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Do relative status and income matter more than absolute?
If this were true, then most immigration would be from rich countries to poor countries.
Posted by Tyler Cowen on October 10, 2007 at 02:23 PM in Economics | Permalink
Comments
Likewise, people would choose to save their money and live in cheap neighborhoods rather than stretching their incomes as far as possible in order to live in upscale neighborhoods.
Granted, some people do choose to save their money and live in cheap neighborhoods, but they generally do so in order to accumulate wealth, not in order to be the richest guy on the block.
Posted by: Brandon Berg at Oct 10, 2007 2:31:48 PM
I'm stunned. Isn't it clear that wage levels in poor countries are much lower than rich countries? Perhaps retirement into poor regions make sense, but even then, what about entitlements, not to mention culture, relationship, and offspring investments.
Posted by: Chi at Oct 10, 2007 2:33:29 PM
"Likewise, people would choose to save their money and live in cheap neighborhoods rather than stretching their incomes as far as possible in order to live in upscale neighborhoods."
This assumes that the group against whom I measure my relative wealth in the neighborhood. That is just silly.
Posted by: aaron_m at Oct 10, 2007 2:37:10 PM
"Likewise, people would choose to save their money and live in cheap neighborhoods rather than stretching their incomes as far as possible in order to live in upscale neighborhoods."
This assumes that the group against whom I measure my relative wealth in the neighborhood. That is just silly.
Posted by: aaron_m at Oct 10, 2007 2:37:31 PM
"This assumes that the group against whom I measure my relative wealth in the neighborhood. That is just silly."
So why do people commonly make the assumption that the country is the appropriate unit within which comparisons are made. Seems just as silly.
Posted by: josh at Oct 10, 2007 2:40:44 PM
Immigrating to a poorer country does not necessarily raise your relative status, since your production opportunities in the poor country will be lower (or the country would not be poor in the first place). We know that the Balassa Samuelson mechanism causes PPP differences to persist, and these involve relative status only indirectly, if at all.
Posted by: guest at Oct 10, 2007 2:42:37 PM
Chi, the things you mention are "absolute" status and income. By moving to a poor country your absolute wages, entitlements, etc. may decrease, but your "relative" position amongst your neighbors would likely be enhanced. The point is most immigration is NOT from rich countries to poor countries, which tends to lend support to the notion that absolute status and income is more important than relative status and income.
This is important because there is also at least some evidence that certain reforms will result in the average worker having a higher absolute income, but a lower relative income.
For example, certain free market reforms might raise the average worker's annual income, but might also raise the average CEO's income by an even greater amount, so that worker's relative income decreases, while his absolute income increases. If relative income matters more to the worker, this is bad, but if absolute income matters more it is good.
Posted by: Doug at Oct 10, 2007 2:43:16 PM
This draws a false line separating relative from non-relative by a country border. Even if you move to a poor counry you still have the relative reference of the one you left. More likely, it's not a country-to-country comparison, but a neighborhood-to-neighborhood one. You don't have to move to another country to move to a much worse off area.
Of course absolute matters - just not as much once you have security, education, and access to health care. I think once these are met, relative becomes more important (relatively speaking). Maslow's pyramid, anyone?
Posted by: asparagus at Oct 10, 2007 2:43:46 PM
I would also note that many DO immigrate to poorer countries when they retire. Because they no longer have need for the "production opportunities" that quest points out, this just happens to be the time when such a move is most likely to raise their relative income.
This doesn't automatically mean that relative income is more important, though, because such a move could also raise absolute income, because a fixed income may buy a bigger house and more goods and services in a poorer country.
Posted by: Doug at Oct 10, 2007 2:48:57 PM
Time has to be a factor. I do get envious on occasion. Like for the 10 seconds it takes to walk by a really nice car, or the minute and a half it takes to read about the 100 richest people in the world - but then it passes. So how could a couple of minutes of envy every other day have much of an influence on my happiness? Maybe some people's minds just get stuck more than mine.
Posted by: Randy at Oct 10, 2007 2:49:03 PM
"So why do people commonly make the assumption that the country is the appropriate unit within which comparisons are made. Seems just as silly."
Actual answer: Because it is ideologically self-serving to do this.
Posted by: J. at Oct 10, 2007 2:49:52 PM
False, because people can't change their developed frame of reference. This is why first generation immigrants are happy to clean the dirty toilet bowls of Americans, because they are comparing themselves with the co-nationals they identify with back home and feel relatively wealthy in comparison to this psychological reference group. Meanwhile their second generation children adopt the reference group of their new country, and feel relatively short-changed compared to this new reference group.
Similarly, an American who becomes the richest little poor man in a 3rd world country, will never be able to use these dramatically reduced living standards as his frame of reference. He is psychologically primed as an American, and his status and living standard reference group will be other Americans.
Posted by: Jason Malloy at Oct 10, 2007 2:50:14 PM
It might be a bit extreme to suggest, but maybe, just maybe, they matter both?
Posted by: Great Zamfir at Oct 10, 2007 2:52:56 PM
"If this were true, then most immigration would be from rich countries to poor countries."
How would your relative position change if you move from a rich country to a poor country? Maybe initially, you may be relatively better in the poor country because of the savings you've done in the rich country. But, after a while, you end up earning less income (it's a poor country remember) and you wouldn't be better off than others around you.
Posted by: anon at Oct 10, 2007 2:56:33 PM
but your "relative" position amongst your neighbors would likely be enhanced.
Nonsense. The way to raise your relative position is to move to an area where your relative advantage is strongest. Absolute income levels are irrelevant.
tends to lend support to the notion that absolute status and income is more important than relative status and income.
