A new study reveals that the United States is less economically mobile than was previously estimated. More and more Americans than ever are convinced that the national ethos—“Work hard and get rich”—is a myth, and they are right. The relationship between class and family background is even stronger than was previously suspected.
The report, Economic Mobility in the United States, written by Grusky and his Stanford colleague Pablo Mitnik, calculates that approximately half of all parental income advantages in the United States are passed on to children. That means most Americans are likely to remain in the same social class they were born into, be it rich, poor, or middle income.
Grusky and Mitnik use a measure called intergenerational income elasticity, or IGE, to determine the extent to which economic advantage is passed from parents to their children. IGE ranges between 0 and 1. In a society with an IGE of zero, opportunity is equally distributed—rich and poor children have the same expected income as adults. But, when IGE reaches 1, inequality is perfectly reproduced, and children inherit all the advantages and disadvantages of their parents. Prior studies have measured IGE in the U.S. at as low as 0.34, but Grusky and Mitnik’s findings indicate that the country is more immobile than we thought.
The persistence of economic advantage increases as you move higher along the income scale. Between the 50th and 90th percentiles, parents pass on roughly two-thirds of their advantage to their kids. Opportunity is distributed unequally, and children born on the opposite edges of society can expect different futures: A child raised by rich parents can expect a salary 200 percent larger than that of a child raised by low-income parents. “Children who are born into the bottom of the parental income distribution are not getting full access to opportunities,” Grusky says. “That means we’re wasting their talents. That means that our economy is not exploiting all that it should exploit in terms of the potential human capital that’s available to it.”
Last April the Republican-led House voted to eliminate the tax on property transferred from the deceased to their heirs. The tax only applies to estates worth $5.4 million or more, and if eliminated, it would add $270 billion to the deficit over the next 10 years, leaving fewer funds to invest in education and health care, which would enhance economic mobility.
The study reveals how out of reach the American dream has become. While labor has become more efficient and profitable, workers aren’t sharing in the wealth. In the three decades after World War II, for example, worker productivity and hourly wages rose in tandem. But from 1973 to 2013, worker pay rose just 9 percent, even though productivity increased by about 74 percent. “The suppression of wages is the most salient variable limiting or even reversing economic mobility,” says Michael J. Thompson, a political scientist at William Paterson University and author of The Politics of Inequality. The decline of unions is partly responsible for this shift. “When people can no longer bargain for their wages and their work conditions, they will be at the mercy of owners,” Thompson says.
The Commerce Department estimates that American companies earned the most in 85 years, while employees took home the lowest wages since 1948. While employee compensation dropped to its lowest level in 65 years in 2013, corporate profits reached an 85-year high The Commerce Department reported last week that corporations earned $2.1 trillion in 2013, pocketing (after taxes) 10 percent of the country’s GDP. Before 2010, the highest level of after-tax profits was 9.1 percent in 1929, the year the government started keeping records (and the year the Great Depression began).
U.S. corporations doing business overseas earned $2.1 trillion in foreign profits, almost doubling their earnings in a five-year span.Overseas earnings are effectively untaxed, which has prompted corporations to come up with more and more creative ways of making money earned at home look like money earned internationally. General Electric collected the biggest overseas profits: $110 billion. The conglomerate told Reuters, “GE operates in more than 170 countries, and most of these overseas earnings have been reinvested in active business operations like manufacturing facilities and loans to non-U.S. customers.”
Employees, meanwhile, took home the lowest-ever recorded wages and salaries at $7.1 trillion, or 43.5 percent of the economy. They also received fewer benefits: Health insurance, pensions, and other non-cash payments in 2013 were at their lowest since 1948, when the employer-financed system of health insurance was just getting under way. Why are workers receiving a dwindling portion of the nation’s income? Some chalk it up to unions’ declining negotiating power and to globalization, which has turned over some jobs to cheaper workers abroad. Technology also plays a role, as does government policy.
Meanwhile, corporations have been aggressively lobbying to lower the 35 percent top corporate tax rate. Apparently it puts them at a disadvantage in the competitive global market.
16.1 million kids—22 percent of American children—were living in poverty in 2013, the report found. That’s 3 million more impoverished kids than in 2008, when the nation was reeling from the subprime mortgage crisis. Children of color were worst off, with 39 percent of African American, 37 percent of Native American, and 33 percent of Hispanic kids living in poverty.
“Young children raised in low-income households may get insufficient food and nutrients, which can negatively impact physical development. When children go to school hungry, they are unable to focus their full attention on learning,” wrote the report’s authors.
Studying is kind of tough when you’re a kid growing up living in a motel or shelter because there’s no place in the United States a parent earning minimum wage can afford a market-rate two-bedroom apartment. Good luck hitting the books if your stomach is growling, which is what faces 25 percent of children living in major cities who don’t have enough food at home, according to No Kid Hungry. They’re getting their meals from schools because their families don’t have enough money for a trip to the grocery store.