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How has income volatility evolved?
I've had many people asking me whether Jacob Hacker's results about "the great risk shift" hold up. The CBO weighs in:
Since 1980, there has been little change in earnings variability for both men and women. There is some evidence that, between 1960 and 1980, earnings variability increased for men but was offset by a decrease for women. Those findings are consistent with most existing studies of the topic that use publicly available survey data, which tend to find higher levels of earnings variability for men in the 1980s and 1990s relative to the 1970s, but little change since around 1980.
Here is the paper. I'll read through it soon, and report back if my deeper impression runs in the other direction. If you know of relevant defenses of Hacker, please do leave them in the comments. I'd like to get to the bottom of this.
Posted by Tyler Cowen on April 17, 2007 at 02:12 PM in Data Source | Permalink
Comments
My sense is that the weakness of the CBO's report is its source data. It's all based on wage data from SSA, which means that it has no demographic information etc. So, for example, if you wanted to look at household income uncertainty you couldn't see this in the CBO data. And since there are fewer married couples today than in 1970, more people living alone, higher frequency changes in household composition (more divorce, more co-habitation) then you could have no change individual income variability but big changes in family or household income variability.
Another factor (which I don't believe) is that wages are a smaller share of income than they used to be, or at least there are a greater number of people who receive lots of income from non-wage sources (business income, capital gains etc) and that changes in the variability of these sources of income has increased.
Saez, Song and Kopzuck [sic] also have a new working paper on this that looks at a much longer time frame with the SSA data and comes to similar conclusions about the stability of wages over the last couple decades. In particular they show that the increase in income inequality at the very high end isn't due to random shocks or higher variance--once you're that rich you are always that rich. In fact, mobility between the sorta-rich and the really rich has gone down recently.
Posted by: adam at Apr 17, 2007 3:44:52 PM
Not an economist, but it seems to me that a lack of increase in income volatility doesn't exactly refute the contention that individual and family *risk* has increased.
Put another way, even if money inflow remains constant, risk is a function of probability and severity of money outflow, right?
Or am I misreading the Hacker thesis?
Posted by: T:Porter at Apr 17, 2007 4:17:58 PM
Since 1980 women's share of employment has increased significantly.
Women have greater income volatility then men.
Consequently, total or average volatility has increased.
This is true even though volatility for men or women is unchanged.
It stems from the change in composition.
Posted by: spencer at Apr 17, 2007 4:45:43 PM
Spencer, your conclusion seems unlikely for two income families. If the woman's income is half of the household income, a 50% decline in her income only reduces household income by 25%. Think of it as diversification of sources of income.
Of course, the story is different for households with only female wage earners.
Posted by: scarhill at Apr 17, 2007 10:34:38 PM
The CBO addresses the question that can be answered with wage data from the SSA, but more interesting (and useful) would be a look at consumption variability, not earnings variability.
Posted by: mike at Apr 18, 2007 10:15:00 AM
Just a quick random thought, but if I lose my pension at age 50 it really doesn't
show in my earnings (I'm guessing)so my income may appear the same but my
risk has increased.
"On average" I think we are all better off. The pie is bigger, but the
distribution is not necessarily even.
Posted by: save_the-rustbelt at Apr 18, 2007 10:40:44 AM
FYI, Hacker's work is based on the Panel Study on Income Dynamics sample, which contains extensive demographic information and the like.
Posted by: Isaac at Apr 18, 2007 10:52:00 AM
Spencer makes a point that is often overlooked in all kinds of statistics.
I remember during either the late 80's or early 90's a story made the rounds of the mainstreammedia that had "everybody" wringing their hands in despair. It seems that mean SAT scores were declining in the US. It also turned out that SAT scores were rising for whites, blacks, hispanics, and asians (I am not sure about "native" Americans, but they make up a very small aprt of the overall demographic pool). Amazingly, or perhaps not so amzingly considering selection bias for who goes into media, virtually everyone in the media missed the point that this meant that our education system was improving overall! The reason the overall mean average was going down was because the lower performing subgroups were making up a larger percentage of the overall population.
