Why Fewer Americans Outearn Their Parents

It’s growing inequality—not a temporarily sluggish economy—that is most likely to blame.

Jonathan Ernst / Reuters

There was a time when most Americans could expect their children to grow up and be better off than they were. As my colleague Alana Semuels notes, most baby boomers born in the 1940s ended up earning more money than their parents, and they did so well before middle age. But that is no longer the case, according to new research from economists and sociologists at Stanford, Harvard University, and the University of California, Berkeley, which finds that it’s now significantly harder for younger generations to improve their financial standing.

For the first time, economists and sociologists are able to quantify what they call the “fading American Dream.” For their paper, released this month, Stanford economist Raj Chetty and his colleagues sorted through recently obtained, anonymized tax records from thousands of Americans in order calculate and compare earnings between children and their parents—something that researchers had been unable to do until now. The decline in economic  mobility between parents and kids over the past half century is astounding. About 90 percent of Americans born in the 1940s earned more than their parents by the time they turned 30. Only about half of those born in the 1980s can say the same. Figures were adjusted for inflation and household size.

While the decline in mobility is consistent across all 50 states, the sharpest drops were in the industrial Midwest. The rate of mobility fell by about 48 percentage points in Michigan and 45 percentage points in Indiana. The smallest declines happened in Massachusetts, New York, and Montana, where mobility fell by about 35 percentage points. Those hit hardest were members of the middle class, and the biggest gap in generational earnings was between sons and their fathers. About 95 percent of men born in the 1940s grew up to outearn their fathers, compared to just 41 percent of those born in 1984, the last cohort included in the study.

The fact that men from Rust Belt have struggled the most to move up the socioeconomic ladder echoes some of the frustrations voiced by those who voted for Donald Trump, propelling him to the presidency. But researchers also found that simply improving economic growth—an oft-touted campaign promise—wouldn’t be enough to help those same middle-class men.

Researchers analyzed two economic trends that could explain the sharp decline in mobility. The first is that the economy is growing at a much slower pace than the postwar boom years of the 40s, 50s, and 60s. But they concluded that slowed growth doesn’t account for most of the decline in intergenerational mobility. Even if the economy were growing at the same level, only 62 percent of Americans born in 1984 would earn more than their parents did by the time they turned 30, the study finds. So while shrinking economic growth is part of the problem, it’s not the driving force.

The second trend, growing income inequality, seemed to have more of an impact on declining mobility. Fifty years ago, economic growth was more evenly distributed among all social classes, while today it is significantly more concentrated among the most affluent Americans. If the distribution of wealth had remained the same, 80 percent of Americans born in 1984 would be earning more than their parents, which closes most of the current earnings gap between generations.

These findings show that growing the economy can only do so much for average Americans, says Maximilian Hell, one of the Stanford researchers who authored the study. “If we care about restoring economic mobility, we need to make sure income growth is more broadly shared,” he says.

But that’s not as easy as it might sound. Conservative and liberal views differ on what has led to growing inequality in the first place. Liberals blame the declining power of collective bargaining and unionization, which they say decreased workers’ ability to negotiate salaries, benefits and job security. Conservatives blame increased regulation and taxation of small businesses, which they say hampered expansion, hiring, and growth. Despite those differences, most sides tend to agree on this: In today’s high-tech, highly automated labor market, a college education is more necessary than ever. Strengthening labor unions, supporting small businesses, and investing in higher education could all help more people get ahead, says Hell.

On the positive side, even if the economy keeps growing at the same, comparatively slow rate, the decline in mobility could be reversed if something is done about inequality.  “It would take a humongous amount of economic growth alone, which we haven’t seen in decades, to take us back to the boom years,” says Hell.

Based on the findings from this new study, cutting taxes on the most affluent, as Trump has suggested, won’t be enough to make America great again. Instead, the real challenge for the incoming administration is to ensure that future economic growth is shared among everyone.