Parable of the talents

Kevin Lewis

August 25, 2017

Higher Inequality Increases the Gap in the Perceived Merit of the Rich and Poor
Nicholas Heiserman & Brent Simpson
Social Psychology Quarterly, September 2017, Pages 243-253

The rewards people receive are often taken as indirect evidence of their merit. We outline an argument that addresses how the magnitude of macrolevel income inequalities affects perceptions of the distribution of merit in a society. We propose that higher levels of economic inequality will lead to perceptions of greater differences in merit such that societies with higher inequality will be characterized by a larger “merit gap,” namely, larger differences in the perceived merit of the rich and poor. We test these arguments using an online experiment that manipulated the level of inequality (high vs. low) in an anonymized society. Participants perceived a larger merit gap in high versus low inequality societies. Our arguments and findings have implications for attitudes about inequality and redistributive policies.

“Not Allowed to Inherit My Kingdom”: Amenity Development and Social Inequality in the Rural West
Jennifer Sherman
Rural Sociology, forthcoming

This article, based on 84 in-depth interviews and 10 months of ethnography, focuses on the rural Washington community of “Paradise Valley,” whose economic bases in mining, ranching, and logging declined by the end of the twentieth century. Recently, economic development has focused on amenity-based tourism and second-home ownership, as well as attracting wealthy in-migrants. Job growth has been concentrated in construction and service sectors, particularly low-paid, part-time, and seasonal jobs in hospitality, retail, and food services. The community has changed from a relatively homogenous population of working-class residents to a more diverse and divided community. The article explores outcomes of these changes, including gentrification and housing shortages, unemployment and underemployment, and a social divide in which the community's longtime and working-class residents are marginalized. I explore these social consequences of amenity-based development, illustrating the ways in which the social divide is reproduced and the gradual disenfranchisement of those with roots in earlier social and economic systems in the valley, focusing on the changing meanings and uses of different types of symbolic capital.

Income Redistribution Predicts Greater Life Satisfaction Across Individual, National, and Cultural Characteristics
Felix Cheung
Journal of Personality and Social Psychology, forthcoming

The widening income gap between the rich and the poor has important social implications. Governmental-level income redistribution through tax and welfare policies presents an opportunity to reduce income inequality and its negative consequences. The current longitudinal studies examined whether within-region changes in income redistribution over time relate to life satisfaction. Moreover, I examined potential moderators of this relationship to test the strong versus weak hypotheses of income redistribution. The strong hypothesis posits that income redistribution is beneficial to most. The weak hypothesis posits that income redistribution is beneficial to some and damaging to others. Using a nationally representative sample of 57,932 German respondents from 16 German states across 30 years (Study 1) and a sample of 112,876 respondents from 33 countries across 24 years (Study 2), I found that within-state and within-nation changes in income redistribution over time were associated with life satisfaction. The models predicted that a 10% reduction in Gini through income redistribution in Germany increased life satisfaction to the same extent as an 37% increase in annual income (Study 1), and a 5% reduction in Gini through income redistribution increased life satisfaction to the same extent as a 11% increase in GDP (Study 2). These associations were positive across individual, national, and cultural characteristics. Increases in income redistribution predicted greater satisfaction for tax-payers and welfare-receivers, for liberals and conservatives, and for the poor and the rich. These findings support the strong hypothesis of income redistribution and suggest that redistribution policies may play an important role in societal well-being.

Geography of intergenerational mobility and child development
Louis Donnelly et al.
Proceedings of the National Academy of Sciences, forthcoming

Recent research by Chetty and colleagues finds that children’s chances of upward mobility are affected by the communities in which they grow up [Chetty R, Hendren N (2016) Working paper 23002]. However, the developmental pathways through which communities of origin translate into future economic gain are not well understood. In this paper we examine the association between Chetty and Hendren’s county-level measure of intergenerational mobility and children’s cognitive and behavioral development. Focusing on children from low-income families, we find that growing up in a county with high upward mobility is associated with fewer externalizing behavioral problems by age 3 years and with substantial gains in cognitive test scores between ages 3 and 9 years. Growing up in a county with 1 SD better intergenerational mobility accounts for ∼20% of the gap in developmental outcomes between children from low- and high-income families. Collectively, our findings suggest that the developmental processes through which residential contexts promote upward mobility begin early in childhood and involve the enrichment of both cognitive and social-emotional development.

