Q. When did you first become interested in mobility, wages, and income
growth?
A. As a graduate student in the mid-1970s. What we'd always been told was
that income distribution was constant throughout the twentieth century. So it
didn't seem to be an issue worth studying. But nonetheless, a lot of people
talked about how different people lived. So in 1978, I put together the
Social Stratification in the U.S. poster and fact
book.
It was a very large poster that showed the distribution of income,
occupations, and family status in one graphic. It was used by a lot of people
to understand the basic data. It was sometimes called Sociology 101 on a
poster.
Q. What did you discover?
A. When I did the first update in 1983, I found some interesting new data
that showed for the first time that the middle class was shrinking. Robert
Kuttner first used the term in August 1983 in Atlantic
magazine. But he didn't have any numbers. In December 1983, Bruce Steinberg,
who was then at Fortune, and I independently used CPS data
to show polarizing incomes. Since then it has obviously been a very hot
issue.
There was a movement from the middle to both extremes. Nineteen
eighty-three was right after a fairly serious recession, remember. What I found
was an 8 percent decline in the middle. Five and one-half percent went down to
the lower income group and two and one-half percent went up.
Q. How did you define middle class?
A. Well, that becomes very interesting. If you go to a couple that's making
$20,000 a year--let's say the husband's a sanitation worker; the wife just
works part time; they have one kid; and they live in the city--they'd say they
were middle class. Or they might say lower middle class. In the suburbs, if you
have a dentist husband and a social worker wife and they make $120,000, and
they have three cars and one kid in college and another in high school, they
might define themselves as upper middle class. Back in 1983, I thought the
right definition of middle class was family income between $15,000 and $50,000
a year. Today, it's about the equivalent of $25,000 to $75,000 a year.Q So in
1983 that's how you found the shrinking middle class. But then you came to
another conclusion. You also found that taking a snapshot of America's income
profile at any particular moment could be misleading.
A. Right. Everyone who's used longitudinal data--that is, when you follow
the income movements of the same people over many years--has been surprised at
the amount of volatility that exists.
Q. Volatility of what? Movement up and down?
A. Let's look at the number of people having a single bad year, which can
be defined as being 25 percent below the average of the three adjoining years.
To get 25 percent below an average, that means income would have to drop, for
example, from $50,000 to $33,000 and then bounce back up to $50,000. That's how
you get a 25 percent decline in the middle year from the three-year average.
Ten percent of the population have that experience in any given year. Of the 10
percent that are having a bad year, two-thirds fall all the way to the bottom
quintile.
These people who are having the one bad year tend to jump back immediately
the next year. So fully one-third of the bottom quintile in any given year are
there temporarily.
Q. That can be misleading because it implies that they are climbing the
mobility ladder when in fact they only had a bad year.
A. Right. If you just look at the stratification and movement forward from
that year, you find very strong growth. This is a central problem with some
social mobility studies.
Q. You mean that if you do a longitudinal study in too simple a fashion it
will show a great deal of upward mobility almost automatically?
A. Yes. They might have been laid off, and then they jump right back. But
that doesn't imply more social mobility.
Q. There have been a couple of studies about social mobility that suggested
that there was considerable social mobility. Did they make this adjustment
you're talking about?
A. No. Another problem of longitudinal data is the need to be very careful
with the age group, because if you start with very young people, what you'll
see is very strong growth simply as they enter the labor force and start their
careers. Similarly, if you include older people--for instance, if you track
people from 55 to 65--you will find that they will have retired or cut back a
lot so their income will have declined. So if you don't choose your ages
carefully, you'll bias the study by starting with young people in the bottom
quintile and old people in the top quintile; then when you look at them ten
years later, you will see that young people move up and people in the top
quintile move down, and really all you've done is seen the entry of young
people into the labor force full time and the exit, partial or full, of old
people.
A 1992 Treasury study using IRS data argued that the poor did better than
the rich in the 1980s. But they failed to account for these age effects and
ended up with a bottom quintile with only 7 percent of the survey and a top
quintile with 28 percent. Not surprisingly, they thought they found
considerable mobility out of the bottom.
Q. Now, you tried to correct for these biases. How did do you go about
doing that?
A. Well, I focused simply on the same age group and followed them over ten
years. Specifically, I took a sample of people who were 24 to 48 in the 1960s
and followed them until they were 34 to 58 in the 1970s. Between the 1970s and
the 1980s, I followed another group with similar age characteristics. By
starting at 24, you basically have everybody in the labor force who's going to
get there, and so you're not seeing the movement into the labor force from
school, which biases the data. And, similarly, by making the maximum age 48 to
58, you haven't run into the early retirement years. If you track people who
age from 50 to 60, what you find is that 60 percent of them have lower earnings
at 60 than they had at 50. That is, they started to cut back. I didn't find
that up to age 58.