I'm convinced that the same holds true, to a certain extent anyway, for US poverty and income statistics, namely that the US has "imported" a huge amount of poor people from Mexico and elsewhere. With a rising median income amongst people born in the USA, and a rising percentage of immigrants who are definitely poorer than the median, we wind up with what apppears to be a relatively stagnant median income.
It is simply imperative to at least try to adjust for demographic changes when considering overall trends.
Posted by: happyjuggler0 at Apr 18, 2007 12:51:33 PM
Have you seen this? It is another approach to the issue.
In the past quarter century, the ups and downs of the American economy - that is, its business cycle volatility - have decreased. That's a good thing: it means less severe recessions, milder swings in the unemployment rate, and possibly fewer business failures. Over the same time period, though, the volatility of employment growth rates and sales growth rates at some 10,000 companies whose securities are traded on various stock markets have risen, on average.
In Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms (NBER Working Paper No. 12354), co-authors Steven J. Davis, John Haltiwanger, Ron Jarmin, and Javier Miranda seek to explain these apparently contradictory trends. For their study, they use the recently developed Longitudinal Business Database (LBD), which contains annual observations on employment and payroll for some 6 million U.S. businesses. This is a dramatically larger and more comprehensive database than the COMPUSTAT data on publicly traded companies used in previous studies. Publicly traded companies constitute less than 1 percent of all U.S. firms and about one-third of U.S. employment in the non-farm business sector.
Posted by: spencer at Apr 18, 2007 2:36:10 PM
Tyler
Real vs. nominal income volatility may play a role here. Inflation in the 70s averaged 8-9%, with peaks at 12-13%.
So a 'fall' in real income might have been concealed as stability in nominal income. And consumers have many obligations in nominal terms (their mortgage) and tend to think in nominal terms.
Fast forward to the '00s, and inflation is very low. An income shock shows up on the paycheque in nominal terms, not just real ones.
scarhill
Excellent post. Yes the portfolio effect must be huge: families with 2 income earners probably have greater stability of income than families with 1 earner during the 1970s.
happyjuggler0
I remember also that SATs were 'regraded' to allow higher scores. I had a friend who had perfect SATS (1981)-- this was extremely rare then. I have learned that perfect SATS are now quite common.
If SATS were indeed rising for whites, blacks, Hispanics and Asians, then I am not sure how the average SAT score could have been falling? Those categories must be at least 90%, if not 99% of college bound Americans?
I don't think it was so much as demographic change, as the fact that a greater percentage of the population was writing SATS.
(other measures of student competence *did* show a fall. Ask any first year college instructor about student competence to express themselves in written English, vs. 30 years ago. Again this may be a function that a wider section of society goes to university).
On US income that *is* showing a trend, it is the rise and rise of the top 1% (and in fact the top 0.1%) of incomes, relative to the median. This has been extraordinarily pronounced since 1980.
(remove at to reply by email)
Posted by: Valuethinker at Apr 19, 2007 10:04:04 AM
valuethinker,
Imagine a group of W's and B's, each containing five people. The five W's score an average of 1200 on the (old, i.e. two categories, not three) SAT's, and the five B's score a mean average 800 on the SAT's. The average for the group is 1000.
Now imagine that ten years later education where W's live has improved, and the average SAT score for W's is 1250. The education system where the B's live also improves, and they score an average of 850. What is the overall average?
If you answer 1050, you gave the wrong answer. The correct answer is that there isn't enough information, you need to know how many W's there are and how many B's there are. If there are still 5 W's and 5 B's, then 1050 is correct. But what happens if there are now 5 W's and 10 B's? You add 5250 and 8500, making 13750. Then divide 13750 by 15 to get 916 2/3.
So instead of of an overall improvement of 50 points if the ratio of the two groups is the same, you have a decrease in the overall average of 83 1/3 points, quite a swing!
This isn't to say that your thesis is incorrect of worsening schools. The point simply is that changing the demographics of the sample, of any sample, distorts what is actually happening and can distort what is actually a good thing into what appears to be a bad thing.
Posted by: happyjuggler0 at Apr 20, 2007 11:22:46 AM
Oops, that is funny. 5 times 1250 is 6250, not 5250.
983 1/3 is thus the correct average, not 916 2/3. Still, the point remains valid even though I can't do math in my head the way I used to be able to as a youngster.
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