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Incomes and inequality: what the numbers don't tell us
Here is my NYT column from today (right now the on-line piece has some typos/broken links, I hope they will be fixed), excerpts:
Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.
Furthermore, more-educated groups show greater income inequality than less-educated groups. Uneducated people are more likely to be clustered in a tight range of relatively low incomes. But the educated will include a greater range of highly motivated breadwinners and relaxed bohemians, and a greater range of winning and losing investors. A result is a greater variety of incomes. Since the United States is growing older and also more educated, income inequality will naturally rise.
Thomas Lemieux, professor of economics at the University of British Columbia, estimates that these demographic effects account for about three-quarters of the observed rise in income inequality for men and 69 to 95 percent of the observed rise in income inequality for women (AER June 2006, earlier version at www.irs.princeton.edu/seminars/lemeiux.pdf, "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill")...In other words, rising income inequality is not just a result of unfairness or bad public policy...
Studies of personal happiness, based on questionnaires and self-reporting, indicate that the inequality of happiness is not growing over time in the United States. Furthermore, the United States has an inequality of happiness roughly comparable to that of Sweden or Denmark, two nations with strongly egalitarian reputations. (See the symposium in Journal of Happiness Studies, December 2005.) American society offers good opportunities for people to be happy, even if not everyone becomes rich.
My conclusion?
What matters most is how well people are doing in absolute terms. We should continue to improve opportunities for lower-income people, but inequality as a major and chronic American problem has been overstated.
Posted by Tyler Cowen on January 25, 2007 at 06:12 AM in Economics | Permalink
Comments
I am more of Amartya Sen's point of view when it comes to the "absolute vs. relative" issue: "relative deprivation of incomes can yield absolute deprivation in terms of capabilities".
Yet I recognize that this is a perspective I bring into the question. What puzzles me is that economists of both left (pro-egalitarian) and right (pro-market) not only argue consistently for and against the question of whether large inequalities are important, as you would expect, but also about whether or not such inequalities exist. So Paul Krugman will argue that it's all about the top 1% (inequality is a big deal), while Gary Becker will argue that it's just education (inequality isn't that big a deal) and so on. Our hosts here do surprise me sometimes - which is why I keep coming back - but not in this case: it does not surprise that TC finds a piece arguing that demographics is important (inequality isn't that big a deal).
I am perennially disappointed that people's prior beliefs enter into even the descriptive part of the problem. Other people's anyway.
Posted by: tom s. at Jan 25, 2007 7:34:24 AM
tom s. raises a good point that I have often thought about. It is, of course, conceivable that people could disagree about the descriptive part of the problem. But in the ideal situation in which researchers are doing inbiased work, we could not expect political leanings to be correlated with exactly how the descriptive part differs.
Posted by: Aaron Fix at Jan 25, 2007 8:06:27 AM
Just wanted to give you a tip. You linked your article on today’s NYT with this link. If you go to The New York Times Link Generator (here), you can get this link to your article: your archived article, thus forever valid.
Posted by: lilalia at Jan 25, 2007 8:17:27 AM
"Life is not a race against fellow human beings, and we should discourage people from treating it as such... what matters most is how well people are doing in absolute terms."
It certainly appears you are making an assertion of fact here rather than expressing your own opinion. But where's your evidence? The happiness studies you reference as demonstrating that money makes people happier at a declining rate, so that there is "a natural check on the inequality of happiness," also make it clear that absolute wealth levels have even less of an effect on happiness than relative ones do (see Diener and Biswas-Diener's 2001 review of innumerable papers including Easterlin 1974, Clark & Oswald 1996, Blanchflower & Oswald 2004, Luttmer 2005, and Firebaugh & Tach 2005). Plenty of experimental evidence also supports the importance of relative outcomes (check out the vast literature on the Ultimatum Game).
I'm perpetually amazed at the willingness of economists to assert that assumptions are facts. Its certainly true that homo economicus has always cared only about absolute outcomes, but claiming this as a null hypothesis that needs to be disproved is clearly a matter of opinion. My own experience of human nature -- and I had careers as a diplomat and investment banker before becoming a research psychologist -- strongly suggests that people focus more on relative than absolute outcomes.
Posted by: es at Jan 25, 2007 9:20:51 AM
Maybe the relativists can compare themselves to past generations. TC, thanks for writing that, I'm sure that will be the best thing I'll read all day.
Posted by: snoopy at Jan 25, 2007 9:25:28 AM
Your conclusion runs counter to that of Benjamin Friedman in The Moral Consequences of Economic Growth. He argues on historical grounds that relative prosperity is what matters most. Can you explain why you think he is wrong?
Posted by: Dan Cole at Jan 25, 2007 9:28:24 AM
I'm a libertarian economist, but it seems to me that we're neglecting an important fact: median incomes have barely moved in three decades, and 1-quartile incomes have fallen slightly over that period (in real terms). Regardless of inequality per se, it is a major problem for our economic policies/tax structure to produce such an outcome. Total GDP increase is much less important than increase in wages at the 1,2 and 3-quartiles, and on that measure the US has not performed well recently.
