From the comments

Do relative status and income matter more than absolute?

If this were true, then most immigration would be from rich countries to poor countries.

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.

"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.

"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.

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.

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.

"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.

It might be a bit extreme to suggest, but maybe, just maybe, they matter both?

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.

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.

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.

What actions would give a revealed preference for relative vs absolute status?

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.†

[Obligatory Onion parody]

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.

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.

"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."

I have 200 times the average annual GDP of Kribati in my savings account right this second. And sadly it's really not much.

Um, so you think that if I cashed out my bank account and high-tailed it to... let's say China, my "relative status" would have risen? That if I moved from "nice area where I am now" to "slum" I would have higher status? You must be mad. People live in expensive neighborhoods *as a form of status competition* (as well as for the amenities). You'll never meet any status-obsessed person who will say "Jeez, Manhattan real estate is so expensive that there will always be people who have nicer apartments than I do; I should move to Kansas and buy the biggest house in town."

Let's ignore my lack of language skills and my isolation from non-American social networks, and say that I moved to China. You know what would be higher? *My absolute consumption.* True, my salary would be marginally lower than what I can get here, and so I would be able to buy marginally fewer electronic doodads which have world market prices. But I would be able to pay for mansions, lavish banquets every night, servants, and vast quantities of consumer goods. Despite the higher relative cost of the electronics, I could buy my current consumption bundle with 1/10 my salary. This is true, to a lesser extent, of the poorer areas within America as well. You move there to consume more, and accept a lower status relative to the people whom you actually care about.

"The answer is that rents and the general price level would skyrocket. Relative income does matter in the real world."

This is actually an argument for absolute position mattering. People don't go there because they can't buy as much stuff (and maybe don't value living in the city as much as the people who do choose to go).

We don't have to find psychological and social reasons to see why relative income matters. It is simple:

Scarcity is one of the fundamental principles of economics. So, if there is only so much of something(say land...suits well for the illustration. If you'd like, we can assume some good, but it complicates the things a bit), if I don't earn more income that others, I wouldn't be able to buy it. So, yes, I lose out and yes relative income matters from a purely economic point of view also.

And if this happens with all land and all goods (to a majority of people), it will lead to plutocracy, don't it?

In relation to rational choice in the ultimatum game:
http://www.marginalrevolution.com/marginalrevolution/2007/10/chimps-more-rat.html ,
immigrants in the US from poorer countries do not reject an unfair offer in the Ultimatum Game(because they have lowered inequity aversion, according to Tyler's hypothesis)?

Badger, the answer to Tyler's question is yes somewhat obvious. But framing the question like that itself is clever...what if Tyler had asked - "Does relative income matter?". Speculating about which one matters more is indeed a waste of time.

Random observation: I like how commenters have been emulating Tyler's quirk of saying "yes such-and-such" i.e. "the answer to the question is yes somewhat obvious." (that's actually a little more extreme than Tyler). It's a testament to how much people look up to him. Kind of sweet, and funny at the same time.

Here is Ernst Fehr's utility function on inequality aversion:

http://www.iew.unizh.ch/wp/iewwp004.pdf

It should be obvious that people's norms are anchored to their home country, so when they move the to U.S. it seems like a step up compared to home.

But their kids will have their norms anchored to the U.S.

In the reverse, when Americans move to a poor country, the group they wind up comparing themselves to is NOT the piss poor people making up the bulk of the population, but rather other rich American expatriates, and the country's elite.

I think dj superflat nailed it - people should learn to get over it. Personally, I don't see any great justification for "society" to concern itself with absolute income, let alone differences in relative income.

Absolute status is obviously important. So is relative status.

People measure how their group is measured against outsiders - because outsiders might use the relative difference to negatively affect them. Fear is a powerful motivator, and history tells us that potential abuses that result from a disparity in power eventually becomes actual abuses. This is the root of much anti-American sentiment today, and a major reason why Americans disliked Japan in the '80s and early '90s.

Furthermore, there is the issue of status - especially among elites. Once basic needs are met, people become more obsessed at showing they are doing better than their peers. Moving from Manhattan to Honduras is meaningless because rich Manhattanites do not consider Hondurans their peers and the relative differences between them do not matter.

So why is relative status between Americans important? One is that if working and middle class Americans decline relative to the rich, they fear they could notthwart attempts by the rich to exploit them. Another is that if the elite become more entrenched within themselves, then intra-elite competition becomes worse. A third fear is that the elite adopts a cosmopolitan attitude that causes them to feel more in common with similar elites in other countries, rather than solidarity with the regular folks back home - this actually goes back to the first fear, but with an additional sense of betrayal. In any case, all three contribute to a breakdown in social cohesion with bad repercussions for the country as a whole.

