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News : US Economy Last Updated: Nov 19, 2013 - 7:25 AM

American Dream of rags to riches more Hollywood than reality
By Michael Hennigan, Finfacts founder and editor
Nov 18, 2013 - 9:20 AM

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One of the hallmarks of the American Dream is equal opportunity: the belief that anyone who works hard and plays by the rules can achieve economic success. Recent research finds that 40% of Americans consider it common for a person in the United States to start poor, work hard, and become rich. But that rags-to-riches story is more prevalent in Hollywood than in reality. In fact, 43% of Americans raised at the bottom of the income ladder remain stuck there as adults, and 70% never even make it to the middle while only 4% move from rags to riches.

The Pew Charitable Trusts' the Economic Mobility Project report [pdf] says that Americans raised in the bottom quintile of household income remain there a generation later (with income of less than $28,900 in 2009 dollars, adjusted for family size). Twenty-seven per cent rise up slightly into the second quintile, 17% land in the middle of the distribution, and 9% end up in the 4th quintile.

Despite the debate over the value of a college education (Wall Street Journal paywall), a college degree remains the single biggest predictor that a person will move up the ladder. Eighty-six per cent of those who jumped out of the bottom quintile had graduated from college, versus 55% of non-grads. However, only 7% of people raised at the bottom of the scale receive a college degree.

Pew used about 40 years of data from the Panel Study of Income Dynamics, a project of the University of Michigan, which has followed families from 1968 to the present. The findings echo those of a 2012 study from the Federal Reserve Bank of San Francisco, which used the same dataset and found that 44% of Americans in the bottom quintile remain there a generation later.

Unlike Pew, the Fed researchers looked at mobility for all Americans. They discovered considerable “stickiness” at both ends of the income spectrum. In other words, poor or wealthy children are most likely to stay in their respective wealth brackets as adults. There’s a great deal more fluidity in the middle, with people more likely to move both up or down the scale.

The Wall Street Journal asked: "So, should we celebrate or bemoan the Pew and Fed results?" It’s tricky, said Mary Daly, an economist at the San Francisco Fed.

In a birthright economy - - think India’s old caste system - - 100% of individuals would remain in the economic category they’re born into. In an ‘equal chance’ economy, socioeconomic status would change in a random but predictable way, with 20% of people staying where they are and 20% moving into each of the other categories (imagine a lottery machine where 100 balls pop around a tank and 20 are randomly funneled into each of five different baskets).

The Journal says by contrast, the US is nominally a meritocracy where talent and hard work are ostensibly rewarded. “What would a true meritocracy deliver in terms of percentages?” Daly asked. “It’s hard to know what the right benchmarks are.”

But Americans attached to the rags-to-riches myth might be disappointed to know that other countries show greater mobility among have-nots.

In Sweden, Finland, Norway, Denmark and the United Kingdom, between 25% and 30% of people stay in the bottom quintile, according to Daly, compared to the 44% in the U.S.

“This is what we call the ‘parental penalty,’ and it’s really high in the US,” she said. “If you’re born in the bottom here, your likelihood of sticking in the bottom is much higher.”

Pew said human capital played a strong role in upward mobility from the bottom. College graduates, dual-earner families, and people who did not experience unemployment were highly likely to move up. For example:

  • 86% of college graduates, 84% of dual-earner families, and 64% of people who were continuously employed left the bottom income quintile;
  • By contrast, only 55% of non-college graduates, 49% of single-earner families, and 34% of people who experienced unemployment moved up from the bottom quintile.

Factors such as education and dual incomes also increased the chances that someone would rise from the  bottom to at least the middle quintile.

Race was another powerful factor in upward mobility from the bottom, but was less important for upward mobility to at least the middle quintile.

  • 68% of whites left the bottom, compared with 45% of blacks, a gap of 23 percentage points;
  • This gap shrinks to 10%age points for those who reached at least the middle - - 35% of whites did, compared with 25% of blacks.

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