Jacob Hacker’s *The Great Risk Shift*, part II

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 calculationsHis 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. 

Comments

In general, I agree with your comments on Hacker's theory. But I think you are wrong with your comments that "Factor 1) [family/divorce] works against him, given the families diversify risk to some extent" or that "he doesn't mention falling divorce rates but rather stays vague."

The fact is that Americans are increasingly single and living alone. In 1960, 69.3% of people over age 15 were married. In 1990, it was 60.7% In 2006, 56.3% were married. (This is CPS/Census data.) If two earner families are more diversified than 1 earner families (which is a reasonable bet) then this diversification is waning over time. Therefore, even if individual earnings volitility is unchanged, family earnings may become more volatile because the composition of "families" is shifting to single living alone from married living together.

(And I thought the decline in divorce was a function of the decline in marriage rates and the later age of first marriage--a consequence of changes in family composition, not a cause.)

[That said, I still think Hacker's wrong--I don't get the sense that this can be that big a deal given that in 1960 those married couples were still single earner couples etc. But I don't think you can just dismiss the idea out of hand.]

Adam,

I do not know the specifics of the Census data you mention and how family is defined, but I remember seeing statistics showing greater levels of cohabitation or similar types of “non-married† family structure. This makes me think that increasing family income volatility on account of changes in family composition may be overstated.

I do think Hacker is wrong as well. I think his argument does not pass the common sense test. My friends and I feel rather confident about the future, and secure in many ways (and I am unemployed). When I ask people now who were my age in the 1960s and 1970s, I find almost universally they feel today is better than the past on so many levels. This of course is anecdotal and suffers from possible sampling and cognitive biases.

"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."

Increased correlation between income shocks within families (due to changes in matching patterns or whatever)? This would imply that some people are more buffeted negatively by the winds of chnage, while other, separate people are less, or positively buffeted. No idea whether this has any empirical basis.

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