Class Act

Kevin Lewis

December 07, 2010

The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares

Jonathan Parker & Annette Vissing-Jorgensen
NBER Working Paper, December 2010

We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the U.S., since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in income cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality.


Social disadvantage and the self-regulatory function of justice beliefs

Kristin Laurin, Gráinne Fitzsimons & Aaron Kay
Journal of Personality and Social Psychology, forthcoming

Five studies support the hypothesis that beliefs in societal fairness offer a self-regulatory benefit for members of socially disadvantaged groups. Specifically, members of disadvantaged groups are more likely than members of advantaged groups to calibrate their pursuit of long-term goals to their beliefs about societal fairness. In Study 1, low socioeconomic status (SES) undergraduate students who believed more strongly in societal fairness showed greater intentions to persist in the face of poor performance on a midterm examination. In Study 2, low SES participants who believed more strongly in fairness reported more willingness to invest time and effort to achieve desirable career outcomes. In Study 3, ethnic minority participants exposed to a manipulation suggesting that fairness conditions in their country were improving reported more willingness to invest resources in pursuit of long-term goals, relative to ethnic minority participants in a control condition. Study 4 replicated Study 3 using an implicit priming procedure, demonstrating that perceptions of the personal relevance of societal fairness mediate these effects. Across these 4 studies, no link between fairness beliefs and self-regulation emerged for members of advantaged (high SES, ethnic majority) groups. Study 5 contributed evidence from the World Values Survey and a representative sample (Inglehart, Basañez, Diez-Medrano, Halman, & Luijkx, 2004). Respondents reported more motivation to work hard to the extent that they believed that rewards were distributed fairly; this effect emerged more strongly for members of lower SES groups than for members of higher SES groups, as indicated by both self-identified social class and ethnicity.


Caste as an Impediment to Trade

Siwan Anderson
American Economic Journal: Applied Economics, forthcoming

We compare outcomes across two types of villages in a poor region of rural India. The two types of villages systematically vary by which caste is dominant, i.e., the caste group which owns the majority of land. The dominant caste is either from an upper caste or a lower backward caste. The key finding is that income is substantially higher for low caste households residing in villages dominated by a low caste. Many of the usual factors which have previously been thought to adversely effect groups with high social distance: public good provision, political economy considerations, and exploitative tenancy or credit relations, do not seem to be important here. Instead, it is found that social distance reduces economic welfare due to a trade break-down across caste groups; thus precluding the efficient functioning of markets. Specifically, trade in irrigation water across castes seems to be difficult to maintain even though the potential gainsfrom trade are huge and such trade is remarkably simple. All else equal, lower caste water buyers have agricultural yields which are 45% higher if they reside in a village where water sellers are of the same caste compared to one where they are not.


Relative deprivation and intergroup competition

Nir Halevy, Eileen Chou, Taya Cohen & Gary Bornstein
Group Processes & Intergroup Relations, November 2010, Pages 685-700

Two experiments utilized a new experimental paradigm -- the Intergroup Prisoner's Dilemma-Maximizing Difference (IPD-MD) game -- to study how relative deprivation at the group level affects intergroup competition. The IPD-MD game enables group members to make a costly contribution to either a within-group pool that benefits fellow ingroup members, or a between-group pool, which, in addition, harms outgroup members. We found that when group members were put in a disadvantaged position, either by previous actions of the outgroup (Experiment 1) or by random misfortune (Experiment 2), they contributed substantially more to the competitive between-group pool. This destructive behavior both minimized inequality between the groups and reduced collective efficiency. Our results underscore the conditions that lead group members to care about relative (rather than absolute) group outcomes and highlight the need to differentiate between the motivation to get ahead and the motivation not to fall behind: the latter, it appears, is what motivates individual participation in destructive intergroup competition.


A Test of Conspicuous Consumption: Visibility and Income Elasticities

Ori Heffetz
Review of Economics and Statistics, forthcoming

This paper shows that, consistent with a signaling-by-consuming model à la Veblen, income elasticities can be predicted from the visibility of consumer expenditures. We outline a stylized conspicuous consumption model where income elasticity is endogenously predicted to be higher if a good is visible and lower if it is not. We then develop a survey-based measure of expenditure visibility, ranking different expenditures by how noticeable they are to others. Finally, we show that our visibility measure predicts up to one-third of the observed variation in elasticities across consumption categories in U.S. data.


Financial satisfaction over the life course: The influence of assets and liabilities

Anke Plagnol
Journal of Economic Psychology, forthcoming

Various studies have shown that financial satisfaction is, among other domains, an important determinant of overall individual well-being. Contrary to the common belief that financial satisfaction mainly depends on an individual's income, evidence for the U.S. indicates that life course financial satisfaction steadily increases from the thirties onwards, whereas life course income shows an inverted U-pattern with a peak at midlife. To judge from other studies in the U.S. and Norway, this pattern for financial satisfaction is not unique. The aim of the present analysis is to explore the determinants of this life course financial satisfaction pattern, taking into account not only income but also the possible impact of assets and liabilities. The analysis suggests that while income has the expected positive relation, increasing financial satisfaction at older age can be partly explained by decreases in liabilities and increases in financial assets, and that assets and liabilities considered separately provide a better explanation than net wealth. In addition, reduction in the dependency burden at old age leads to increased financial satisfaction while the deterioration of health has a negative impact. The data are from the second and third waves of the U.S. National Survey of Families and Households.