I do two other things to deal with the volatility and the problems of what
statisticians call reversion to the mean. That's when you have a bad year and
you tend to jump back. Or when you have a good year and you tend to fall back.
What I do is stratify people into rich and poor, not on the basis of their
early years, not on the basis of their late years, but on the basis of all ten
years. So I take their ten-year average earnings or income. That determines who
is in the top and who is in the bottom quintiles. The other thing I do is, I
never use single years. All of my comparisons are actually three-year averages.
I compare business cycle peaks in 1969, 1979, and 1989. I compare the average
income of 1967, 1968, 1969 to the average of 1977, 1978, 1979. And in the 1980s
I compare the average of 1977, 1978, 1979 to 1987, 1988, 1989. The basis of the
study, then, is to compare the experience of the 1970s, which is actually 1967
to 1979, to the experience of the 1980s, which is 1977 to 1989. So, it's a
reasonably fair test.
Q. Let's talk about some of the conclusions.
A. In terms of family income in the 1970s, what I found is that 21 percent
of prime-age adults had lower incomes at the end of the decade versus the
beginning. And in terms of male earners, 24 percent had lower earnings at the
end of the decade compared to the beginning.
In the 1980s, instead of 21 percent being income losers you now had 33
percent being losers. A significant jump. In other words, one out of three
prime-age adults had lower income at the end of the 1980s than they did at the
beginning. And for male earners, 36 percent were losers in the 1980s versus 24
percent in the 1970s.
Q. So, for one out of three people, income actually declined in the 1980s.
This helps us get around the problems with dealing with average wages
only.
A. Correct. Because an average does not compare the same people, as I do
here. This does compare the same people, and you can make a strong statement
about how many people are individually better or worse off.
Q. Now, did this surprise you?
A. I didn't have a preconception. I think what this does is provide very
strong evidence that things changed for the worse.
Q. Between the 1970s and the 1980s?
A. Yes. Income inequality did indeed go up and it became harder for people
to succeed.
Q. How did you measure income in these studies?
A. There are two measures. One is family income in inflation-adjusted
terms. And the other is individual annual earnings in inflation-adjusted terms.
So one is a family measure, which includes earnings from all family members,
property income, and transfer payments. The only money flows excluded are
employer-provided health care and pension benefits.Q There's often an argument
made that by not including corporate benefits in these measures we are
underestimating the growth of income.
A. That's partially true. But I think most of the growth in corporate
benefits occurred early on, when wages were also growing.
Q. You mean in the 1970s?
A. The 1960s. Benefits really started jumping early on. By about the
mid-1970s the real value of the benefits didn't change that much, even though
it cost corporations more as health care expenditures grew at a high rate. The
inflation index for health care expenditures outpaced the consumer price index
in general by a lot so employers had to pay more to get the same
benefits.
Q. You also found a change in the social mobility between the two
decades.
A. In the 1970s people on the points of the income scale had about the same
chance to move ahead, even though they started off at different points. A
person in the lowest quintile had as good a chance to move up as one in the
second quintile. But in the 1980s two things are worth noting. One is that your
chances of success became much better the higher up you started off. So instead
of everyone basically moving up together, the people who had more education,
who started out being higher earners moved ahead faster than those who had less
education and started off at a lower point. That's number one. But, number two,
even in the top quintile there were more losers in the 1980s than in the 1970s.
That is, the jump from 21 to 33 percent for income and from 26 to 36 percent
for male income was so great that it affected all people up and down the income
scale, even though it affected those at the bottom of the scale more
dramatically than those at the top.
So, for example, in the 1970s, of people in the bottom quintile, 33 percent
were losers compared to 21 percent for society as a whole. In the top quintile,
only 13 percent were losers over the course of the decade. If we look at the
bottom quintile in the 1980s, however, 53 percent lost ground over the course
of the decade. In other words, more than one out of every two in the bottom
quintile at the beginning of the 1980s made less by the end of the decade. And
for the top quintile, that ratio went up to 18 percent.
So what this showed is that the 1980s were worse for everybody. But it
affected those at the lower end much more than those at the top.
Q. You've also done a lot of work on job stability.
A. Job stability is difficult to measure because it's measuring a multiyear
phenomenon. Most researchers in this subject area have relied on a single
question that the census bureau asks every four years. And that is employer
tenure. How long have you been with the same company? Surprisingly, if we track
the answers to those questions from 1973 to 1993, we don't see much change in
the distribution. If you adjust for age and you adjust for education, there's
very little change. Given how much discussion there is of downsizing, this
result was not anticipated. But I would argue that this is not a good question
because there is a lot of
recall bias.
