By Sarah Kenyon, Research Associate, Kenan Institute of Private Enterprise
The American Dream, or the belief that through hard work all things can be accomplished, is deeply rooted in the United States’ psyche. Although first coined in 1931 by James Truslow Adams in his book The Epic of America, this sentiment can be seen throughout American political, historical and fictional writings from the preamble of the Declaration of Independence to F. Scott Fitzgerald’s The Great Gatsby.
However, according to the St. Louis Federal Reserve, the percentage of middle income earners (the middle 50%-90% of income earners) fell from 42% in 1989 to 37% in 2016 (Kent & Ricketts, 2019). The numbers are starker when analyzed by race. In 2016, “the average wealth of white households … was seven times the average wealth of black households and five times of Hispanic households” (Brainard, 2019).
As the middle class shrinks and consumer debt, education and healthcare costs increase, a national conversation has focused on the wealth gap within America and the realities of the American Dream (Brainard, 2019; Andriotis & Brown, 2019).
Academic research has and continues to heavily investigate the wealth gap (Piketty & Saez, 2003; Saez & Zucman, 2016; Chetty et al., 2017; Autor, 2014). While many facets affect the wealth gap, literature has identified income mobility and income inequality as two factors with significant influence.
Income mobility, the ability to change economic status, is a crucial component of generating wealth. Research, however, indicates that income mobility in the United States has decreased, especially for certain geographic regions and populations (Lefgren, Pope, & Sims, 2019; Chetty et al., 2017; Durlauf & Seshadri, 2018). Chetty et al. (2017) found that “absolute income mobility has fallen across the entire income distribution, with the largest decline for families in the middle class.” Compared to Canada, which has a similar national philosophy of the American Dream, the United States has significantly lower intergenerational income mobility (Connolly, Corak, & Haeck, 2019).
Literature has noted that the level of intergenerational mobility varies substantially across the United States. Although some areas of the country have high levels of income mobility, other areas have income mobility levels lower than any developed country, given the available data. While income mobility levels vary within regions, as a whole, the Southeast region experiences the lowest upward income mobility, while the Great Plains, West Coast and Northeast have high income mobility. In addition, areas with high income mobility tend to have “less residential segregation, less income inequality, better primary schools, greater social capital and greater family stability” (Chetty, Hendren, Kline, & Saez, 2014).
According to U.S. Census Bureau data, income inequality has steadily increased for the last 50 years, reaching an all-time high in the most recent calculations. In addition, since the late 1970s, the majority of wealth accumulation has been within the top 10% of earners (Saez & Zucman, 2016).
Source: U.S. Census Bureau Gini Ratio for Households, by Race and Hispanic Origin of Householder
For more research regarding income inequality and income mobility, see the latest work of Paige Ouimet, UNC Kenan-Flagler Business School associate professor of finance; Jim Johnson, UNC Kenan-Flagler Business School professor of strategy and entrepreneurship; and Maryann Feldman, UNC-Chapel Hill professor of public policy and UNC Kenan-Flagler Business School professor of finance.
Interested in learning more about the Kenan Institute of Private Enterprise’s wealth gap work? Click here to visit the institute-affiliated CREATE center for the latest on research, events, and alumni and student spotlights. For information on the recent Closing the Wealth Gap conference, click here.
Andriotis, AnnaMaria, and Ken Brown. 2019. “Record Debt Swamps Middle-Class Families — Cars, Colleges and Housing Have Become More Costly, but Wages for Many Have Barely Budged.” The Wall Street Journal: A1.
Autor, D. H. (2014). Skills, education, and the rise of earnings inequality among the “other. Science, 344(6186), 843–851. https://doi.org/10.1126/science.1251868
Autor, D. H., & Dorn, D. (2013). The Growth of Low-Skill Service Jobs and the Polarization of the US Labor Market. American Economic Review, 103(5), 1553–1597. https://doi.org/10.1257/aer.103.5.1553
Brainard, L. (2019). Is the Middle Class within Reach for Middle-Income Families? Retrieved from https://www.federalreserve.gov/newsevents/speech/brainard20190510a.htm
Cai, Z., & Heathcote, J. (2018). College Tuition and Income Inequality. https://doi.org/10.21034/sr.569
Cairo, I., & Sim, J. (2018). Income Inequality, Financial Crises, and Monetary Policy. https://doi.org/10.17016/FEDS.2018.048
Chetty, R., Grusky, D., Hell, M., Hendren, N., Manduca, R., & Narang, J. (2017). The fading American dream: Trends in absolute income mobility since 1940. Science, 356(6336), 398–405. https://doi.org/10.1126/science.aal4617
Chetty, R., Hendren, N., Kline, P., & Saez, E. (2014). Where is the land of Opportunity? The Geography of Intergenerational Mobility in the United States. The Quarterly Journal of Economics, 129(4), 1553–1623. https://doi.org/10.1093/qje/qju022
Connolly, M., Corak, M., & Haeck, C. (2019). Intergenerational Mobility Between and Within Canada and the United States. Journal of Labor Economics, 37(S2), S595–S641. https://doi.org/10.1086/703465
Durlauf, S. N., & Seshadri, A. (2018). Understanding the Great Gatsby Curve. NBER Macroeconomics Annual, 32, 333–393. https://doi.org/10.1086/696058
Ifcher, J., Zarghamee, H., & Graham, C. (2019). Income inequality and well-being in the U.S.: Evidence of geographic-scale- and measure-dependence. Journal of Economic Inequality, 17(3), 415–434. https://doi.org/10.1007/s10888-018-9404-z
Kent, A., & Ricketts, L. (2019, August 14). Wealth Inequality in America: Key Facts & Figures [St. Louis Federal Reserve]. Retrieved November 1, 2019, from https://www.stlouisfed.org/open-vault/2019/august/wealth-inequality-in-america-facts-figures
Lefgren, L. J., Pope, J. C., & Sims, D. P. (2019). Contemporary State Policies and Intergenerational Income Mobility (Working Paper No. 25896). https://doi.org/10.3386/w25896
Piketty, T., & Saez, E. (2003). Income Inequality in the United States, 1913-1998. Quarterly Journal of Economics, CXVIII(1), 39.
Saez, E., & Zucman, G. (2016). Wealth Inequality in the United States Since 1913: Evidence from Capitalized Income Tax Data. Quarterly Journal of Economics, 131(2), 519–578. https://doi.org/10.1093/qje/qjw004