Economic Context and Americans' Perceptions of Income Inequality

Ping Xu & James Garand
Social Science Quarterly, December 2010, Pages 1220-1241

Objectives: The increase in income inequality in the United States over the past three decades has been well documented, though Americans differ in their perceptions of rising inequality. In this article we investigate the degree to which context shapes individuals' perceptions of rising income inequality in the United States.

Methods: Using objective data on state-level income inequality and survey data from the 2004 American National Election Study (ANES), we estimate a series of ordered logit models depicting individuals' perceptions of rising income inequality as a function of state income inequality and various control variables.

Results: We find that individuals residing in states with high income inequality are more likely than other individuals to perceive large increases in national income inequality over the past 20 years. We also consider possible interaction effects for state income inequality with political knowledge and family income, but our evidence suggests that such effects are limited to family income. We find that individuals from lower income strata are more likely to translate state income inequality into inequality perceptions than those with higher incomes.

Conclusion: State inequality context significantly shapes individuals' perceptions of rising income inequality, particularly among those with lower incomes.


Getting Ahead of the Joneses: When Equality Increases Conspicuous Consumption among Bottom-Tier Consumers

Nailya Ordabayeva & Pierre Chandon
Journal of Consumer Research, forthcoming

It is widely believed that increasing the equality of material possessions or income in a social group should lead people at the bottom of the distribution to consume less and save more. However, this prediction and its causal mechanism have never been studied experimentally. Five studies show that greater equality increases the satisfaction of those in the lowest tier of the distribution because it reduces the possession gap between what they have and what others have. However, greater equality also increases the position gains derived from status-enhancing consumption, since it allows low-tier consumers to get ahead of the higher proportion of consumers clustered in the middle tiers. As a result, greater equality reduces consumption when consumers focus on the narrower possession gap, but increases consumption when they focus on the greater position gains (that is, when consumption is conspicuous, social competition goals are primed, and the environment is competitive).


Life Satisfaction and Income Inequality

Paolo Verme
Review of Income and Wealth, forthcoming

Do people care about income inequality and does income inequality affect subjective well-being? Welfare theories can predict either a positive or a negative impact of income inequality on subjective well-being and empirical research has found evidence of a positive, negative, or non-significant relation. This paper attempts to determine some of the possible causes of such empirical heterogeneity. Using a very large sample of world citizens we test the consistency of the effect of income inequality in predicting life satisfaction. We find that income inequality has a negative and significant effect on life satisfaction. This result is robust to changes of regressors and estimation choices and also persists across different income groups and across different types of countries. However, this relation is easily obscured or reversed by multicollinearity generated by the use of country and year fixed effects. This is particularly true if the number of data points for inequality is small, which is a common feature of cross-country or longitudinal studies.


The Causal Pathway From Socioeconomic Status to Disability Trajectories in Later Life: The Importance of Mediating Mechanisms for Onset and Accumulation

Miles Taylor
Research on Aging, January 2011, Pages 84-108

This study examines the mechanisms by which different aspects of socioeconomic status affect disability trajectories among older adults. The author conceptualizes and models disability in two life course components, onset and growth, in order to see how socioeconomic status and its mechanisms differ in their effects on the timing and accumulation of disablement. Using the Duke Established Populations for Epidemiologic Studies of the Elderly (EPESE), the author finds that the effects of education are mainly preventive for disability onset where financial resources both delay and ameliorate a trajectory of disability accumulation after onset. Health behaviors and mastery work as independent mediators of education while financial-based capital works to mediate both income and education effects. This study highlights transitions and trajectories in health processes, showing that education effects are far reaching and robust but only work for onset, while financial-based capital is effective in ameliorating a trajectory of disability in later life.


Anti-consumption in East Germany: Consumer resistance to hyperconsumption

Pia Albinsson, Marco Wolf & Dennis Kopf
Journal of Consumer Behaviour, November/December 2010, Pages 412-425

A common ideology of consumption is that more things translate to a higher quality of life. This paper challenges this ideology. We explore the consumption resistance (anti-consumption) of "cheap and low-quality" goods experienced by consumers living in former East Germany. We interviewed men and women who lived in East Germany about their consumption experiences before, during, and after Reunification. We present three emergent themes: "consumer resistance - emergence of anti-consumption," "continued frugality - resistance to contemporary throwawayism?," and "Western Brand Resistance." Our research reveals a deep aversion among East Germans to the modern, bureaucratic and obligatory practice of throwawayism and hyperconsumption. We find feelings of resentment and betrayal and discover a much deeper issue with consumption: the fact that consumption is often a disillusioning experience and that material possessions and abundance are actually driving East Germans apart - making them feel less socially connected. As East Germans are swept up in the global economic juggernaut of capitalism, they find that their collective identity and sense of community is also swallowed up. Upon this realization, dialogism appears, and we uncover this as resistance to Western practices of hyperconsumption, frugality-as-an-ethic and an aversion to low quality throwaway-type products. Based on our findings, we make suggestions for marketing practice and for future research.


