There’s nothing more American than going from rags to riches. Or so the image goes.
The reality, according to a recent study, is far less rosy.
The ability to go from poor to rich — or at least to climb out of poverty — has become much harder to do in the last three decades, according to an analysis by Wells Fargo Securities. The percentage of low-income people who moved up the economic ladder slowed sharply from 1980 to 2009, compared with the previous dozen years, the study found.
The drop in economic mobility, combined with recently declining government aid to the poor, has left many Americans with no way to dig themselves out of poverty.
“Those at the lower end of the income distribution are currently stuck between a rock and a hard place,” the study said. “They do not have the economic mobility to improve their finances in the labor market, and government assistance helping them get by is now drying up.”
The picture was brighter for the middle class, whose ability for upward mobility improved notably from 1980 to 2009. The highest-earning people in the study — those in the top quintile — had average annual income of $140,000. For the top 1%, it was $644,000. And the top 0.1% earned an average $1.1 million a year.
Despite several recessions and bear markets, the middle class benefited from superior education, which led to higher-paying jobs, and from profit built up over many years in the stock market, said John Silvia, Wells Fargo’s chief economist, who co-wrote the report with two colleagues.
The study was limited. It tracked only about 500 households, in part because of the lack of reliable data on specific households over extended periods of time. But Wells Fargo economists believe the sampling is representative of the broad population.
The study was prompted by the intense national debate over income inequality that in part spawned the Occupy Wall Street movement, with critics saying wealth is increasingly concentrated in the hands of the richest Americans to the detriment of everyone else. A report by the Congressional Budget Office in October said after-tax income for the top 1% of U.S. households ballooned 275% from 1979 to 2007. The gain for the bottom one-fifth was 18%.
The Wells Fargo economists posited that rising income inequality is “not necessarily problematic” if it’s accompanied by economic mobility — in other words, if people can improve their financial lot through diligence and hard work.
What the study found, however, is that low-income people are having a tough time.
The study compared economic mobility in two periods: 1968 to 1980 versus 1980 to 2009.
Economic mobility for the bottom one-fifth of wage-earners was relatively strong in the first period. They earned a cumulative 4.7% of the group’s total income in 1968. By 1980, their share of income more than doubled to 11.2%. In other words, many people in the bottom income rung in 1968 appeared to successfully move up the economic ladder by 1980.
That dynamic did not hold in the second period.
In 1980, the bottom fifth of wage-earners made up 5.2% of total U.S. income. By 2009, however, their share of total income had risen to only 6.1% — meaning most people made little financial headway. The middle class, by comparison, saw their income share rise to 26.1% by 2009 from 18.2% in 1980.
“There’s still a lot of mobility for people who grew up in average-earning families to move up into higher income brackets if they work hard and go to college and study and all of that,” said Joe Seydl, a Wells Fargo economic analyst. “But it is alarming that people who are born into poverty may stay in poverty.”
To boost their economic position people at the bottom rung need help on several fronts, including improved education, early-childhood development and basic financial literacy, according to the study.
Academic and anecdotal evidence has shown a similar economic stagnation among low-income people, said Adolfo Laurenti, an economist at Mesirow Financial in Chicago.
In the past, high school graduates could go from low-level manufacturing jobs to high-five-figure positions and middle-class lifestyles, he said. But those jobs are scarcer today, and many of them require higher levels of education and technological skill.
“The interaction between education and the jobs being created in the 21st century economy is a major driver behind what we see in unemployment, income and social mobility,” Laurenti said.