Democracy is basically a political system created and maintained by a large middle class. An economic system that degrades the relative power of the middle class hurts the chances of democratic survival. Democracy requires a levelling system where members of the middle class are able to enter the elite, and the working poor are able to enter middle class ranks. That insures that 1) the elite sees itself aligned with the middle class - because it is made up of people who came from that background, and 2) the poor do not rise in discontent because there is social mobility.

"It doesn't matter if poor people are getting richer; what matters is that the rich are getting richer faster."

I was willing to admit above that both relative and absolute income matter, and even that their importance can shift. If you can't afford enough to eat, you probably care more about raising absolute income than relative, while once you move up a little materially, you start to care more about relative income.

But the type of thinking illustrated in the quote above is just so disgusting and repulsive to me. It's why I could never identify myself as a liberal or a democrat, even though I share probably just about as many specific policy views with democrats as republicans. Precisely because of this reasoning, the left's position never really seems to be about making the poor richer, but about making the rich poorer. Its so non-productive, non-helpful and centered around negativity and spitefulness and tearing others down rather than building yourself up, that I can't see how anyone can stomach it.

Income disparity, while it may cause some discomfort, is also one of the main drivers of human productivity and advancement. Why do you think people work so hard? Where do you think advancement comes from? I can see a real moral imperitive to help those around you obtain a minimum level of subsitence, but I'm sorry, if the discomfort that income disparity causes you is too much to bear, then you probably have some psychological or social problems that YOU need to work on for yourself. The answer to your psychic pain lies within. The answer should not be to cripple one of the driving forces behind the advancement of our entire species.

Folks,

Relative status is enormously important for a reason that everyone knows, but few are willing to talk about. High relative status improves one's prospects with the opposite sex. Earning $50K when everyone else earns $25K, is better than earning $75K when everyone else earns $150K, from the standpoint of finding a mate.

The issue isn’t “irrational† envy, but the superior life opportunities that superior relative status provides, at any absolute income level. For a funny (and serious) take on this, see The Economics Of Finding A Rich Husband.

A stable, prosperous, democratic, and free society is nurtured by such values as tolerance, individual responsibility, respect for law, etc. And it is hurt by other attitudes, such as tribalism, that nevertheless may have held more primative societies together.

That many people see relative wealth as very important is not healthy and lets call it by its name: envy. One hopes that envy will one day be seen to be as pernicious as racism is understood to be today.

Doug, TGGP, quest, Seer, and Chris Durnell:

All of you have used the term "absolute status." Could one of you please define this term. I really don't understand what you mean.

Thanks.

I think that yes, relative wealth is more important than absolute. In fact, I don't see how absolute wealth can really factor in at all, given how lousy we are at perceiving it. But! That's not the whole story. There are two big factors at play here.

First, one has to ask, "relative to what?" The answer is clearly, "relative to your peers." I've heard it said that "Happy is the man who earns more than his brother-in-law." It doesn't matter where your friends, peers, and general social group live, if you don't earn as much as or more than they do, you'll always feel poor. It matters a little who you rub shoulders with from day to day. It matters much more who you rub shoulders with at the family Christmas party, and high school reunions.

Second, simply surrounding yourself with people much poorer than yourself provides too large a contrast. One wants to be above average, but not often conspicuously so. There are social and practical tradeoffs involved in being wealthier than your neighbors: you become a more frequent target for both charitable requests and for burglaries. If your neighbors are foreign to you as well (not your peers) you will generally feel even less safe among them.

by your definition, people in the 99% income who nonetheless hang with folks with more money will feel poor. that's just silly. they may feel envy, they may feel like it's hard to keep up with their set, but they don't feel poor (by just about any reasonable definition of the word).

those of you who think you're explaining only why the "poor" in the US who are "rich" by world standards deserve our concern/consideration seem to fail to recognize that you're also asking for our concern/consideration for (e.g.) wall street bankers or silicon valley IPO beneficiaries or trust fund babies with millions who feel like it's hard to keep up with their so-called peers. my heart bleeds for such folk, really, they're not just self-centered, myopic fools who should know or have been taught better, who should realize they've won the lotto rather than been cruelly cursed by fate, etc.

will those who think relative status is what matters please confirm that they share similar concern for millionaires who feels it's hard to keep up, and not just those they perceive to be relatively poor by US standards, even if not by world standards? if not -- if you don't feel ivana trump's pain at trying to keep up w/o a sometime billionaire husband to keep her, find it entirely legitimate and worthy of our concern, as well as remedial action -- your position is just a not so subtle veil for hostility towards those with more money, or misguided concern for those who are for the most part objectively rich by world standards but subjectively poor by your own.

Do Ph.D. qualifying tests for economics Ph.D.s test for Asperger's Syndrome?

I might not be happy about being able to get into my car in my warm garage and drive on a paved, safe, well-lit road to a nearby grocery store at any time to buy Advil Cold & Sinus (TM) or a chicken that will likely not make me sick.

Simply because all of that doesn't make me happy doesn't change the fact that it does make me better off than a significant portion of the world's population who live in the dirt and can barely get enough calories to survive.

