Friday, January 26, 2007

Incomes and Inequality: What the Numbers Don’t Tell Us
By TYLER COWEN
January 25, 2007
NYTimes

[All emphasis added].
[M]uch 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 (“Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?” The American Economic Review, June 2006). In other words, rising income inequality is not just a result of unfairness or bad public policy. [...]

In any case, [...] income is not the only — or even the most — important measure of inequality. For instance, inequality of consumption — the difference between what the poor consume and what the rich consume — does not show a significant upward trend (Dirk Krueger and Fabrizio Perri, “Does Income Inequality Lead to Consumption Inequality?” The Review of Economic Studies, January 2006). Consumption, of course, is not an ideal indicator of well-being; a high or steady level of purchases may reflect growing debt, and the ease of buying a big-screen TV does not reflect a comparable ease in buying good health care.

Happiness, possibly the most relevant variable for a study of inequality, is also the hardest to measure. Nonetheless, inequality of happiness is usually less marked than inequality of income, at least in wealthy societies. A man earning $500,000 a year is not usually 10 times as happy as a man earning $50,000 a year. The $50,000 earner still enjoys most of the conveniences of the modern world. Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness.

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.

If we look at leisure, from 1965 to 2003, less-educated groups experienced a bigger boost in free time than more-educated groups (Mark Aguiar and Erik Hurst, “Measuring Trends in Leisure: The Allocation of Time Over Five Decades,” Federal Reserve Bank of Boston Working Paper). In other words, the high earners are working hard for their money and perhaps they are having less fun. [...]

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? [...]

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.

Tyler Cowen is a professor of economics at George Mason University and co-author of a blog at www.marginalrevolution.com.

7 Comments:

Blogger Harry Eagar said...

He's singing my song.

I have been making a point for several years now that aggregate unemployment numbers conceal what is actually happening -- in America (at least) there are two classes and two economies.

1. People who have too much work to do.

2. People who have nothing to do.

The example I like to use is the Army. For more than a century, it has been official policy not to enlist illiterates.

This was not strictly enforced in World War I, when the Army needed hostlers, who need not read.

By World War II, soldiers had to be able at least to read a little.

By the 1980s, the Army had few spots for anyone without a high school diploma.

The same effect, less strong, is observable with hotel chambermaids.

The social question is not, how much do people make at the top but how much do they make at the bottom?

As of last April, in my quarterly reports of real estate sales I have quit paying attention to average or median prices. Now I report the lowest price, which for the last quarter of 2006 was $550,000, in a county where the median family income is $68,000 and the average annual individual pay (one job) is around $27,000.

January 27, 2007 6:25 AM  
Blogger Duck said...

Work will continue to be reshaped by improvements in robotics, computing and communictions. If you assume that humans will only be paid to do things that machines cannot do better and cheaper, then it doesn't leave much hope for the vast majority of us, at least as far as the traditional industrial model is concerned.

Last year I watched a Discovery channel show about the automation of port facilities. One of the few human jobs was the crane operator who loaded and unloaded the shipping containers. Human hand-eye coordination, in a trained and experienced operator can still be a hard to replicate task, but for how long?

Skipper may belong to the last generation of pilots to be able to work until retirement age.

I see two new models of economic life that can solve the problem of unemployable human capital. One is the return to self sufficiency. People buy the general purpose tools, such as star-trek like fabricators and such, to supply themselves with all the necessities they need to survive, and they trade with other "dropouts" from the mass production grid those hand-made items that make their lives more "human".

The other model is that as companies become so efficient that they can't efficiently use human labor that they will pay people to do the one thing that the machines can't do: consume their products.

The most important value-add that the consumer provides is his decision of what to buy. This is something that central planners and corporate marketers aren't competent to do. Consumers pick the winners and losers, they direct the "invisible hand" of market demand. So why not pay them to do it? It will be cheaper than paying them to look busy in front of a computer terminal or on a factory floor all day.

January 27, 2007 7:39 AM  
Blogger Hey Skipper said...

Duck:

Excellent post, but this struck me as a bit off key:

Thomas Lemieux ... 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

Having some acquaintance with meaningful precision, this sentence doesn't hang together very well, and leaves some explaining to do.

Given all the factors involved "about three quarters" seems to fairly convey the knowable.

But for women, the numbers suddenly get precise, while covering a wide range. From a stastical standpoint, that seems contradictory, while also begging the question about the wide uncertainty.

Unless, of course, that simply comes with the territory when dealing with women.

Which makes my question self answering.

Never mind.

That said, the article pokes some serious holes in the latest leftist trope. In particular, the rapidly decreasing "happiness" return with increasing income.

Above a certain, relatively low amount, income just isn't worth the ink spilled on it. Over the last five years, I have run the gamut on this, so can speak from first hand experience.

Duck:

Skipper may belong to the last generation of pilots to be able to work until retirement age.

Fundamentally speaking, your suspicion should not be an assertion.

However, given the already existing airframes, the requirement for nowhere near developed external control over semi-autonomous vehicles, the certification process, and the reluctance (rational or otherwise) of people to fly on automated airplanes, or live underneath them, I think there is at least one generation left.

The real barrier is not in getting one plane to be pilotless, but for many, or all of them, to be.

Not that it is particularly undoable, just that it hasn't been done.

There may also be issues with certain pattern recognition things that humans do very well, but machines do badly, particularly when it comes to planning weather avoidance.

January 27, 2007 8:02 AM  
Anonymous Anonymous said...

There's always the Diamond Age future.

January 27, 2007 8:56 AM  
Anonymous Anonymous said...

I've been spending a good amount of time recently playing around with the NIPA accounts, particularly the savings rate. Looking at the savings rate necessarily means looking at the income numbers. It turns out, though, that the NIPA income numbers are just very artificial, given the macro issues the NIPA statistics are meant to address.

If instead of NIPA income you use "money" income numbers, almost all the troubling income inequality problems go away. (Although I'm with Harry. I don't particularly care about income inequality anyway.)

To give two examples, the NIPA numbers don't count government transfer payments as income and they don't count money taken from your 401(k) as income (contributions are income in the year earned and capital gains are ignored).

January 27, 2007 8:18 PM  
Blogger Hey Skipper said...

Duck:

Oops.

Fundamentally speaking, your suspicion should be an assertion.

Which is a strikingly clumsy way of saying:

Essentially, you are rigt.

January 27, 2007 10:36 PM  
Blogger Oroborous said...

I like to use the U.S. Census Bureau household income figures, which are also broken down by age.

For households headed by people between the ages of 26 - 65, with at least one full-time worker, the "income inequality" between the lowest and highest in the middle 85% is very low, about 1:4. There's just no problem there - at least, not currently.

As Harry and Duck have touched upon, the elites in terms of brains, talent, knowledge, wisdom, or connections will continue to do better and better, but a huge chunk of those more-ordinary people at the bottom, 40% - 60%, will be competing not only against low-wage overseas workers, but also against ever-better automation.

While I expect that everyone will continue to have a livable income, either through work or social support payments, the top 40% of households in terms of income are likely to pull further and further away from the rest.

It will be a mounting political problem.

January 28, 2007 4:11 AM  

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