Jacob Hacker writes:
I have received many questions about the Congressional Budget Office’s (CBO) recent report that finds that individual earnings volatility, while extremely high, has not risen since the 1980s. Although this new research significantly expands what we know about individual earnings volatility, it does not challenge my contention that family income volatility has grown, nor is it at odds with my larger argument that the level of economic risk that families face has risen dramatically.
Do read his entire response, and ask exactly how many of the paragraphs speak to the point at hand. The CBO data appear perfectly good, and point in an overwhelmingly consistent direction across different measures; in contrast Hacker’s measure of volatility is extremely complicated and non-intuitive. In his response, Hacker never challenges the claim that individual volatility of income doesn’t seem to be rising.
His response focuses on the difference between individual and family income, but this comparison should not in general favor him. Note that a) divorce rates generally are falling, b) on net families provide income and wealth insurance, c) volatility swings in the upward direction are good rather than bad, and d) if a woman darts in and out of the workforce, for optimizing reasons, this will boost family income volatility but that is fine. Try telling any of the standard Hackeresque stories — "we are now more buffeted by the winds of change" — and making it consistent with an essentially unchanged level of individual income volatility. That is very hard to do in a convincing manner.
Go again to Hacker’s calculations. His volatility index is especially high today and especially low for 1974-1982. Those were the days of double-digit unemployment, rampant inflation, prime rates of 20 percent, oil price spikes, and universal feelings of volatility and decline, not to mention lower transfer payments from government. That doesn’t pass the "huh?" test.
You’ll notice other funny features of his measure; for instance 1993 is about "twice as volatile" by Hacker’s pre-tax metric as 1991. Was America getting so much shakier over those two years, otherwise considered economically healthy? For purposes of contrast, the difference between 1974 (the first year in the series) and 2000 (the next to last year) is also by a factor of two.
Here is the CBO report, do paw through those graphs (sadly I can’t get them to reproduce on this page but they are crystal clear).
See what Hacker is pinning his hopes on:
Unlike earnings volatility, family income volatility hinges on (1) the joint labor supply decisions of workers in the family; (2) family formation, expansion, contraction, and dissolution; (3) the earnings and losses of family-owned businesses and capital holdings; and (4) government taxes and benefits. Each of these could cause individual earnings volatility and family income volatility to follow different paths.
Factor 1) works against him, given the families diversify risk to some extent. On 2) he doesn’t mention falling divorce rates but rather stays vague, 3) might help him but if the family owns a business or great deal of capital it is probably not a public policy problem, noting that much of this volatility may be in the upward direction, and 4) government benefits should provide insurance on net. His last sentence in that paragraph — "Each of these could cause individual earnings volatility and family income volatility to follow different paths" — simply isn’t very potent.
Also recall that Hacker’s original estimates try to convert family income into individual income by a mathematical operating involving the division by the square root of family size. That is admittedly an imperfect conversion but how does it square with his claim #2 that varying family size will help his argument? He claimed his attempted conversion to an individual level measure as a virtue of his original method, but now that we have a direct measure of individual volatility he is moving back in the direction of claiming the family estimate is on his side.
It can plausibly be argued that unemployment duration has increased, and that this class of losers is simply stuck in a bad state without necessarily seeing much income volatility. This is a) far weaker than Hacker’s thesis, b) does not affect the population as a whole, and c) unemployment rates are generally low even if many spells of unemployment are longer.
Here is my first post on Hacker’s book, which criticizes some of his non-income volatility claims.