The dynamism of the U.S. economy is frequently underappreciated. Several recent studies provide new evidence that American households experience considerable mobility over time in income, earnings, and wealth. Contrary to prevailing public opinion that households get stuck at a given income or wealth level for decades or generations, there is actually a significant amount of movement up and down the economic ladder over even very short periods of time.
For example, some new research from the Federal Reserve Bank of Minneapolis is summarized in the table above, based on data from the Panel Study of Income Dynamics that follows the same households over time. The results above answer the question: For households that were in a given earnings quintile (20 percent group) in 2001, what percentage of those households moved to a different quintile by 2007? Here are some conclusions about the earnings mobility for households that had positive earnings in both years:
1. For those U.S. households that were in the lowest earnings quintile (bottom 20 percent) in 2001, only 56 percent of those households remained in that quintile in 2007, and 44 percent had moved to a higher quintile by 2007. Five percent of low-income households in 2001 had moved to one of the top two quintiles in just six years.
2. For those households that were in the highest earnings quintile (top 20 percent) in 2001, 34 percent had moved to a lower quintile by 2007, and 5 percent of those households had moved all the way to the bottom quintile.
3. For those households in the middle earnings quintile (middle 20 percent) in 2001, about one-third moved to a higher quintile by 2007, more than one-fourth moved to a lower quintile, and only 42 percent remained in the same quintile.
4. More than half of the households in the second, third, and fourth quintiles in 2001 moved to a different earnings quintiles by 2007 (see bottom row in chart).
The Federal Reserve Bank study looked at a fairly short time period of only six years, and we would obviously expect to find even more earnings mobility over a longer period of time.
There is also significant mobility for U.S. households living in poverty, according to another study. The Census Bureau reported this month that of the 28.13 million Americans living below the official poverty line in 2004, almost 12 million, or 41.6 percent of those people, were not living in poverty by 2006. The L.A. Times reported these findings with an article titled “Poverty Often a Temporary State, U.S. Census Study Finds.”
Bottom Line: It’s a common misperception that earnings or wealth quintiles are static, closed, private clubs with very little turnover, so that once a household finds itself in an earnings quintile or living below the poverty line in a given year, it’s doomed to stay there for life. But the empirical evidence tells a much different story of dynamic change and turnover in the U.S. economy—people and households move up and down the earnings and wealth quintiles throughout their careers and lives. Many of today’s poor are tomorrow’s rich, and many of today’s rich are tomorrow’s middle class, reflecting the significant upward and downward mobility in the U.S. economy.