Market versus Meritocracy: Hungary as a Critical Case

Erzsébet Bukodi & John Goldthorpe
European Sociological Review, December 2010, Pages 655-674

We review two conflicting arguments concerning meritocracy in modern societies. One argument, ‘meritocracy as functional imperative' (MFI), derives from the American liberal tradition and sees the development of meritocracy, and especially of education-based meritocracy, as essential to the technological and economic dynamism of such societies. The other argument, ‘market versus meritocracy' (MVM), derives from the European liberal tradition and sees meritocracy of any kind as in various respects incompatible with the principles of a free-market economy and liberal democracy. The transition that has occurred in several of the societies of the former Soviet bloc from state socialism, under which education-based meritocracy was relatively highly developed, to liberal capitalism provides a ‘natural experiment' that allows for the empirical testing of the two arguments. We focus on changes in the relations between social class origins, educational attainment, and class destinations in the case of Hungary, for which extensive and high-quality survey data are available. In general, our findings do not support expectations under the MFI argument but are consistent with expectations under the MVM argument.


The Contribution of the Minimum Wage to U.S. Wage Inequality over Three Decades: A Reassessment

David Autor, Alan Manning & Christopher Smith
NBER Working Paper, November 2010

We reassess the effect of state and federal minimum wages on U.S. earnings inequality, attending to two issues that appear to bias earlier work: violation of the assumed independence of state wage levels and state wage dispersion, and errors-in-variables that inflate impact estimates via an analogue of the well known division bias problem. We find that erosion of the real minimum wage raises inequality in the lower tail of the wage distribution (the 50/10 wage ratio), but the impacts are typically less than half as large as those reported in the literature and are almost negligible for males. Nevertheless, the estimated effects of the minimum wage on points of the wage distribution extend to wage percentiles where the minimum is nominally non-binding, implying spillovers. We structurally estimate these spillovers and show that their relative importance grows as the nominal minimum wage becomes less binding. Subsequent analysis underscores, however, that spillovers and measurement error (absent spillovers) have similar implications for the effect of the minimum on the shape of the lower tail of the measured wage distribution. With available precision, we cannot reject the hypothesis that estimated spillovers to non-binding percentiles are due to reporting artifacts. Accepting this null, the implied effect of the minimum wage on the actual wage distribution is smaller than the effect of the minimum wage on the measured wage distribution.


Measuring unfair (in)equality

Ingvild Almås et al.
Journal of Public Economics, forthcoming

This paper shows one way of generalizing the standard framework of inequality measurement to allow for a distinction between fair and unfair inequalities. We introduce the unfairness Lorenz curve and the unfairness Gini, which are generalizations of the standard versions of the Lorenz curve and the Gini. With this more general framework in place, we study the implications of responsibility-sensitive theories of justice for the evaluation of the income distribution in Norway from 1986 to 2005. We find that both the pre-tax and the post-tax income distribution have become less fair in Norway, even though the standard Gini for the pre-tax income distribution has decreased in the same period. Two trends explain this development: the increase in income share of the top percentile and the change in the situation of females in the labor market. The concentration of income at the top of the distribution contributes both to increased unfairness and increased inequality, whereas the increase in females' working hours and level of education primarily contributes to a reduction in inequality. Thus, the latter effect dominates for the standard Gini and the former effect for the unfairness Gini. Furthermore, we find that the increase in post-tax unfairness is even larger than the increase in pre-tax unfairness, which shows that the tax system in Norway contributes less to eliminating unfairness in 2005 than in 1986.


Efficiency in the Domesday economy, 1086: Evidence from Wiltshire estates

John McDonald
Applied Economics, October 2010, Pages 3231-3240

It may surprise some readers that frontier methods such as Data Envelopment Analysis (DEA) can be used to assess the productive efficiency of the estates of eleventh century England. This is possible because in 1086, William the Conqueror carried out a comprehensive survey (the Domesday Survey) of lands he invaded 20 years earlier. The survey provides high-quality data on the inputs and outputs of most manors in England. A previous analysis of the data for Essex estates indicated that the average efficiency of the Domesday agricultural economy was comparable to, if not higher than that for more modern economies, that some tenants-in-chief displayed significantly more entrepreneurial flair than others, and that the geographical location, the size of the estate and the arable/livestock mix all significantly affected estate efficiency. In this article, analysis of a second Domesday county, Wiltshire, confirms the general results for Essex, but indicates some differences in the factors affecting estate efficiency.


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