Inequality and Growth in the United States: Why Physical and Human Capital Matter
Nikos Benos & Stelios Karagiannis
Economic Inquiry, forthcoming

We investigate the relationship between economic growth and top income inequality under the influence of human and physical capital accumulation, using an annual panel of U.S. state-level data. Our analysis is based upon the “unified” framework offered by Galor and Moav (2004) while the empirics account for cross-section dependence, parameter heterogeneity, and endogeneity, in nonstationary series. We conclude that changes in inequality do not influence growth, neither in the short run nor in the long run in the United States as a whole in the 1929–2013 period. Our findings are robust to the inclusion of overall income inequality measures. These findings provide support for the theoretical prediction of the unified theory of inequality and growth, according to which the growth effect of inequality becomes insignificant in the latest stages of economic development that the United States experiences during our period of investigation. Therefore, future policies aiming at moderating the concentration at the upper end of income distribution are not likely to have adverse growth consequences in developed countries such as the United States.

Estimating the Level and Distribution of Global Wealth, 2000–2014
James Davies, Rodrigo Lluberas & Anthony Shorrocks
Review of Income and Wealth, forthcoming

This paper estimates the level and distribution of household wealth globally, as well as for regions and countries, for the period 2000–2014. The data used are mainly from household surveys and national accounts balance sheets, covering about two thirds of the world's population and over 95% of global household wealth. Lists of the most wealthy published in the media are used to adjust the upper tail. Wealth levels and distributions are imputed for countries without data. Estimated global household wealth stood at USD 251 trillion in 2014, having grown from USD 117 trillion in the year 2000. Wealth per adult in 2014 was USD 53,000. The estimated Gini coefficient of global wealth was 92.2% in 2014 and the share of the top 10% was 88.3%. Wealth inequality fell from 2000 to 2007, with the share of the top 10% falling from 89.4% to 86.5%, before rising steadily to 2014. From 2000 to 2008 the share of financial assets in gross wealth, an important driver of wealth inequality, fell from 55.2% to 50.2%, before climbing to 55.0% in 2014. Household debt rose from 13.6% of gross assets in 2000 to 16.0% in 2008, and has since fallen to 13.9%.

Income Level and Income Inequality in the Euro-Mediterranean Region, C. 14–700
Branko Milanovic
Review of Income and Wealth, forthcoming

Was the Euro-Mediterranean region at the time of the Roman Empire and its Western successor states more unequal than the European Union today? We use some scant evidence on personal income distribution within the Empire and differences in average regional incomes to conclude that the Empire was more homogeneous, in terms of regional incomes, than today's EU, and inter-personal inequality was low. Moreover, income inequality was likely less around year 700 than in Augustus's time. The latter finding contrasts with a view of rising inequality as the Western Roman Empire dissolved.

Positional Goods and the Social Rank Hypothesis: Income Inequality Affects Online Chatter about High and Low Status Brands on Twitter
Lukasz Walasek, Sudeep Bhatia & Gordon Brown
Journal of Consumer Psychology, forthcoming

According to the social rank hypothesis, consumers who live in regions with higher income inequality will show greater interest in, and attention towards, positional goods and high-status brands that serve a social signaling role. We analyze millions of posts on the microblogging platform Twitter for mentions of high and low status brands. We find that luxury brands such as “Louis Vuitton” and “Rolex” are more frequently mentioned in tweets originating from U.S. states, counties and major metropolitan areas with higher levels of income inequality. In contrast, mentions of everyday brands such as “Walmart” or “Kmart” are more frequent in regions with a more equal distribution of income. Using sentiment analysis, we find higher valence (positivity) and arousal (excitement) for tweets that both mention high status brands and originate from regions with high levels of income inequality. These results corroborate the social rank hypothesis, showing that more psychological resources are allocated to positional consumption when the income gap between the rich and the poor is larger.

Anger Promotes Economic Conservatism
Keri Kettle & Anthony Salerno
Personality and Social Psychology Bulletin, forthcoming

Research suggests that certain facets of people’s political ideals can be motivated by different goals. Although it is widely accepted that emotions motivate goal-directed behavior, less is known about how emotion-specific goals may influence different facets of ideology. In this research, we examine how anger affects political ideology and through what mechanisms such effects occur. Drawing on the dual-process motivational model of ideology and the functionalist perspective of emotion, we propose that anger leads people to support conservative economic ideals, which promote economic independence and discourage societal resource sharing. Four studies support our hypothesis that anger can enhance support for an election candidate espousing conservative economic ideals. We find that anger shifts people toward economic conservatism by orienting them toward competition for resources. Implications and future research on the relationship between emotions and political ideology are discussed.

