The Problem with Following Income Trends

Greg Mankiw is at it again. This time, he is posting data on his blog about how income inequality is increasing around the world. In other words, he is trying to say that the rich are getting richer while the poor are getting poorer. This is nonsense, and I once did a post at Debate Politics. I essentially argued that following data by looking at income classes is flawed because the composition of these groups change with time. The oft-maligned rich are not the same people from year to year. My post shows the pervasiveness of this phenomenon.

It seems to me that many people have gotten in the habit of following income trends by comparing classes over time. This is a deeply, deeply flawed method.

"A substantial fraction of workers ages 25 to 55 (about 40 percent between 2002 and 2003) experience large changes in earnings from one year to the next (defined here as changes in earnings of 25 percent or more)."

That right there should be enough to dismiss any claims of income trends using census data, but let's go deeper. In case you were wondering about household income:

"Large changes in household income from year to year (defined here as changes in income of 25 percent or more) are less common than large changes in individual earnings. Still, about 25 percent of U.S. households experienced such large changes in income between 2004 and 2005."

It's the same problem with following household income by class! Of course, I like to point out the flaws that household income is unreliable because the composition of the household changes with time, divorces are at about 50% which makes this statistic even more unrealiable (unless this data is somehow corrected by excluding that, but anyway, this isn't my only criticism of following household data).

Now let's look at people who have gained more than 25% and those who have lost more than 25%.

All sourced here. Link

I then went on to show the problem that immigration creates for income trends.

Here's another problem: immigration.

Brink Lindsey - "The share of the total population born in foreign countries has jumped from 5 percent in 1974 to 12 percent in 2004. Relatedly, people of Hispanic origin have climbed from 5 percent of the population in 1974 to 14 percent in 2004.

The huge wave of Hispanic immigration over the past generation has been good for the immigrants and their families, and good for the country as a whole. But this big influx of relatively low-skilled immigrants has to have depressed median income compared to what it otherwise would have been. Unfortunately, I’m not aware of good studies that quantify the effect."

Quoted at Reason

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Mankiw, you have fallen prey to one of the oldest tricks in the book. This is something that real economists like Thomas Sowell have known and talked about for many years. Maybe he is worth a read.