Q. What do you mean by that?
A. We should remember that these are just surveys. We know from the census
that some questions are answered better than others. For example, wage income
is basically reported correctly. If we compare the answers of the census of all
wages to what we know from the national product accounts numbers, they come
within 1 percent of each other. With welfare, interest payments, rents,
dividends, these are 50 percent underreported. That is, the answers in the
census don't add up to the answers of the national accounts. Similarly, I would
argue that a value-laden question, such as how long have you been with your
employer, is the kind of question that people will get wrong. If you're 45, you
don't want to admit that you've been on the job only one year.
Q. So how did you try to design a study of job stability?
A. The approach I used was again to look at ten years' worth of answers.
Each year in the data set people were asked, _ _Is the job you have now the
same job you've had for the previous twelve months?___ That's a kind of simpler
question to answer. If you said you had a different job, they then asked what
was the industry and occupation of your previous employment. So I summed up the
answers for all ten years in the 1970s and all ten years in the 1980s. Strong
stability was defined as changing jobs at most once in ten years. So to be
strongly stable, you either never changed jobs or you changed once. Workers
were medium stable if they changed two or three times in ten years. Workers
were defined as unstable if they changed jobs in four or more years out of
ten.
Let me say a few words about working women. The ten-year slices show that
women worked much less than the single-year slices. In the 1970s women averaged
only 880 hours of work a year, whereas prime-age men averaged slightly over
2,200 hours. In the 1980s, women averaged 1,250 hours a year, while men
averaged 2,180. So women increased their participation dramatically, but they
still remained very far behind men in terms of hours worked.
Q. So they were not really comparable?
A. Right. Because women have fewer hours, the only data on stability I
looked at were for men. It turned out that in the 1970s, 67 percent had strong
employment stability. Some two out of three changed jobs at most once. Only 12
percent had weak stability or changed jobs four or more times. In the 1980s,
only 52 percent were strongly stable, compared to 67 percent in the 1970s.
Those with weak job stability rose from 12 percent to 24 percent.
Q. That suggests that there has been a considerable rise in job instability
in the 1980s.
A. Yes, this supports the notion that downsizing has increased and
something has seriously changed in workplace relations.Q In general, then,
would you conclude that social mobility has declined in America?
A. Yes, and it especially declined for lower-income individuals markedly in
the 1980s. That is not to say that there wasn't a lot of short-term ups and
downs. Nearly two-thirds of Americans made it into the top 40 percent of income
in at least one year in the 1980s. Forty-two percent of Americans spent at
least one year among the top 20 percent of earners. This may be why Americans
are so unwilling to tax the well-off. But dropping into the bottom quintile was
also common. I asked how many people would qualify at least once in ten years
for the Earned Income Tax Credit--that is, their earnings were so low that
annual income fell below $28,000 for a family with one child in a single year.
The number came to 39 percent. That is, two out of five people would have made
so little income that they would have qualified for the EITC at least once in
the decade. In a given year, about 70 percent of EITC-eligible families have
low ten-year incomes. The rest are having only a single bad year and are in
effect using EITC as wage insurance.
Only a small group of people are in the top quintile year in and year out.
According to my calculations, only 6 percent of Americans were in the top
quintile in ten out of ten years. By the way, the cutoff point for the top
quintile for a family is $75,000 to $80,000 of annual income. The break point
for the two top quintiles is $60,000. The lowest quintile were those families
that made $25,000 and less.
Q. Despite the life-cycle effect, one out of three actually made less money
after ten years even as they aged and became more experienced at their
work.
A. Correct. Let me conclude with one number that is particularly striking.
Take young men who are more or less just starting out. These are typically the
years in which their earnings grow the fastest on a percentage basis. It's the
takeoff point in their careers. I am talking about men 24 to 28. Some 62
percent saw their incomes grow by more than 40 percent in the 1970s, and only 9
percent had declining earnings over time. But in the 1980s, 26 percent had
lower incomes at the end of the decade--not 9 percent, but 26 percent. That's a
threefold increase. And instead of 62 percent having gains of 40 percent or
more, only 42 percent did.
Q. Sum up the state of American incomes for us.
A. Inequality is growing. People at the top are doing better than the rest.
And a higher proportion of people are actually losing ground. Finally, while we
don't yet have the data, there is no reason to think that this situation has
improved in the 1990s, and there are many reasons to think that the experience
of the 1950s and 1960s was much better.
Challenge, the Magazine of Economic Affairs
Published by M.E. Sharpe, Inc., 80 Business Park Drive, Armonk, NY 10504.
Phone: 914-273-1800. Toll Free Phone: 1-800-541-6563. Fax: 914-273-1800.