Rank reversal aversion inhibits redistribution across societies
Wenwen Xie et al.
Nature Human Behaviour, July 2017

Income inequality is pervasive despite evidence of inequality-averse social preferences. We show that people will sometimes support inequality to avoid reversing the rank of others in society. Using a third-party dictator game that we call the redistribution game, we found that people sometimes choose more unequal outcomes to preserve existing hierarchies. When a proposed transfer reversed pre-existing income rankings, adults across cultures were twice as likely to reject the transfer. Running the same experimental game in a society of nomadic Tibetan herders with a low level of market integration, we observed an exceptionally high aversion to rank reversals. In children, we found that inequality aversion develops between the ages of four and five, as shown in previous studies, whereas rank reversal aversion develops between the ages of six and seven. Just as some animal species develop stable pecking orders to reduce in-group violence, human aversion to reversing rank is observed at an early age and across cultures.

Trends in Earnings Inequality and Earnings Instability among U.S. Couples: How Important is Assortative Matching?
Dmytro Hryshko, Chinhui Juhn & Kristin McCue
Labour Economics, October 2017, Pages 168-182

We examine changes in inequality and instability of the combined earnings of married couples over the 1980–2009 period using Social Security earnings data matched to Survey of Income and Program Participation panels. Relative to male earnings inequality, the inequality of couples’ earnings is both lower in levels and rises by a smaller amount. We also find that couples’ earnings instability is lower in levels compared to male earnings instability and actually declines in these data. While wives’ earnings played an important role in dampening the rise in inequality and year-to-year variation in resources at the family level, we find that marital sorting and coordination of labor supply decisions at the family level played a minor role. Comparing actual couples to randomly paired simulated couples, we find very similar trends in earnings inequality and instability.

Economic Inequality and Public Support for Organized Labor
Benjamin Newman & John Kane
Political Research Quarterly, forthcoming

When exploring the political response of citizens to economic inequality, scholarship primarily focuses on support for left parties and demand for redistribution. This article expands upon this literature by exploring whether inequality generates public support for a known inequality-attenuating force in society — labor unions. In contrast to prior work, which largely focuses on national levels of inequality, we focus on the effect of citizens’ firsthand exposure to inequality in their local context. We theorize that residing in a context with visible income inequality should generate support for expanding the power of unions and should do so by augmenting the perceived exigency of unions in advocating for the working class. Using observational analysis of national survey data, reinforced with matching, placebo tests, and a survey experiment, we find strong support for our theoretical expectations.

Does Financial Deregulation Boost Top Incomes? Evidence from the Big Bang
Julia Tanndal & Daniel Waldenström
Economica, forthcoming

We estimate the impact of financial market deregulation on top income shares. Using the novel synthetic control method to investigate the two ‘Big Bangs’ of financial deregulation, the UK in 1986 and Japan in 1997–9, we find that pre-tax top income shares increased after both deregulation episodes. This finding is robust to placebo tests, alternative ways of constructing synthetic controls, and the examination of post-treatment trends and UK wage microdata trends. Higher earnings among financial sector employees appears to be the key mechanism behind this result.

Support for redistribution is shaped by compassion, envy, and self-interest, but not a taste for fairness
Daniel Sznycer et al.
Proceedings of the National Academy of Sciences, 1 August 2017, Pages 8420–8425

Why do people support economic redistribution? Hypotheses include inequity aversion, a moral sense that inequality is intrinsically unfair, and cultural explanations such as exposure to and assimilation of culturally transmitted ideologies. However, humans have been interacting with worse-off and better-off individuals over evolutionary time, and our motivational systems may have been naturally selected to navigate the opportunities and challenges posed by such recurrent interactions. We hypothesize that modern redistribution is perceived as an ancestral scene involving three notional players: the needy other, the better-off other, and the actor herself. We explore how three motivational systems — compassion, self-interest, and envy — guide responses to the needy other and the better-off other, and how they pattern responses to redistribution. Data from the United States, the United Kingdom, India, and Israel support this model. Endorsement of redistribution is independently predicted by dispositional compassion, dispositional envy, and the expectation of personal gain from redistribution. By contrast, a taste for fairness, in the sense of (i) universality in the application of laws and standards, or (ii) low variance in group-level payoffs, fails to predict attitudes about redistribution.

