Incomes and inequality: what the numbers don’t tell us

by on January 25, 2007 at 6:12 am in Economics | Permalink

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.

tom s. January 25, 2007 at 7:34 am

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.

lilalia January 25, 2007 at 8:17 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.

snoopy January 25, 2007 at 9:25 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.

cure January 25, 2007 at 9:59 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.

Ivan January 25, 2007 at 10:42 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.

Sandy P January 25, 2007 at 11:04 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.

foo January 25, 2007 at 11:40 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.

Roy Bland January 25, 2007 at 11:49 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.

Roy Bland January 25, 2007 at 11:55 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).

Wild Pegasus January 25, 2007 at 12:58 pm

foo is right about the housing market. Check out the top graph here.

- Josh

Steven Vickers January 25, 2007 at 1:35 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?

lannychiu January 25, 2007 at 2:41 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.

Harold Porosoff January 25, 2007 at 2:46 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

and another thing January 25, 2007 at 3:10 pm

note especially how inequality helps those at the top….in the land of the blind, the one-eyed man is king.

Adam January 25, 2007 at 5:32 pm

The naked economist “Why Income Inequality Matters” http://finance.yahoo.com/expert/article/economist/19750

Robb January 26, 2007 at 12:55 pm

My only real problem with this discussion is that it assumes that there is no social mobility. If you are born into a family in the lowest 10% of earners, you are destined to stay there? I just don’t think that’s happening. Sure, median incomes have have no moved much in 3 decades, but to think that the only thing that is happening is the rich getting richer and the poor getting poorer is silly. There is just too much anecdotal evidence to the contrary, especially if you consider intergenerational moves. My grandfather was a farmer, my father went to college and now supervises in a power plant, and now I have a masters degree and work as a securities analyst. This kind of thing happens all the time in this country, because we offer the opportunity to use your abilities to live the best life you can possibly lead. I get the feeling like the stagnation of median incomes is hiding a lot of movement underneath.

Peter Schaeffer January 27, 2007 at 12:35 am

Foo,

What state/city do you live in?

Peter Schaeffer January 27, 2007 at 1:00 am

Asiequana,

Your observations about “we have added around another 100 million people to the country† are valid, but not exactly PC. It is a matter of “faith† in many circles that runaway population growth can only be a good thing. If you question that dogma, people will start talking about immigration†¦

Rosie I January 28, 2007 at 11:45 pm

Charlton suggest that the extra money that people get doesn’t necessarily make them happier, but increase their utility. This contradicts to the idea of rationality. If human acts rationally, they will only do something that increase their utility, therefore makes them happy. In addition, the huge disparity in income is not cause by someone working on something that he/she doesn’t like. Professionals work longer hours not necessarily for pay but to get promotion which will give them more satisfaction. For someone who loves what they are doing, it yields more utility for them to engage more in work compare to someone who doesn’t like their job in the first place. The premium therefore, is not the cause why there is an income inequality.

Johnny January 29, 2007 at 10:23 am

I am 25, going back to school (because my first attempt was not really about going to class), taking 18 hrs., working 35+ hrs a week, making about 20 K a year, and doing everything on my own with a truck payment included. I have some loans for school, which by the way are easily obtained. With this expierence I strongly disagree with the opinion that it is hard for the lower class to get an education if they so desire. That arguement is simply an excuse designed to point the finger at people who have had the resolve to suffer the hardship of going to school. Basically, tose many, many Americans can choose, and they choose not to.

Bruce K. Britton February 4, 2007 at 2:35 pm

There are 4 types of inequality. Three are:
Wealth inequality (inequality in one’s claims on resources);
Income inequality (inequality in the yearly increment to wealth); and
Consumption inequality (inequality in the resources actually claimed).

Of these three, consumption inequality is the one primarily relevant to the effects of material resources on well being (wealth not contributing to well-being-that-is-due-to-material-factors unless you spend it (except for misers)).

But consumption inequality has to be divided into two parts:
nominal consumption inequality (inequality in the amount spent);
and most important
Experiential Consumption Inequality (inequality in how good ones experience of living is, insofar as ones experience is due to material factors).

The only important form of inequality for conscious beings is Experiential Consumption Inequality.

But Experiential Consumption Inequality can only vary within very narrow limits, once a person has enough to satisfy basic needs.

This is because every person has only 16 hours a day to live, and can only do 1 thing at a time. So a person who has 2 cars (or 10), or 2 houses (or 10), can only live in one house at a time, or only drive one car at a time, and any satisfaction they experience is due to their experience: one car’s worth, or one house’s worth, not 10 cars worth or 10 houses worth.

A person who buys a $300 meal can only eat as much as a person who buys a $10 meal; their satisfaction is not 30 times as great ($300/$10).

In addition, the decreasing marginal utility of consumption kicks in to decrease the increment in well being: the $10 meal may be way more satisfying than the $300 meal if the $10 eater is hungry. To someone without a car, getting one car is deeply satisfying; to someone who has 9 cars, another may be a pain in the ass (“Stop with the cars already!”).

This is why differences in wealth (income, consumption) do not turn into differences in well being, once you get above basic needs (google World Database of Happiness for exhaustive empirical verification).

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