Fostering upward economic mobility in the United States

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Article Highlights

  • Historically, increasing the unemployment rate by 1 percentage point has been shown to increase the poverty rate by 0.4 to 0.7 percentage points.

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  • One of the strongest ways to build the human capital of disadvantaged neighborhood residents is through a greater degree of school choice.

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  • Encouraging college completion would greatly improve the mobility of low-income students.

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Executive Summary

While the national conversation continues to focus on income inequality and the minimum wage, the level of opportunity for economic mobility in the United States is astonishingly low. In a recent paper, Harvard University economist Raj Chetty and his colleagues find that upward mobility in the United States has stagnated in recent decades, despite periods of economic growth and an expansion of welfare programs. Another study found that 70 percent of Americans born into the bottom two quintiles will not make it to the middle class. Other developed nations offer more opportunity and mobility than the United States.[1]

In this paper, we review the literature on the state of intergenerational mobility in America. Most studies find that a parent’s level of income is a significant determinant in a child’s income level. The causes for persistence identified by the literature include (1) segregation, (2) income inequality labor market challenges, (3) welfare programs, (4) education, and (5) family structure. We provide policy proposals in each of these areas.

Segregation and geography are important factors in mobility because low-income households living in isolation no longer have the benefit of interaction with good peer groups. There are various approaches to overcoming segregation, such as encouraging the in-migration of richer households into poorer areas or improving public transit routes into poor areas. We propose building the human capital of disadvantaged city residents through a greater degree of school choice, which has been shown to counteract many neighborhood disadvantages.

Having a job is the surest way out of poverty. There is an immediate need to encourage more participation in the labor force following the Great Recession. We propose experimenting with a wide variety of policies to encourage employment, such as work-sharing arrangements, relocation vouchers for those in hard-hit communities, and customized job-training programs with employers.

Welfare programs that incentivize work have been far more successful in boosting incomes and mobility than simple cash assistance programs. The US Census Bureau estimates that the earned income tax credit (EITC) lifted 5.4 million people out of poverty in 2010 alone.[2] We propose expanding the EITC to childless adults, reducing the marriage penalty by adding a second-earner deduction, and reducing the disincentives to work in other welfare programs.

High-school dropout rates are highly correlated with low upward mobility. We propose a “milestone” credit that would give low-income teenagers a cash bonus upon receiving their high-school diploma. We propose linking welfare payments to a requirement that dependents are enrolled in school. We also propose implementing pilot programs that experiment with the timing of Federal Pell Grant disbursements to encourage graduation.

Family structure is perhaps the strongest indicator of intergenerational mobility. Since the 1980s, there has been a staggering decline in the traditional family as the number of families headed by a single mother has doubled. We propose reforming the childcare tax credit to make it easier for single mothers to reenter the workforce, leave welfare, and climb the ladder of opportunity for themselves and for their children. We also propose ways to encourage child support.

While mobility is possible for some, it may be beyond the reach of others. One of the most startling recent trends in welfare is that payments have shifted away from the truly poor and toward those with higher incomes. We propose streamlining existing tax credits and means-tested benefits to improve take-up rates for the poor and limit how high up the income distribution means-tested programs go.

The status quo is not working. The United States spends nearly $800 billion every year on antipoverty programs, yet upward mobility is not improving.[3] A child born into a low-income family is likely to stay low income. Federal policies are needed to encourage work, education, and stable family structures to improve upward mobility and reduce the cycle of dependence.

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Notes

1. Raj Chetty et al., “Where Is the Land of Opportunity?: The Geography of Intergenerational Mobility in the United
States” (working paper no. 19843, National Bureau of Economic Research, Cambridge, MA, 2014), www.nber.org/
papers/w19843.pdf?new_window=1
.
2. Robert Greenstein, “Government Programs Kept Millions out of Poverty in 2010,” Center on Budget and Policy Priorities, September 13, 2011, www.offthechartsblog.org/government-programs-kept-millions-out-of-poverty-in-2010/.
3. According to a report from the US House Committeeon the Budget, US antipoverty programs cost a combined $799 billion in fiscal year 2012. See US House Budget Committee, The War on Poverty: 50 Years Later (Washington, DC,
March 3, 2014), http://budget.house.gov/uploadedfiles/war_on_poverty.pdf.

 

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