Anti-Profit Beliefs: How People Neglect the Societal Benefits of Profit
Amit Bhattacharjee, Jason Dana & Jonathan Baron
Journal of Personality and Social Psychology, forthcoming

Profit-seeking firms are stereotypically depicted as immoral and harmful to society. At the same time, profit-driven enterprise has contributed immensely to human prosperity. Though scholars agree that profit can incentivize societally beneficial behaviors, people may neglect this possibility. In 7 studies, we show that people see business profit as necessarily in conflict with social good, a view we call anti-profit beliefs. Studies 1 and 2 demonstrate that U.S. participants hold anti-profit views of real U.S. firms and industries. Study 3 shows that hypothetical organizations are seen as doing more harm when they are labeled “for-profit” rather than “non-profit,” while Study 4 shows that increasing harm to society is viewed as a strategy for increasing a hypothetical firm’s long-run profitability. Studies 5–7 demonstrate that carefully prompting subjects to consider the long run incentives of profit can attenuate anti-profit beliefs, while prompting short run thinking does nothing relative to a control. Together, these results suggest that the default view of profits is zero-sum. While people readily grasp how profit can incentivize firms to engage in practices that harm others, they neglect how it can incentivize firms to engage in practices that benefit others. Accordingly, people’s stereotypes of profit-seeking firms are excessively negative. Even in one of the most market-oriented societies in history, people doubt the contributions of profit-seeking industry to societal progress.

Punishment and Economic Inequality: Estimating Short-Term and Long-Term Equilibrium Relationships
Dae-Young Kim
Criminal Justice Policy Review, August 2017, Pages 641-668

During the post–World War II (WWII) period, U.S. prison populations and economic inequality have historically shared a common trend. Both indexes were low and fairly stable until the early 1970s, but afterward, they rose significantly. In the context of the prison boom and high economic inequality, such a meaningful coincidence that both variables follow the same trend calls for the present study examining their historical long-term relationship. With annual national data from 1950-2010, this study uses time-series regression techniques within a co-integration and error-correction framework. Although estimated results are sensitive to the model specification used in parameter estimation, there are in general both short-term and long-term equilibrium relationships between the two variables. Finally, this study concludes with a discussion of implications for policy development and future research.

Exposure to rising inequality shapes Americans’ opportunity beliefs and policy support
Leslie McCall et al.
Proceedings of the National Academy of Sciences, forthcoming

Economic inequality has been on the rise in the United States since the 1980s and by some measures stands at levels not seen since before the Great Depression. Although the strikingly high and rising level of economic inequality in the nation has alarmed scholars, pundits, and elected officials alike, research across the social sciences repeatedly concludes that Americans are largely unconcerned about it. Considerable research has documented, for instance, the important role of psychological processes, such as system justification and American Dream ideology, in engendering Americans’ relative insensitivity to economic inequality. The present work offers, and reports experimental tests of, a different perspective — the opportunity model of beliefs about economic inequality. Specifically, two convenience samples (study 1, n = 480; and study 2, n = 1,305) and one representative sample (study 3, n = 1,501) of American adults were exposed to information about rising economic inequality in the United States (or control information) and then asked about their beliefs regarding the roles of structural (e.g., being born wealthy) and individual (e.g., hard work) factors in getting ahead in society (i.e., opportunity beliefs). They then responded to policy questions regarding the roles of business and government actors in reducing economic inequality. Rather than revealing insensitivity to rising inequality, the results suggest that rising economic inequality in contemporary society can spark skepticism about the existence of economic opportunity in society that, in turn, may motivate support for policies designed to redress economic inequality.

