federal government's official source for labor market information.
These
measures of yearly earnings inequality suggest that the gaps between
high-wage and low-wage workers increased between the late 1970s and
early 1990s. However, this does not necessarily imply that the gaps in
individuals'
lifetime earnings grew as well. Understanding whether this pattern
persists at the individual level—that is, whether lifetime earnings
gaps are
widening—requires examining individual earnings changes over time.
Earnings
mobility over time
A primary advantage of the PSID data is that they
track individuals over time, which enables us to examine earnings histories
for a specific
set
of individuals. This in turn enables us to address the question
of earnings mobility, or the ability of individuals to move up (or down)
the earnings
distribution.
To avoid transitory fluctuations and keep the analysis
focused on economically meaningful changes in long-term earnings and
purchasing
power, we use
measures of earnings averaged over five-year periods. To compare
the pattern of earnings changes in the 1970s, 1980s, and 1990s,
we
examine
earnings changes that occurred for fixed samples of men between
three pairs of five-year periods: 1967/71 to 1977/81, 1977/81
to 1987/91,
and 1985/89 to 1994/2000 (the latest five-year period available,
excluding the nonsampled years of 1997 and 1999). We focus on
real (inflation-adjusted)
earnings and apply essentially the same sample restrictions as
those described above for the yearly earnings tabulations. However,
for
each comparison of earnings changes, the sample is restricted
to men for
whom
we have valid earnings observations for all ten sample years
underlying the comparison. Also, the sample is restricted to men aged
25-45
in the base period, so that they are no older than 59 in the
later period
being
used for the comparison.
 Figure 2 displays the shares of individuals
whose changes in five-year average earnings in the 1970s, 1980s, and
1990s fall
into different
value groupings. For example, the first three bars show the
percentage of individuals
who experienced earnings losses greater than $15,000 in the
1970s, 1980s, and 1990s. All values are in real dollars. As the figure
indicates, individuals
were more likely to experience earnings gains than earnings
losses
in all three decades. This reflects, in part, the normal tendency
for prime-age
male earnings to increase as men age and grow into jobs with
higher skill requirements and greater authority. That said,
there are
notable differences
in the pattern of earnings gains over time. In the 1970s (that
is, the change between 1967/71 and 1977/81), the most likely
earnings path for
a prime-age male involved little change in five-year average
earnings during a decade. About 34% of men in our sample had
five-year average
earnings in 1977/81 within $5,000 (up or down) of their 1967/71
earnings.
Another 30% saw their earnings rise between $5,000 and $15,000
over the period. Large earnings gains (more than $15,000) were
less frequent,
occurring for about 24% of all men in our sample. The frequency
of large
earnings gains (more than $15,000) rose in the 1980s and again
in the 1990s; by the 1990s 31% of men experienced earnings
gains of
$15,000
or more.
The picture for earnings losses is more mixed. The
likelihood of an earnings decline of more than $5,000 rose in the 1980s.
Between
1967/71
and 1977/81,
11% of the men in our sample experienced earnings losses
greater than $5,000; during the 1980s period, 17% experienced such
a decline. This
pattern reversed somewhat during the 1990s, with fewer men
recording losses of $15,000 or more. The percentage of men
with earnings
losses between $5,000 and $15,000 also came down in the 1990s
but remained
higher than it was during the 1970s.
While the tabulations
underlying Figure 2 tell us that more people gain than lose, they do
not reveal who is experiencing
the earnings
gains
or losses. Thus, they do not answer the question of whether
earnings gains are most pronounced among individuals who
are higher earners
or those who are lower earners in the first place. This
relationship between
the initial level of earnings (for example, in 1967/71)
and the change in earnings (for example, between 1967/71 and
1977/81) can be captured
by examining correlations.  Figure 3 displays these correlations,
which represent the tendency for average earnings to increase
or decrease
in accordance with the initial level of average earnings
in the
base period.
The first thing to note from this analysis
is that the correlations between initial earnings and the change in
earnings is relatively
low in all
years. This suggests that the connection between initial
earnings and earnings changes is relatively weak over
our sample period.
Even so,
there are clear differences in these correlations over
time. During the 1970s the correlation was negative,
indicating that individuals
with
relatively low base period earnings tended to receive
larger earnings gains than individuals with relatively high base
period earnings.
This pattern was reversed in the 1980s and 1990s: in
those decades, base
period earnings and earnings changes are positively related,
indicating that
individuals with higher base earnings tended to see larger
increases in earnings. The positive correlation was weaker
in the 1990s
than in the 1980s, indicating that low earners' relative
ability to
improve their
earnings increased somewhat between these two decades.
However,
in the 1990s it remained true that individuals with higher
initial earnings
tended to experience larger earnings gains.
Discussion
Like official government data sources, the PSID data
for prime-age, full-time male earners show relatively
flat
median earnings
and rising dispersion
across high earners and low earners between the late
1970s and early 1990s. The PSID data also indicate
a substantial
amount
of upward
mobility over 10-year horizons during the period.
There is a moderate amount
of downward mobility as well, even though prime-age
men typically see their
earnings grow as they age.
Overall, these results
indicate that upward mobility remains an attainable goal for the majority
of working
age individuals.
The
presence of
mobility implies that yearly measures of earnings
inequality likely overstate
the permanent earnings differences between individuals.
That said, the earnings dynamic has changed in
recent decades, shifting from
one that
slightly benefits lower earners to one that slightly
benefits higher earners.
Mary Daly
Rob Valletta
Research Advisors
References
Card, David, and John DiNardo. 2002. "Skill-Biased Technological
Change and Rising Wage Inequality: Some Problems and Puzzles." Journal
of Labor Economics 20(4), pp. 733-783.
Hubbard, Glenn. 2003. "Measure Tax-Cut 'Fairness' Over a Lifetime." Wall
Street Journal, January 8.
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