Posted by: cure at Jan 25, 2007 9:59:59 AM
Wealth can rise from two sources - a rise in income or a decline in cost. Although median income may have been stagnent for 3 decades thanks to companies like Wal-Mart what you can buy for that income has risen significantly.
Posted by: asiequana at Jan 25, 2007 10:24:26 AM
asiequana is right.
How much blog could you consume 30 years ago. How much did it cost?
How much did streaming video on demand cost 30 years ago.
There is so much free entertainment with an internet connection. Food is also very, very cheap.
snoopy makes a good point: either you look at absolute measures, or compare yourself to past generations if you must be relative. Both look amazingly good.
Posted by: Ivan at Jan 25, 2007 10:42:57 AM
Let's discourage people from racing against each other by writing and posting as "anonymous". That way, we'd consider each piece on its own merits and remove all the competition.
Posted by: Bill Harshaw at Jan 25, 2007 10:49:17 AM
I was thinking more along the lines of TVs, really, really cheap. Parents bot a 27" Sony console in '82 for $1200 - which is still working, BTW.
Posted by: Sandy P at Jan 25, 2007 11:04:17 AM
On the other hand, how much does a competent education or reasonably good health insurance cost? The health care will be better in terms of machines and drugs, but you'll get less time with the doctor and more hassle about the bill now. The education will be worse all around, as far as I can tell. Though you can supplement your crappy public education with the internet, if you're so inclined.
Posted by: albatross at Jan 25, 2007 11:22:29 AM
Hmm, let me compare myself to my parents. Both were working class . Mother worked part-time. They were able to own a home in a nice neighbourhood, reasonable commute, worked regular hours, raised three kids.
I'm a professional. My wife's a professional. We work long hours (a requirement of the job). You can't bank on working in the same job for more than 5 years. We can't afford to buy a house in any decent neighbourhood with less than 1 hour commute (each way).
But we can buy as many 50" plasma screens as we like. Yup, the relative comparison is great. Everything is just swell. No problem that the top 1% is making off with all the loot. It's not a race after all.
Posted by: foo at Jan 25, 2007 11:40:56 AM
Great piece, tks for the link. A couple of questions?
* Why are so econ people so caught up in arguing about whether absolute or relative inequalities matter most? Seems bizarre to me. How about saying "both matter," and then poking around and finding out more. Maybe one matters more than the other among certain people, or in certain regions, or in certain countries. Maybe they mix and match and shift over time according to mood, personality, age, sex, recent meals, phases of the moon etc. I'm so puzzled by this "one matters more than the other" fistfight that I figure there must be some ideological battle going on behind the scenes that explains it.
* Fun to see you citing happiness studies.
* I have no way of knowing, but has anyone taken a look at the impact on US inequality of these two factors: 1) the people at the tiptop who loot corporations, award each other golden parachutes, etc, and 2) the way we import so many, many millions of poor people? In other words, if we didn't have a very small number of people awarding each other hundreds of millions of dollars, and if we didn't have millions upon millions of poor recent arrivals, would our inequality stats look nearly as bad as they do?
Posted by: Michael Blowhard at Jan 25, 2007 11:44:36 AM
"What matters most is how well people are doing in absolute terms"
Okay yes, but that notion is consistent with the idea that relative poverty in rich countries is a problem. This is because the life of the relatively poor* in rich countries is, in absolute terms, miserable. And that's something to worry about. So the whole debate (absolute versus relative) misses the point, or at least is talking at cross purposes.
I agree that those who cite rising inequality as a big problem in itself are mistaken - unless what they really mean is that rising inequality somehow leads to rising absolute misery.
I doesn't matter that in dollar terms the relatively poor in rich countries are actually pretty well off (that is, well off relative to third-world nations) if the people in question are still living miserable lives in hellish neighbourhoods, like, you know, the sort of people and places that we all know exist in our cities and pray our children never end up in.
* here I am not talking about lower-income households, but rather what's sometimes called the 'underclass' - those living in high drugs, crime, unemployment, low education areas.
Posted by: Roy Bland at Jan 25, 2007 11:49:01 AM
Inequality of happiness and income
Very nice article from TC.
He reports that inequality of happiness is less than of income - I guess this would be predicted from the fact that a significant proportion of higher wages are paid to make people do things which make them unhappy, and which they would not do unless paid extra: dirty or dangerous work, travelling a lot to uninteresting places to meet uninteresting people to discuss uninteresting things, acquiring skills in tough subjects like math and statistics, working long and anti-social hours at other people's convenience etc.
Most people do these kind of things only when they are paid a premium; the extra money presumably increases their overall 'utility' enough to make it worthwhile, but extra money doesn't necessarily make them 'happier' as measured by happiness questionnaire studies.