It's more complicated than that. If absolute status and income is more important than relative status, why doesn't everyone immigrate to Manhattan where even clerical jobs pay six figures? The answer is that rents and the general price level would skyrocket. Relative income does matter in the real world.
Posted by: guest at Oct 10, 2007 2:58:45 PM
My feeling is that, both sides (relative and absolute wealth ) of the value comparison have their backers. In this day and age of quick information dissemination and large numbers, enough number of people voice their backing to one stream of thought or another to make it difficult to discard that stream as theoretically not rational.
Posted by: Spiff at Oct 10, 2007 3:07:40 PM
I don't know about you all, but I always compare myself to whichever group best supports the hypothesis that relative status and income matter more than absolute.
I do note, however, that the "status symbol" element of that hypothesis pretty much presupposes that the comparison group is made up of people one actually knows. The chances of Bill Gates stopping by to admire my expensive car are disappointingly slim.
Posted by: Paul Zrimsek at Oct 10, 2007 3:17:45 PM
I think that people in general are smarter than economists.
Posted by: Max at Oct 10, 2007 3:18:38 PM
I think the answer is the same as anything else... Both matter. The law of diminishing returns would seem to apply as well. The more absolute income you have relative to relative income the more important relative income is, and the more relative income you have relative to absolute income, the more important absolute income is.
Posted by: Doug at Oct 10, 2007 3:20:53 PM
This discussion suffers from oversimplification. Relative status probably is important, but why would it be the only thing important to a person?
Why would the neighborhood or the country be the relevant unit of comparison?
Here are some hypotheses:
1) Human happiness depends on both absolute and relative prosperity.
2) My "baseline" for comparing prosperity depends largely upon "the people I see throughout my day." This could include television, billboards, my neighbors/loved ones, friends, coworkers, people I see in cars...
3) Moving my baseline down is more painful than moving it up. So moving to a poor area both makes me feel relatively well off, and hurts my self-image because it revises my baseline of prosperity down. While I adjust my baseline, I must face that I have "taken a step down" and that is hard to accept.
4) Capitalism often makes people less happy about their status by showing rich people on TV and billboards. This may lead to an inefficiently high pursuit of money, by some definition of "efficiency." Or maybe it's a good thing.
Posted by: mk at Oct 10, 2007 3:24:45 PM
What actions would give a revealed preference for relative vs absolute status?
Posted by: TGGP at Oct 10, 2007 3:25:36 PM
I am curious, how many here have checked to see what earning percentile they fall in?
BTW I have been in lower USA earning percentile (but I have always known I was rich) and now I am in a high earning percentile an it does not feel that different to me.
For anyone in USA who feels poor I recommend a trip to a third world country. Everyone that I know that has travled to a third world country felt very rich, some even to point of feeling un-comfortable about it.
Posted by: Floccina at Oct 10, 2007 3:34:42 PM
Here is an example of how people can't voluntarily change their psychological status hierarchy reference group:
In Silicon Valley, Millionaires Who Don’t Feel Rich:
Silicon Valley is thick with those who might be called working-class millionaires... many such accomplished and ambitious members of the digital elite still do not think of themselves as particularly fortunate, in part because they are surrounded by people with more wealth — often a lot more.When chief executives are routinely paid tens of millions of dollars a year and a hedge fund manager can collect $1 billion annually, those with a few million dollars often see their accumulated wealth as puny
... “People around here, if they have 2 or 3 million dollars, they don’t feel secure,” said David W. Hettig, an estate planner based in Menlo Park who has advised Silicon Valley’s wealthy for two decades...
... “Here, the top 1 percent chases the top one-tenth of 1 percent, and the top one-tenth of 1 percent chases the top one-one-hundredth of 1 percent,” he said.
“You try not to get caught up in it,” he added, “but it’s hard not to.”
See also this post by the Inductivist showing that happiness levels shift depending on whether you have more or less education than your father. Rich sons who move to the middle class will be less happy than poor sons who move up to the middle class despite the fact they are in the same place. It's their position relative to their developed reference group that differs.
Posted by: Jason Malloy at Oct 10, 2007 3:35:38 PM
"Immigrating to a poorer country does not necessarily raise your relative status, since your production opportunities in the poor country will be lower (or the country would not be poor in the first place)."
Some of those countries do allow foreign direct investment opportunities. People use these to get rich, but the tend to spend that money back home, rather than live big in the poor country. This wasn't always the case-- there was a time when colonizers liked to be the big fish in the new country. You can read about them and they aren't pretty all holier than thou with their big status, like kings or nobility. But, today most people would prefer to spend their absolute income back in the rich country. My guess: a combination of (a) cultural and globalization effects (you can't get away with being that smug) (b) the fact that your money buys you much better stuff in the rich country, such as a better neighborhood, more convenience, or rather that the rich country has this convenience even for the poor and (c) people just care more about (b) than (a). Some people always have and always will be smug, but most people are not.
"why doesn't everyone immigrate to Manhattan where even clerical jobs pay six figures?"
Basically, they do. Thats why rents are so high and suburbs are ever-expanding and it takes 2 hours to drive 5 miles into the city.
Posted by: liberty at Oct 10, 2007 3:37:22 PM
Another factor is poverty, and what goes along with it, is repulsive to some to certain degree. Some educated people from the 3rd world countries like to move to the USA to enjoy a country where poverty is not so hard to look at, even though they loose their maids, relative position and cheap services when they do so. I also think that is part of some of the reason for the wars on poverty, smoking, obesity in the USA.
Posted by: Floccina at Oct 10, 2007 3:43:32 PM
