One often heard contemporary economic myth is that the rich are getting richer and the
poor are getting poorer.
Like any myth there is a nugget of truth to this.
For example, if we look at the data, the top 20 percent of income earners today do have
a larger share of national income than they did in the past, and the bottom 20 percent
of income earners do have a smaller share of national income than they had in the past.
There’s two problems with that data.
First of all, that data doesn’t tell us anything about the absolute condition of the
poor: Just because one has a smaller share of income doesn’t mean that one is absolutely
poor.
So, for example, it could be the case that even though poor Americans have a smaller
share of national income, their absolute income is higher.
If I asked you, would you rather have a sixth of a pizza or a ninth of a pizza, your answer
might depend on how big the pizza is.
And having one-ninth of a pizza might be better if the pizza was much larger than the one
of which you’d have one-sixth.
The real income of poor Americans today is higher than it used to be even though their
share of total income is somewhat lower.
But all this misses the more fundamental point.
The bigger problem is that data is snapshot data that compares wealthy people in one year
with wealthy people in years before, poor people in one year with poor people in years
before.
What it doesn’t take into account is the movement in individual households through
time.
If we could track individual households, we might be able to know what happens to poor
people in, say, five years or ten years or fifteen years.
And in fact, we do have that data.
One set of data shows that between 1979 and 1988, 86 percent of households that were poor
in 1979, were no longer poor in 1988.
A second set of data from the University of Michigan shows that of households that were
poor in 1975, over 95 percent of them were no longer poor by 1991.
One of the most important things to understand when we talk about the rich getting richer
and the poor getting poorer is this idea of income mobility.
The reality is, for most Americans, that they start off poor and they slowly become richer
over time.
And in fact, if we look at that data comparing 1975 and 1991, what we find is that the average
income gain for rich households over that period was just about $4,000, but the average
gain for poor households over that period: $28,000.
So what really happened between 1975 and 1991 is that the rich got richer, but the poor
got richer a lot faster than the rich did.
So whenever we talk about rich and poor, we have to take account of this issue of income
mobility.
So how can it be that most Americans are getting richer when we know that there are still plenty
of poor people out there?
Well the fact is that one of the things that happens over time is who comprises the income
distribution changes.
Immigrants, young people entering the labor force come into that income distribution at
low levels of income.
They become the new poor while the old poor slowly move their way up.
So even though a first glance at the data may make it seem like the rich are getting
richer and the poor are getting poorer, the reality of the United States in the early
21st century is that everybody’s getting richer, rich and poor alike.
And the idea that the rich are getting richer and the poor are getting poorer is largely
a statistical artifact and mostly a myth.