Top one percent income mobility significantly lowers inequality measures
A Federal Reserve study reveals significant income mobility within the top one percent in the U.S., with one-third exiting after a year and two-thirds after a decade. This high turnover substantially lowers top income shares when measured over multi-year periods, reducing the top 1% fiscal income share by over 10 percent across two decades.
High turnover at the top of the income ladder
The study finds pronounced circulation into and out of the top one percent in the U.S., with one-third of individuals exiting after a single year and two-thirds departing after a decade.
This mobility is even higher at the very top, where three-quarters of the top 0.1% are no longer in that group after ten years.
Such high mobility significantly lowers top income shares when measured over multi-year periods, reducing the top 1% share by an average of 15 percent over two decades.
For the top 0.1%, 0.01%, and 0.001% shares, two-decade mobility decreases them by over 20 percent, 30 percent, and 40 percent respectively.
These U.S. exit rates are notably higher than those observed in other developed countries, indicating a more dynamic top income distribution.
Unpacking wealth, income, and entrepreneurial dynamics
The research extends previous analyses by considering a broader income measure, closer to national income, which shows a smaller effect of variability on top income shares and a flatter trend over time.
Furthermore, the paper introduces novel measures of average wealth inequality over multi-year periods, finding that multi-year wealth inequality is lower than single-year measures, though to a lesser extent than the proportional reduction seen in income inequality.
A key finding attributes the long-run increase in income variability among the top 1% almost entirely to entrepreneurial income, reflecting highly volatile passthrough business income that contributes to entrepreneurs circulating in and out of top annual income groups.
A dynamic view of economic elites
This study offers a crucial re-evaluation of U.S. income inequality by demonstrating the significant impact of mobility at the top.
While it challenges static perceptions of wealth concentration, the more modest effect on wealth inequality suggests persistent structural advantages.
Ultimately, understanding this dynamic circulation is essential for crafting effective and targeted economic policies.