What’s Limiting Upward Economic Mobility?

Young man sitting on path

Work hard and you’ll achieve success and have a higher income than your parents. That’s the American dream. Yet thousands of struggling Americans are realizing that determination isn’t always enough, and it’s difficult to get ahead when you’re always behind. Here are five important things to know about economic mobility challenges holding people back.

1. Income inequality is real

You’re not imagining it. Income inequality is widening. While underlying causes are hotly debated, the reality is that income has shifted upward. At the same time, people living in low-income communities and middle neighborhoods can have fewer paths to prosperity and success than those in high-income neighborhoods. Obstacles range from fewer businesses, civic institutions, and job opportunities to an academic achievement gap, especially for children growing up in areas where violence is prevalent.

If the basis of the American dream is earned success, we need to have a playing field where everyone has a fair chance.

– SF Fed President John Williams

2. Part-time work is part of the problem

Reduced hours and lower wages make it harder for part-time employees to save, build wealth through assets, and get ahead. In January 2017, 5.84 million Americans were working part-time involuntarily, sometimes holding more than one part-time job. Certain sectors and industries prefer part-time labor to full-time employees for flexibility and efficiency, compounding the problem.

3. Long commutes take their toll

There is a correlation between economic mobility and commute times. Take the impact of high housing costs as an example. Many people work in San Francisco but it’s a notoriously expensive place to live, and middle and lower-income people are pushed out further from job centers. A service worker may live as far away as Antioch, 45 miles away. As commute distances increase, so do transportation costs and challenges of balancing family life. What gets reduced is actual savings.

4. College offers a way up, but it’s not a guarantee

The labor force has been declining with the onset of a “silver tsunami” of retiring baby boomers, placing more pressure on labor productivity growth for overall GDP growth. At the same time, as a proxy for future productivity growth, the percentage of 25-29 year olds with a Bachelor’s degree demonstrates that not all communities are achieving their potential, with clear splits along racial lines: Asians at 63%; Whites at 43%; Blacks at 21%; Hispanics at 16%. Complicating things is that mobility may be more difficult for Blacks and Hispanics, who generally have the highest unemployment rates even when compared to similarly educated peers.

5. People aren’t saving enough

The Fed’s most recent Survey of Household Economics and Decisionmaking found that nearly half of all Americans, regardless of income, would have to borrow funds or sell something to cover an unexpected expense of $400. Income volatility is particularly acute for struggling families where household financial stability and savings are already tenuous. For example, a faulty car transmission or broken arm could have spiraling consequences such as defaulting on a loan, which would adversely affect credit scores. People may borrow from alternative lenders charging extremely high interest rates.

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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.