The odds that kids will do better than their parents have plummeted. One possible fix: Learn from the neighborhoods in which income mobility is still thriving.
It is a core tenet of the American Dream: the idea that if you work hard, America awards you the freedom and opportunity to live a more prosperous life than the one you were born into.
That’s how it used to work, at least. Of kids born in the 1940s, 90 percent did better than their parents. But this scenario has become increasingly rare in recent decades. “Absolute income mobility,” as economists call it, fell to a mere 50 percent for kids born in the 1980s, regardless of where their parents were on the income spectrum. In other words, the odds that the average Millennial will climb to a higher rung on the economic ladder than their parents are 50-50.
That’s the startling finding of new research by a team of economists led by Raj Chetty at Stanford University and Nathaniel Hendren at Harvard. The researchers compared the pre-tax incomes of kids born between 1940 and 1984 at the age of 30 to that of their parents and adjusted for inflation. The graph below, available on the website of their The Equality of Opportunity Project research project, visualizes the top line result:
There are two explanations for this worrisome trend. The first and most familiar one is the post-war boom that fueled the classic American Dream simply ran out of gas; since then, as a whole, economic growth is happening at a slower rate, so the proverbial pie is smaller. But the other explanation is that this pie is just getting sliced more unequally than it was before.
The researchers tested both. Growing up, if 1980s kids had experienced a GDP growth similar to that in the 1940s, but no change in inequality levels, absolute mobility would have crept up to about 62 percent—a modest improvement. On the other hand, if the GDP growth had been as it was then, but the pie was proportioned as it had been in 1940s, absolute mobility would have leaped to 80 percent. That means creating a more equal economy could have closed 71 percent of the gap between the two points in the timeline. The authors write:
The rise in inequality and the decline in absolute mobility are closely linked. Growth is an important driver of absolute mobility, but high levels of absolute mobility require broad-based growth across the income distribution. With the current distribution of income, higher GDP growth rates alone are insufficient to restore absolute mobility to the levels experienced by children in the 1940s and 1950s. If one wants to revive the “American Dream” of high rates of absolute mobility, then one must have an interest in growth that is spread more broadly across the income distribution.
There’s also a geographical discrepancy. Although the decline in the share of kids that were able to outperform their parents happened nationwide, the largest drops occurred along the industrial hubs in the Midwest, in states like Illinois and Michigan (45 and 48 percentage points, respectively). The smallest drops happened in Massachusetts, New York, and Montana (around 35 percentage points).
The overall economic scenario seems grim, but the foundations of the American dream are still in place around the country. The map below shows where the 1980 cohort of kids with the poorest parents (in the bottom fifth of the income distribution) are most likely to beat the odds and prosper (to the top fifth of income distribution). The lighter the color, the higher the upward mobility:
The researchers explain via The Equality of Opportunity Project website why some areas are doing better than others:
The fading of the American Dream is not immutable. There are cities throughout America—such as Salt Lake City and Minneapolis—where children's chances of moving up out of poverty remain high. Cities with high levels of upward mobility tend to have five characteristics: lower levels of residential segregation, a larger middle class, stronger families, greater social capital, and higher quality public schools.
Kids born to rich parents have many advantages, which set the curve in their favor from the start. One of them is access to good neighborhoods, which as Chetty’s previous research has shown, determines economic outcomes to a large extent. So, to reduce overall inequality, look at cities where even poor kids have access to those better neighborhoods, with decent education options, safe, healthy environments, and a diverse social network. Ultimately, that’s what’s going to help put an end to this economic caste system, and allow all Americans—rich and poor—to have a better chance to fulfill their potential.