Income inequality statistics ignore temporal changes in household income.Income ; Households

Thomas A. Garrett

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2011 ■ Number 15
E
very year the U.S. Census Bureau ranks all house-
holds by annual household income and divides this
distribution into quintiles.1 Income quintiles from
different years are often compared to demonstrate the
growing income inequality over time between, say, the
poorest 20 percent of households and the wealthiest 5 per-
cent of households. For example, in 1970 the income of
the wealthiest 5 percent of households was 6.3 times greater
than the income of the poorest 20 percent of households,
whereas in 2007 the income of the wealthiest 5 percent of
households was 8.8 times greater than the income of the
poorest 20 percent of households.2 When such comparisons
are made, it is implicitly assumed that each quintile con-
tains the same households over time.
For most people, income increases over time as they
move from a usually low-paying first job to better-paying
jobs later in life. Some others, however, may lose income
over time due to business cycle contractions, demotions,
career changes, retirement, and so on. Because incomes
are not constant over time, the same households do not
necessarily remain in the same income quintiles. Thus,
comparing income quintiles from different years is a prover-
bial apples-to-oranges comparison because the households
compared are at different stages in their earnings profile.
A recent study examined income mobility in the United
States from 1996 to 2005.3 Using data from individual tax
returns, the study documented household movement along
the distribution of real income over the 10-year period. As
shown in the upper panel of the chart, nearly 58 percent
of the households in the lowest income quintile (lowest 20
percent) in 1996 moved to a higher income quintile by
2005. Similarly, nearly 50 percent of the households in the
second-lowest quintile in 1996 moved to a higher income
quintile by 2005. Even a significant number of households
in the third and fourth income quintiles in 1996 moved to
a higher quintile by 2005.
The study also documented declines in household
income. Of particular note are the findings regarding the
wealthiest households. As shown in the lower panel of the
chart, more than 57 percent of the wealthiest 1 percent of
households in 1996 fell out of that category by 2005. Simi  -
larly, more than 45 percent of the wealthiest 5 percent of
households in 1996 fell out of that category by 2005. 
Income Mobility
Thomas A. Garrett, Assistant Vice President and Economist
Income inequality statistics 
ignore temporal changes 
in household income.
Movement to Higher Income Quintiles, 1996 to 2005 
0
10
20
30
40
50
60
70
Lowest Second Middle Fourth
1996 Household Income Quintile
Percent in a Higher Quintile by 2005
Movement to Lower Income Groups, 1996 to 2005 
0
10
20
30
40
50
60
70
Top 10% Top 5% Top 1%
1996 Household Income Group
Percent in a Lower Group by 2005Over time a significant number of households move to
higher or lower positions along the income distribution.
As a result, public policies such as income taxation and
income redistribution affect “classes” of people differently
over each person’s lifetime. In addition, income mobility
muddies the picture of income inequality derived from a
simple comparison of income quintiles from different years
because such compari  sons incorrectly implicitly assume
that each income quintile contains the same households
over time. ■
1 Here the Census defines (gross) income as money received on a regular basis
from wages, interest and dividends, and government transfer payments. 
2 See U.S Census Bureau, Income Inequality;
www.census.gov/hhes/www/income/data/historical/inequality/index.html. 
All data referred to here are from Table H-1 for all races.  
3 Auten, Gerald and Gee, Geoffrey. “Income Mobility in the United States: 
New Evidence from Income Tax Data.” National Tax Journal, June 2009, 62(2),
pp. 301-28.
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on May 13, 2011
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

Income mobility

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Income mobility

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