Wage Trickle Down vs. Rent Trickle Down: How Does the Increase in College Graduates Affect Wages and Rents?
Jung Hyun Choi & Richard Green
University of Southern California Working Paper, August 2017

This study examines how the changing composition of adult educational attainment in cities affects the distribution of wages and rents in those cities. We extend the Rosen-Roback spatial equilibrium model to show that as the share of college graduates increases, the impact of this change on the overall welfare of skilled and unskilled workers varies, particularly when individuals have different locational preferences and as housing supply takes time to adjust to changing demand. Using the PSID from 1980 to 2013, we find that college graduates gain higher wage premiums in cities where the share of college graduates are increasing. On the other hand, those without college education do not experience the same wage benefit, and some even experience wage losses. These results hold even after controlling for unobserved characteristics of individuals and cities. Rental prices also increase in cities that experience growth in the share of college graduates. On average, the increase in rental costs offsets the earning increases, and thus the residual earnings do not change in cities with greater influxes of high skilled workers. However, the gains and losses differ across individuals with different levels of education. For college graduates, we find that the increase in earnings benefits is greater than the increase in rental cost in cities with growing shares of college graduates. For those without college degrees, rental cost increases outweigh the increase in earnings in these cities. This suggests that less skilled workers can become worse off in cities that attract college graduates, especially in the short run.

The Effect of Violent Crime on Economic Mobility
Patrick Sharkey & Gerard Torrats-Espinosa
Journal of Urban Economics, November 2017, Pages 22-33

Recent evidence has found substantial geographic variation in the level of upward economic mobility across US states, metropolitan areas, commuting zones, and counties. However, minimal progress has been made in identifying the key mechanisms that help explain why some urban areas have low rates of upward mobility while others have rates of upward mobility that resemble the most mobile nations in the developed world. In this article we focus attention on one specific dimension of urban areas, the level of violent crime. Using longitudinal data and an array of empirical approaches, we find strong evidence that the level of violent crime in a county has a causal effect on the level of upward economic mobility among individuals raised in families at the 25th percentile of the income distribution. We find that a one standard deviation decline in violent crime as experienced during late adolescence increases the expected income rank in adulthood by at least 2 points. Similarly, a one standard deviation decline in the murder rate increases the expected income rank by roughly 1.5 points. These effect sizes are statistically and economically significant. Although we are limited in our capacity to provide evidence on the mechanisms explaining the link between crime and mobility, we present suggestive results showing that the decline in the violent crime rate reduced the prevalence of high school dropouts at the county level between 1990 and 2010.

Biomarkers and Long-term Labour Market Outcomes: The Case of Creatine
Petri Böckerman et al.
Journal of Economic Behavior & Organization, October 2017, Pages 259-274

Using the Young Finns Study (YFS) combined with the Finnish Linked Employer-Employee Data (FLEED) we show that quantities of creatine measured in 1980 prior to labour market entry affect labour market outcomes over the period 1990-2010. Those with higher levels of creatine (proxied by urine creatinine) prior to labour market entry spend more time in the labour market in the subsequent two decades and earn more. The associations between creatine and labour market outcomes are robust to controlling for other biomarkers, educational attainment and parental background. Creatine is a naturally occurring nitrogenous organic acid which supplies energy to body cells, including muscles. Our findings are consistent with high energy levels, induced by creatine, leading to productivity-enhancing traits such as a high propensity for effort, perseverance, and high-commitment.

Playing a rigged game: Inequality's effect on physiological stress responses
Martin Shapiro et al.
Physiology & Behavior, 15 October 2017, Pages 60-69

High income and wealth inequality corresponds with high rates of various health and social problems. One possible factor that could be contributing to this correlation is stress experienced by those being treated unfairly in an unequal society. The present experiment attempted to simulate aspects of income inequality in a lab setting while recording several measures of stress. Participants (n = 96) were assigned to one of four groups and played a memory game against a confederate opponent to earn “money” to spend in a lab market. The four groups depended on the difficulty of the problems and the fairness of the game that they and their opponents experienced. Stress attitudes were assessed with the Short Stress State Questionnaire (SSSQ) and four physiological measures: salivary cortisol, medial frontalis and corrugator facial muscle EMG, heart rate, heart rate variability (HRV), and skin conductance levels (SCL). Cortisol levels and HRV scores were the highest in groups that competed in an unfair game regardless of the difficulty of the problem compared to the groups playing a fair game. The group playing an unfair game with hard problems (disadvantaged) also had elevated facial muscle activity indicating negative affect and reported higher distress on the stress questionnaire. The results of this experiment showed that experiencing inequality even for a short time elicited several stress responses even if the participant benefited from the inequality.

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