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Measuring the American Dream

Posted On07/13/2016

ContributorTracy Fischer

Produced in collaboration with Dr. Robert Eyler, Professor of Economics at Sonoma State University and President of Economic Forensics and Analytics, Inc.

 

People pursuing the American dream want upward economic mobility for themselves and their children. For many families, the American Dream includes the opportunity for prosperity, success, and the potential of a better life.

In California, rising pressures caused by the high cost of housing and stagnating wages are affecting the abilities of households to be upwardly economically mobile, driving labor from the state and exacerbating growing worker shortages.

eyler-infographic-blog-header-07

Rising Housing Costs and Stagnating Wages

The above infographic outlines the high cost of housing in California and widening income gaps that are creating a challenging environment for finding and retaining labor. Californians spend more of their income on housing (25%, the highest of any state), and real incomes for the bottom 99% of income earners have actually declined between 1979 and 2012, despite real incomes almost doubling for the top 1% of income earners.

With neighboring states’ housing markets not experiencing the same meteoric rise as in California and California incomes not keeping up, people are increasingly leaving the state to seek economic opportunity elsewhere. In fact, California lost a net total of 625,000 people to other states between 2007 and 2014.

However, examining income inequality at any given time provides only a static snapshot of one point in time rather than a true assessment of how this inequality affects the ability of households to better their economic situations.

Household Economic Mobility

In a recent article published by the Federal Reserve Bank of Cleveland, Daniel R. Carroll and Anne Chen point out the importance of considering economic mobility when trying to understand the income situations for households over time.  Their comprehensive review of recent studies and publications explains how the same household’s income may rise or fall in relation to average incomes over time, and how it’s important to understand this movement to gain a more complete picture of real-life economic prosperity.

The authors’ research shows how 10 and 20-year measurements of household mobility decreased during the 1980s, rose throughout the 1990s, then began to decrease again over the past decade, meaning fewer households’ incomes are changing.  While there has been a small increase in upward movement for the poorest groups over time, for most income ranges the fraction is roughly flat.

Economic Mobility of a Household’s Children

Of children born to parents with a household income in the lowest 20%, only about a quarter end up in the top 40%. This means that, in the US, children born to higher-income households have a significant advantage over their peers born to lower-income households. The authors point out how economic mobility of the next generation is affected not only by inheritable traits but also by access to social connections that build economic opportunity, emphasis on education, inherited wealth, etc.

As the figure below from the article shows, the income inequality we’re experiencing in California and in the US is correlated with less economic mobility between generations. This means the rising inequality in US (and California) incomes may have long-term consequences, making upward economic mobility more difficult for the average household and possibly having repercussions for generations to come.

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Impact

If housing costs continue to rise and incomes do not grow to match, labor shortages would be expected to become more common due to continued worker attrition (especially of lower-income workers) to other states, and economic mobility would be expected to continue shrinking.

These trends are important for employers in California to consider when seeking labor and setting compensation levels. We need to work together to prevent stagnation of economic mobility and continued economic growth and prosperity.

About Dr. Robert Eyler

 

nelsontalks-speaker-eyler-150x150Dr. Robert Eyler is the Professor of Economics at Sonoma State University and President of Economic Forensics and Analytics, Inc., where he has been teaching since 1995. He is also Professor of Economics and Director of the Center for Regional Economic Analysis. Robert earned a Ph.D. from the University of California, Davis in 1998 and a Bachelor of Arts in Economics at CSU, Chico in 1992. He also serves on the Board of Directors of Redwood Credit Union, a $2.3 billion nonprofit financial cooperative.

In addition to being a respected speaker and a return speaker at several Northern California NELSONtalks events, Robert is also an accomplished author, penning two books and several academic articles concerning economic sanctions, the economics of the wine industry, and monetary economics. He has been a visiting scholar at both the University of Bologna and Stanford University and is a native of Sonoma County, where he currently lives with his wife and daughter.
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Additional infographic graphics sources:
https://thenounproject.com/search/?q=apple&i=165747
https://thenounproject.com/search/?q=graduation&i=88629
http://www.freepik.com/free-vector/saving-money-in-business_763371.htm