Krugman would thank the unions for all of my unrecognized good fortune. Tyler correctly does not.

People who care the relative status may have an IMPAIRED BRAIN:

http://www.jneurosci.org/cgi/content/full/27/4/951

Emotion regulation is often critical for adaptive decision making. Here, we investigate whether emotion regulation defects following focal prefrontal brain damage are associated with exceptionally irrational economic decision making in situations of unfair treatment. In the Ultimatum Game, two players are given one opportunity to split a sum of money. One player (the proposer) offers a portion of the money to the second player (the responder) and keeps the rest. The responder can either accept the offer (in which case both players split the money as proposed) or reject the offer (in which case both players get nothing). Relatively low Ultimatum offers are often rejected, and this "irrational" behavior has been attributed to an emotional reaction to unfair treatment. Using the lesion method, we tested the hypothesis that damage to ventromedial prefrontal cortex (VMPC), an area critical for the modulation of emotional reactions, would result in exaggerated irrational economic decisions. Subjects acted as the responder to 22 different proposers who offered various splits of 10 dollars. Offers ranged from fair (give 5 dollars, keep 5 dollars) to extremely unfair (give 1 dollar, keep 9 dollars). The rejection rate of the VMPC group was higher than the rejection rates of the comparison groups for each of the most unfair offers (7 dollars/3 dollars, 8 dollars/2 dollars, 9 dollars/1 dollars). These results suggest that emotion regulation processes subserved by VMPC are a critical component of normal economic decision making.

"People who care the relative status may have an IMPAIRED BRAIN:"
What the study shows is that people with brain impairment have a stronger reaction to unfairness than the control group, not that caring about unfairness indicates brain impairment. Many studies have show that everybody, even young children cares about perceived unfairness.

Yes. But inactivation of the prefrontal cortex enhances the effect of the relative status:
http://research.sbs.arizona.edu/~ndsl/papers/sanfey_neurorep05.pdf

of course, this does not mean people who care their relative status ALWAYS have the impairment.

Relative status is enormously important... from the standpoint of finding a mate.

At the same time people may not like to acknowledge the full significance of their financial status in this regard. This may be another reason why people are not so keen to move into poorer societies where they could easily find a mate. The reasons for their popularity might be painfully obvious.

OF COURSE relative income matters more than absolute

Dirk, even if we acknowledge the great importance of relative income and status to happiness, does this make a case for reducing income inequality? If the basis of it is as above, the allocation of a scarce resources within the society, then reducing income inequality will not change that. The supply of the "best mates" in a society will not be increased. Only the allocation method will be affected. What is the basis of the importance of relative income which allows for it's amelioration through income equality? Even if it's jealousy, would equal incomes not simply shift jealousy into other spheres?

What seems to be missed here is that people don't care about their objective status in their objective peer group at all.

What matters is their perception of their status within their perceived peer group and their percieved derived status from being members of that peer group.

Your peer group isn't who you live near, it's who you identify with. Moving to a poor country does not raise your relative status because your internal reference group remains in the first world.

That's because parents evaluate their children's status in terms of their own perceived peer groups, not to mention the effect on their own status due to the eventual status of their children among the group the parent cares about.

Question for those who believe that their personal happiness is negatively impacted by relative status and/or income. How much time do you spend on such thoughts? Isn't it likely that the negative impact is due to the amount of time spent focused on the thoughts rather than on the circumstances that led to the thoughts?

In the UK there is large scale inward immigration of young people from other (poorer) European countries (Poland, Czech Republic etc.) seeking higher earning opportunities to enhance their status on return visits home.

But we also have large numbers of middle aged and older Brits moving to other (less expensive) European countries (France, Spain etc.) where they enjoy a standard of living that is lower as measured through quantity of material consumption than their lives in the UK, but is higher than that of their indignenous neighbours. And quality of life from externalities (more natural beauty, better weather) is higher.

So we do have immigration from rich countries to poor (as well as vice versa)

I think Mark makes the point. Most people are not born to be billionaires, so they must have an income during their adult life. In that respect, moving to a rich country from a poor makes sense if the rich country has a higher wage rate. Higher absolute status means higher income. However, when people retire, the question is how long their savings will last. In poorer countries with lower prices in non-tradeables such as rent, medical services, etc lower price level means higher real wealth level. In Central Europe where both living costs and wages are lower than in Britain or Germany their is a very substantial outbound migration to Britain and Germany among the active generation (those who are saving and spending) and a high level of inbound migration in the inactive generation (who are only spending their savings). I think higher absolute means higher relative wage if we do not compare to the neighbor but to our parent's generation or young ages. I think relative status means relative to the parents and childhood and not relative to the neighbor.

adaniel, I agree with you basically, but how your theory explains rejection in the Ultimatum game?

http://en.wikipedia.org/wiki/Ultimatum_game

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