Posted by: Bruce G Charlton at Jan 25, 2007 11:52:38 AM
Also, is "foo" right that housing costs have risen such that real incomes (if you factor in housing and not just TVs and the like) have fallen for the average household? I can never figure that out - I see the research saying that median incomes have stagnated, but I don't know how satisfactorily they treat housing, medical and education prices when calculating real income. Any experts out there?
If foo is right, and many people are worse off in the respect he or she suggests, than that's a different problem (different to inequality per se).
Posted by: Roy Bland at Jan 25, 2007 11:55:34 AM
"This is because the life of the relatively poor* in rich countries is, in absolute terms, miserable."
A bold statement if I've ever heard one.
Posted by: snoopy at Jan 25, 2007 12:02:31 PM
foo is right about the housing market. Check out the top graph here.
- Josh
Posted by: Wild Pegasus at Jan 25, 2007 12:58:48 PM
Glass is half empty for me I'm afraid. Comparing my income against future generations is making me miserable.
Posted by: Thom at Jan 25, 2007 12:59:11 PM
I'm a professional. My wife's a professional. We work long hours (a requirement of the job). You can't bank on working in the same job for more than 5 years. We can't afford to buy a house in any decent neighbourhood with less than 1 hour commute (each way).
Out of curiosity, where do you live? My experience is that people who live in certain densely populated areas (e.g. NYC metro area, DC area) wildly overestimate the average commute time for the vast majority of Americans. On the first page of search results for "average commutes," I found the following: "According to the latest census figures, lengthy commutes — and the issues associated with them — are not going away in the near future. Americans, on average, spent nearly 26 minutes commuting to their jobs in 2000, up from 22 minutes in 1990. Among the states, the commutes were longest for residents of New York (nearly 32 minutes), with workers in Maryland, New Jersey, and the District of Columbia experiencing similar delays. By contrast, North Dakotans needed the least amount of time to get to work (just under 16 minutes)." Granted this is slightly out-of-date, but do you have actual data that indicates that multi-hour commuting is common among Americans?
Posted by: Steven Vickers at Jan 25, 2007 1:35:52 PM
Michael Blowhard speaks wisely: "How about saying "both matter," and then poking around and finding out more".
Posted by: tom s. at Jan 25, 2007 2:17:18 PM
My wife and I are both professionals, and we have lived in LA, Boston, New York and now Tulsa for various reasons. I think if you are talking about living in New York, SF, DC or Boston you are going to see pretty nasty commutes and living situations. But it always struck me as ridiculous that people without enormous incomes would choose to live in those areas. Here in Tulsa you can buy an 3000 sf brand new house in a great school district for $300,000. Commuting 1 hour puts you pretty far into farm country, and overall costs are substantially lower.
Based on your profession you might not be able to move, but my general impression is that jobs are much more disperse in the country than they used to be. If you insist on living in a high-income area life will be tough, if you have flexibility you can get a lot more for your money.
Posted by: lannychiu at Jan 25, 2007 2:41:06 PM
Given foo's complaints about affordability and commute I would guess he lives around NYC, Boston, DC, SF or LA. But the qualifier in his argument is the word "decent" neighborhood. As 2 professionals I'm sure your definition of decent is different than what it was when your parent bought their house as two working class people. However decent still means no blacks, or at least only well educated blacks. Because physical intimidation isn't tolerated much anymore we do it by raising the cost of home ownership by raising property taxes or land prices. If you ask me Yonkers is a decent working class town and is affordable for the NYC area but I doubt it would qualify as decent for 2 professionals. Additionally you can thank an inceased risk tolerance of mortgage lenders, declining interest rates, increased urban populations and land conservation movement for a good chuck of the increase we've send in urban and suburban regions in the last few years. If you live in a less populated area where there is lots of land to develop housing affordability is not so much of an issue. My mom's house in semi-rural Wisconsin has not gone up much in value beyond inflation for the last 15 years. The availability of new land to develop around metro areas is much less than the last generation as we have added around another 100 million people to the country and have further concentrated in urban areas. On top of it as communities have become more concerned about retaining the charm of their local community and land conservation has become more of a concern, much of what is left to develop is now taken off the table. This is therefore partly a demographic issue and partly political issue about the control of land use by those who most benefit from the increase of property price resulting from restricted development rather than an income distribution problem.
Posted by: asiequana at Jan 25, 2007 2:41:47 PM
Also from today's New York Times: Childhood Poverty Is Found to Portend High Adult Costs. WASHINGTON, Jan. 24 — Children who grow up poor cost the economy $500 billion a year because they are less productive, earn less money, commit more crimes and have more health-related expenses, according to a study released on Wednesday. See full article at http://www.nytimes.com/2007/01/25/us/25poverty.html
Posted by: Harold Porosoff at Jan 25, 2007 2:46:07 PM
