TCS Daily

The Escalation of Income

By Arnold Kling - September 24, 2004 12:00 AM

"...of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production."
-- Robert E. Lucas, Jr.

The often-used phrase "distribution of income" suggests the metaphor of a pie. I believe that a more accurate metaphor would be an escalator. The pie metaphor treats income as static, thereby ignoring one of the most important facts about the standard of living, which is its rise over time.

For example, consider what I call the "Wobegon" phenomenon. The majority of all families in any given year will be in the top 40 percent of the income distribution fifteen years later! For example, in Myths of Rich and Poor, W. Michael Cox and Richard Alm produce the following information based on a panel of families surveyed in 1975 and again in 1991.

Where they Began in 1975

Percent who made it to the top 40 percent in 1991

Lowest Fifth


Second Fifth


Middle Fifth


Fourth Fifth


Highest Fifth


Overall, over 60 percent of families surveyed in 1975 made it to the top 40 percent in 1991. If the "distribution of income" were a pie, this would be mathematically impossible. The top income category by definition cannot include the majority of people. To put it another way, in 1991 it appears that much of the lower-income category has vanished!

To solve the apparent mystery, think of an escalator. In 1975, many of the families surveyed were young families or new immigrants, and they were near the bottom of the escalator. After fifteen years on the escalator, many of them reached the top half of the escalator. When you came back and surveyed the same families in 1991, most of them were near the top of the escalator. That is, they were in the top income categories relative to all families in 1991.

In 1991, the families at the bottom of the escalator were families that had formed or immigrated after 1975, so that they could not be included in a study that followed families from 1975 to 1991. If you were to look at all families as of 1991, you could spread them evenly across five income categories, but it would be a different group of families than those surveyed in 1975 and 1991.

The Escalator Rides an Escalator

However, the escalation of income does not stop with the fact that new families tend to increase their relative position on the escalator over time. Even holding constant a family's relative income category, its standard of living tends to be rising over time. The escalator itself ratchets up as technological innovation increases productivity, raising income in every category. One could say that the escalator itself is riding on an escalator!

Recently, the Washington Post wrote an article on the theme of middle-class vulnerability. The story says,

"All kinds of jobs that pay in the middle range -- Clark's $17 an hour, or about $35,000 a year, was smack in the center -- are vanishing, including computer-code crunchers, produce managers, call-center operators, travel agents and office clerks."

In fact, the data that accompany the story, which were obscured in a visually incomprehensible chart, show that the direction of movement in incomes is more up than down. The Post reports the following data, which I believe come from the Census Bureau, in which incomes are adjusted for inflation and expressed in 2003 dollars.

Income Distribution

Percent of Households




$75K and up



$50K - $75K



$35K - $50K



$15K - $35K



under $15K



The proportion of families earning $35,000 to $50,000 has fallen from 22.3 percent to 15.0 percent, which is consistent with the tone of the story. However, the proportion of families earning less than that has fallen, also. The most dramatic development is the increase in households earning more than $75,000, which went from 8.2 percent of households in 1967 to 26.1 percent of households in 2003. A large portion of the population has been "squeezed up" into the highest income category.

Return of the Fear Factor

The nature of economic life is changing. Lifetime jobs are disappearing. In fact, lifetime careers may be disappearing. See Progress and Displacement (chapter 10 of Learning Economics).

The net effect of Progress and Displacement on most households is positive. However, some households do not adapt as well. There certainly are people whose incomes move down over time, contrary to the motion of the escalator.

From the standpoint of public policy, however, it is wrong to view the entire system as broken. Statistically, the overwhelming majority of households are riding the income escalator in the right direction. When journalists and politicians argue the contrary, this is a classic example of what I recently called The Fear Factor, in which threats are overstated in order to motivate people to turn over more power to government.

I am in favor of government efforts to help the small minority of people for whom the escalator does not work. What infuriates me is the characterization of the great mass of affluent America as a victim of "middle-class squeeze" or some similar phony ailment.

I distrust journalists, politicians, and economists who use the phrase "distribution of income" and speak in terms of pie metaphors. The "pie" metaphor produces many counterproductive ideas. For example, it might lead you to think that raising the minimum wage is a good idea, even if it leads to the creation of fewer jobs for low-skilled workers. In fact, this is not a good trade-off, because young people need jobs in order to get on the escalator.

If you want to address the real challenges of poverty in this country, use the metaphor of an escalator. Target government intervention at people who are unable to get onto the escalator, due to impediments that may be medical, behavioral, or social. But don't try to "fix" the escalator by carving it up like a pie.

The author's new book is Learning Economics.


1 Comment

#'s in a vacuum
Our writer fails to account for the number of households that are now two income wage earners as opposed to single earners between 1975 and 1991.

He also fails to account for the advancement of women in the workforce, meaning their average wages have risen on average. So has the earnings of the average worker risen in line with total household average earnings. There's a lot of relevant data that would say no. There's census data easily obtained that shows real wages for males have remained flat for over 40 years.

The escalator is a better description for the fluidity of incomes over time, but it's apples to oranges when overlaid with the pie analogy. The pie is a snapshot in time. It's like comparing an income statement to a balance sheet. The pie says, here's the total earnings in this period of time, say 1991. What % went to the top 5% of earners versus the bottom 5% of earners? Today it was reported that in New Jersey, the highest earners had reached a level 13 times that of the lowest earners. That doubled what it was just ten years ago when it was 7 times.

Perhaps the truth lies somewhere in the middle, but pulling one data point as our author has is fruitless. All it accomplishes is the reinforcement of individuals who already agree with the idea that this media focus on the erosion of the middle class is unfounded.

My personal situation, my wife and I combined in 1995 earned slightly less than 100k. Ten years later, we earn double that. One, it supports the author's escalator about incomes. Two, we're not the middle class by any official measure. But I bring this up to make this point: our buying power for new homes in any major metropolitan area is about the same or less than it was in 1995. A moderately maintained home of 2000 sq. ft. in San Francisco will cost you upwards of $1M. In Philadelphia and Baltiore, homes have doubled in value in just five years. Plus energy has doubled recently. And certainly natural resources have skyrocketed: coal, copper, gold, iron, and silver are all booming along with oil due to incremental demand from India and China.

The real test of the economic well-being is what is the market doing? Well, lenders are offering longer term mortgages and car loans, interest only loans for property, looser credit in general. There's a 40 year mortgage and an interest only mortgage. These are responses by the marketplace to the stress on the buying power of consumers. Look for what retailers, bankers, builders are doing to get your dollar and you'll see the picture of our overall buying power. Is it a coincidence that Wal-Mart is 5% of our GDP?

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