Analyzing Inequality in the U.S.

One of the enduring challenges of maintaining social cohesion is ensuring that economic gains are felt broadly and not just by a lucky few.

Economic inequality in the US is greater today than at many other points in its history. The Gini Coefficient, a measure of inequality, is 41.3, close to its highest levels since at least the 1960s (a score of zero would mean everyone earns the same income and 100 would indicate all income is earned by a single person).¹

This is of course after taxes and income redistribution; before those, it is closer to 59.5.²

Comparing Gini Coefficients across OECD countries shows the US with the 5th highest, on par with Mexico, Turkey, and Chile.³ Recent studies of ancient societies estimate that Rome in 150 CE had a Gini Coefficient of around 40, similar to the US today.⁴

The question is: does concentrating wealth into fewer hands matter for the long term success of a country?

Inequality is a Consequence of Freedom

In their 1968 book Lessons of History, Will and Ariel Durant posit that inequality is natural to all societies but is most acute in democracies due to the freedoms afforded citizens combined with differences in abilities. The passage below ignores structural factors that also contribute to inequality (e.g., the US’s history of racial and gender inequities) but nonetheless captures a fundamental truth of democracies:⁵  

If income and wealth inequality are inherent to free societies, policies that only seek equality of outcomes are doomed. A better approach is to focus on social mobility. In other words, structure a society in which anyone with talent can get to the top.

Social mobility is fundamental to America’s history. Alexis de Tocqueville admired this difference between America and aristocratic France in which status was inherited; he said, “The discovery of America opened up a thousand new roads to fortune and delivered wealth and power to the most humble of adventurers.”⁶  

While many of America’s founding fathers were wealthy land owners, it also had its share of rags-to-riches stories: Benjamin Franklin came from a poor family of candle makers and Alexander Hamilton was an orphan from the West Indies.

Studies have since found that countries with low upward mobility are more likely to experience social unrest: riots, general strikes, antigovernment demonstrations, political assassinations, guerrillas, revolutions, and civil wars.⁷

So, a more fruitful analysis is to look at social mobility in the US. We turn there next.

Social Mobility Trends in the US

Harvard economist Raj Chetty is one of the leading thinkers on social mobility. His project called Opportunity Insights studies this topic in the US.

According to Chetty’s research, only around 50% of Americans today earn more than their parents, down from over 90% of children born in the 1940s.⁸

Declining upward mobility has been experienced across all 50 states but has been most pronounced in industrial midwestern states such as Michigan and Illinois.

Chetty and team also found that the decline could be explained by two factors: lower aggregate GDP growth rates and changes in the distribution of that growth. Changes in income distribution contributed for a greater share of the decline.

Which means that, for policymakers, improving aggregate growth rates alone would not be enough to remediate the challenge; the gains need to be shared more widely, too.

How to Improve Social Mobility

Chetty and his team have also looked at factors that enable children from poor neighborhoods to move up the economic ladder. We highlight three here: community employment, economic connections, and targeting underutilized talent.

Community Employment

In one study, Chetty and team looked at data for 57 million children born 1978 to 1982 to analyze what enables them to escape poverty as they enter adulthood.⁹

They found that a primary enabler of upward mobility was high employment levels in a child’s neighborhood. This includes both high employment rates among parents (see below) as well as among other children’s parents.

Other factors such as parental education, wealth, occupation, and marital status explained very little in terms of upward mobility.

The researchers hypothesized two reasons for this correlation: higher levels of employment result in more economic resources for local schools and other programs, and they create positive social influences on children that help to shape their aspirations or later provide job referrals.

Economic Connectedness

In another study, Chetty and team studied the impact of social connectedness on upward mobility. Using data from 21 billion friendships on Facebook that they mapped to individual zip codes, they found that economic connectedness (i.e., having friends from higher economic groups) is associated with higher rates of upward mobility.¹⁰

They further found that economic connectedness is a stronger predictor of upward mobility than other factors such as racial segregation and income inequality.

Underutilized Talent

In a third study, Chetty and team looked at the lives of more than 1 million inventors in the US by linking patent records to tax and school district records, tracking these individuals from birth onwards.¹¹

They found that children from high income families are 10 times more likely to become inventors than children from low income families.

This is even when controlling for 3rd grade math scores. Children who performed above the 90th percentile in math were more likely to become inventors, but even more so if they came from rich families.

One policy idea Chetty and team propose is programs to identify talented math students from underprivileged neighborhoods and expose them to innovation (e.g., mentoring, internships, or other interventions).

The task to improve social mobility is clear, and the data provide some hints on policy prescriptions. Policymakers need to be thoughtful in getting it right.

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1  Federal Reserve Bank of St. Louis. Gini Index for the United States (SIPOVGINIUSA). Accessed January 28, 2025. https://fred.stlouisfed.org/series/SIPOVGINIUSA.

2  Pew Research Center. “Trends in Income and Wealth Inequality.” January 9, 2020. Accessed January 28, 2025. https://www.pewresearch.org/social-trends/2020/01/09/trends-in-income-and-wealth-inequality/.

3  OECD. Income Inequality Indicators. Accessed January 28, 2025. https://www.oecd.org/en/data/indicators/income-inequality.html?oecdcontrol-8027380c62-var3=2022.

4  Alfani, Guido. (2021). Economic Inequality in Preindustrial Times: Europe and Beyond. Journal of Economic Literature. 59. 3-44. 10.1257/jel.20191449.

5  Durant, Will, and Ariel Durant. The Lessons of History. New York: Simon & Schuster, 1968 (pp. 48 - 49).

6  Tocqueville, Alexis de. Democracy in America. Translated by Henry Reeve. Introduction. New York: Harper & Brothers, 1838.

7  Houle, C. (2019). Social Mobility and Political Instability. Journal of Conflict Resolution, 63(1), 85-111. https://doi.org/10.1177/0022002717723434

8  Opportunity Insights. Opportunity Insights. Accessed January 28, 2025. https://opportunityinsights.org.

9  Opportunity Insights, July 2024. Accessed January 28, 2025. https://opportunityinsights.org/wp-content/uploads/2024/07/ChangingOpportunity_Paper.pdf.

10  “7 Key Takeaways from Chetty’s New Research on Friendship and Economic Mobility.” Brookings, August 2022. Accessed January 28, 2025. https://www.brookings.edu/articles/7-key-takeaways-from-chettys-new-research-on-friendship-and-economic-mobility/.

11  Chetty, Raj, John N. Friedman, Emmanuel Saez, Nicholas Turner, and Alex Bell. “Who Becomes an Inventor in America? The Importance of Exposure to Innovation.” Equality of Opportunity Project, 2017. Accessed January 28, 2025. http://www.equality-of-opportunity.org/assets/documents/inventors_summary.pdf.