Three Problems with Chetty's Study of Income Mobility
By David Henderson
Stanford University economist Raj Chetty claims that the American dream is fading. He may well be right, but his data on which he bases that judgment don’t make his case. Alan Reynolds points this out well in a recent Cato blog post titled “Misconceptions in Raj Chetty’s ‘Fading American Dream.‘”
What is the American dream? Here I pretty much agree with Chetty. The dream is that you will be wealthier than your father. The problem comes with their proxy for wealth and with their baseline.
According to Chetty and his co-authors of a December 2016 NBER study, “the fraction of children earning more than their parents fell from 92% in the 1940 birth cohort to 50% in the 1984 birth cohort.” They measure income for each cohort at age 30. In other words, at age 30, only 50% of people born in 1984 had incomes higher than the income of their parents when they were age 30, whereas for the 1940 birth cohort, 92% had income, at age 30, that exceeded their parents’ income at age 30.
Here’s the essence of Reynolds’s critique:
What it [the study] really shows is:
First: Incomes were extremely low in 1940, so it was quite easy to do better 30 years later.
Second: Doing better than your parents is not defined by your income at age 30, but by income and wealth accumulated over a lifetime (including retirement).
Third: A rising percentage of young people remain in grad school at age 30, so their current income is lower than that of their parents at that age but their future income is likely to be much higher.
Alan goes into each of those in detail.
I remember first reading about this a month or so ago and wondering about the 1940 baseline. Think about a typical earner in 1940. That was the tail end of the Great Depression. How hard would it be for someone aged 30 in 1970 to earn more than a parent at age 30 in 1940? Not very.