Thursday, May 19, 2011

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

Book available from Amazon

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.


  1. I suspect that he knows he is wrong, Tony, but he doesn't care. He knows that his message sells and that is his goal.

  2. You nailed it Tony. We are importing poverty, but more importantly, America economomically enriches these people. Brookings did an in-depth cohort study that show that 80% in the bottom quintile escape to points upwards within one generation.

    The problem is, people listen uncritically to people like Mankiw and Krugman because they are famous.

    Heritage also has a really good summation of this issue.

  3. Sorry it took me so long to respond.

    I don't think Mankiw is saying that the poor are getting poorer as he didn't even comment on it really. I'm not even sure anyone has made that argument as the only ones I see involve stagnant wages for the lower percentiles and rising ones for the top earners and compensation not keeping up with output.

    I agree that using income to make a single statement about inequality is flawed and we should instead be looking at consumption and disposable income. For instance I can live in a big city and see my income rise from 40,000 to 50,000k over a 10 years, but I'm still not that better off since the cost of living would be extremely high in a big city.

  4. Fine, he may not have been saying that the poor are getting poorer, but that wasn't the main criticism. My point is that following income like this is nonsensical because the groups that are being followed change over time. We are comparing apples and oranges.