The fading American dream
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One of the defining features of the “American dream” is the ideal that children have a higher standard of living than their parents. But we know less than we should about whether we are living up to that dream.  

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Using data from historical Censuses, we estimate rates of “absolute income mobility” — the fraction of children who earn more than their parents — since 1940. We measure absolute mobility by comparing children’s household incomes at age 30 (adjusted for inflation using the Consumer Price Index) with their parents’ household incomes around age 30 (go here for a summary and here for the study).

 

The results are stark: We find that rates of absolute mobility have fallen from approximately 90 percent for children born in 1940 to 50 percent for children born in the 1980s. Absolute income mobility has fallen across the entire income distribution, with the largest declines for families in the middle class.

These trends are unaffected by using alternative price indices to adjust for inflation, accounting for taxes and transfers, measuring income at later ages, and adjusting for changes in household size.

The same trend has played out across the country. Absolute mobility fell in all 50 states, although the rate of decline varied, with the largest declines concentrated in states in the industrial Midwest, such as Michigan and Illinois. The decline in absolute mobility is especially steep — from 95 percent for children born in 1940 to 41 percent for children born in 1984 — when we compare the sons’ earnings to their fathers’ earnings.

Why have rates of upward income mobility fallen so sharply over the past half century? The key factors here are (1) the declining Gross Domestic Product (GDP) growth rates, and (2) the rising inequality in the distribution of growth.

Although both factors are important, we find that most of the decline in absolute mobility is driven by the more unequal distribution of economic growth rather than the slowdown in aggregate growth rates.

When we simulate an economy that restores GDP growth to the levels experienced in the 1940s and 1950s, but distributes that growth across income groups as it is distributed today, absolute mobility increases to approximately 62 percent. In contrast, maintaining GDP at its current level but distributing it more evenly across income groups — at it was distributed for children born in the 1940s — increases absolute mobility to 80 percent, thereby reversing more than two-thirds of the decline.

These findings show that higher growth rates alone are insufficient to restore absolute mobility to the levels experienced in mid-century America. Under the current distribution of GDP, we would need real GDP growth rates above 6 percent per year to return to rates of absolute mobility in the 1940s.

Intuitively, because a large fraction of GDP goes to a small fraction of high-income households today, higher GDP growth does not substantially increase the number of children who earn more than their parents.

Of course, we still need GDP growth. It does not matter how growth is distributed if there is very little growth to be distributed. The main point is that increasing absolute mobility substantially would require more broad-based economic growth. If one wants to revive the “American dream” of high rates of absolute mobility, one must have an interest in growth that is shared  across the income distribution. 

Raj Chetty is a professor of Economics at Stanford University. David Grusky is a professor of Sociology at Stanford University. Maximilian Hell is a doctoral student at Stanford University. Nathaniel Hendren is associate professor of Economics at Harvard University. Robert Manduca is a doctoral student at Harvard University. Jimmy Narang is a doctoral student at UC Berkeley.


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