NCPA - National Center for Policy Analysis

Overcoming Wage Inequality

June 10, 2003

Earnings inequality has increased significantly over the past three decades, due in large part to increased demand for workers with more knowledge and skill. The rise in inequality has raised concerns about economic mobility and whether those with low incomes have much, or any, hope of climbing the economic ladder. Fortunately, the answer is yes, say the authors of a new study for the Financial Services Roundtable.

One way to think about mobility is to array wage earners into fifths, ranging from the lowest income quintile to the highest quintile. Mobility is then measured by the movement among the quintiles over time. Even after a single year, there is considerable movement:

  • After one year, about one-third of the workers who were in the bottom income quintile move to a higher quintile; and about one-quarter who were in the top quintile move to a lower one.
  • Of those who were originally in the intermediate three quintiles, about half move to another quintile.

There is even more movement over longer periods. Comparing the wages of workers of the same age over a 15-year time period:

  • The percent of workers who remained in the same quintile after one year was 60 percent.
  • The percent remaining in the same quintile fell to 43 percent after five years, to 33 percent after 10 years, and to 29 percent after 15 years.

These results also point to the importance of knowledge and skill, as measured by education and experience, in facilitating economic mobility. Individuals who have responded to the incentives implicit in the increased earnings inequality have experienced the greatest mobility. The implication is that public policies providing individuals and their families greater freedom and opportunity to invest in themselves and their children will have the greatest positive impact on economic success.

Source: Andrew Rettenmaier and Donald R. Deere, "Climbing the Economic Ladder," Financial Services Roundtable, May 2003.

 

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