Spending Power

Kevin Lewis

October 28, 2022

Rapid wage growth at the bottom has offset rising US inequality
Clem Aeppli & Nathan Wilmers
Proceedings of the National Academy of Sciences, 18 October 2022


US earnings inequality has not increased in the last decade. This marks the first sustained reversal of rising earnings inequality since 1980. We document this shift across eight data sources using worker surveys, employer-reported data, and administrative data. The reversal is due to a shrinking gap between low-wage and median-wage workers. In contrast, the gap between top and median workers has persisted. Rising pay for low-wage workers is not mainly due to the changing composition of workers or jobs, minimum wage increases, or workplace-specific sources of inequality. Instead, it is due to broadly rising pay in low-wage occupations, which has particularly benefited workers in tightening labor markets. Rebounding post–Great Recession labor demand at the bottom offset enduring drivers of inequality.

Long-run Trends in the U.S. SES-Achievement Gap
Eric Hanushek et al.
Education Finance and Policy, Fall 2022, Pages 608–640


Rising inequality in the United States has raised concerns about potentially widening gaps in educational achievement by socioeconomic status (SES). Using assessments from LTT-NAEP, Main-NAEP, TIMSS, and PISA that are psychometrically linked over time, we trace trends in SES gaps in achievement for U.S. student cohorts born between 1961 and 2001. Gaps in math, reading, and science achievement between the top and bottom quartiles of the SES distribution have closed by 0.05 standard deviation per decade over this period. The findings are consistent across alternative measures of SES and subsets of available tests and hold in more recent periods. At the current pace of closure, the achievement gap would not be eliminated until the second half of the 22nd century.

Can Conservatives Be Persuaded? Framing Effects on Support for Universal Basic Income in the US 
Eddy Yeung
Political Behavior, forthcoming


Universal basic income (UBI) has been proposed as a policy response to technological advances and structural inequality. Yet, recent data show that most conservatives in Europe and the US are strongly opposed to the welfare proposal. Can framing UBI as a policy that conforms to their ideological predispositions overcome such opposition? Exploiting the compatibility of UBI with core conservative ideals such as individualism and laissez-faire government, I design an original survey experiment that randomly exposes respondents to one of two frames: (1) an equalizing-opportunity frame which emphasizes that UBI creates a level playing field and promotes self-responsibility, or (2) a limiting-government frame which highlights UBI as a policy that limits government and reduces bureaucracy. I find that American conservatives — identified by using 10 policy statements — remained strongly opposed to UBI even after they were presented with such frames. Analyses of open-ended responses, which show that how conservatives explained their opposition to UBI remained unchanged regardless of framing, reinforce this conclusion. Conservatives’ opposition to UBI remained rigid, even after the key components of UBI that fit the conservative ideology were accentuated. These results shed light on the political feasibility of framing UBI, and the rigidity of welfare attitudes among American conservatives.

Do higher income taxes on top earners trickle down? A local labor markets approach
Paul Kindsgrab
Journal of Public Economics, October 2022


This paper measures how much higher income taxes on U.S. top 1% earners “trickle down” and reduce other workers’ wages via geographically concentrated spillovers. Using an exposure design that combines time-series variation in the federal marginal tax rate for top 1% earners with cross-sectional variation in the top 1% income share across local labor markets, I find very little evidence of local trickle-down effects. The point estimates imply zero local trickle-down effects. At conventional levels of confidence, the estimates are statistically inconsistent with a one percentage point increase in the top tax rate reducing worker wages by more than −0.08%. These results undermine claims that trickle-down effects should be an important consideration in setting top tax rates.

Monetary Policy and Inequality: How Does One Affect the Others?
Eunseong Ma
International Economic Review, forthcoming 


This paper studies a labor-supply-side channel affecting the relationship between monetary policy and income inequality. To this end, I build a heterogeneous-agent New Keynesian economy with indivisible labor in which both macro and micro labor supply elasticities are endogenously generated. First, I find that monetary policy shocks have distributional consequences due to a substantial heterogeneity in labor supply elasticity across households. Second, a more equal economy is associated with more effective monetary policy in terms of output. I document supporting empirical evidence for the key mechanism of the model using micro-level data and state-level data in the U.S.

Cognitive ability has powerful, widespread and robust effects on social stratification: Evidence from the 1979 and 1997 US National Longitudinal Surveys of Youth
Gary Marks
Intelligence, September–October 2022, 101686


Few issues in the social sciences are as controversial as the role of cognitive ability for educational and subsequent socioeconomic attainments. There are a variety of arguments raised to dismiss, discount or discredit the role of cognitive ability: socioeconomic background is the dominant influence; if cognitive ability appears important, that is only because important predictors have been omitted; the relative importance of socioeconomic background and cognitive ability cannot be ascertained; and cognitive ability is simply a function of socioeconomic background and, for post-education socioeconomic attainments, education. This study analyses the effects of cognitive ability and socioeconomic background on a chronological sequence of social stratification outcomes - school grades, SAT and ACT scores, educational and occupational attainment, income and wealth - in data from the 1979 and 1997 National Longitudinal Surveys of Youth. The coefficients for cognitive ability decline marginally with the addition of socioeconomic background measures, including family-of-origin income averaged over several years, and wealth. In contrast, socioeconomic background coefficients decline substantially with the addition of cognitive ability. Net of educational attainment, cognitive ability has sizable effects on occupational attainment and income. Net of socioeconomic background, education and occupation, a one-standard-deviation difference in ability corresponds to a sizable 43% difference in positive wealth at around age 35 in the older cohort and a 25% increase in the younger cohort. Therefore, contrary to dominant narratives, cognitive ability is important to a range of social stratification outcomes, and its effects cannot be attributed to socioeconomic background or educational attainment.

Wealth Dynamics in Communities
Daniel Barron, Yingni Guo & Bryony Reich
Review of Economic Studies, forthcoming


This paper develops a model to explore how favor exchange influences wealth dynamics. We identify a key obstacle to wealth accumulation: wealth crowds out favor exchange. Therefore, households must choose between growing their wealth and accessing favor exchange. We show that low-wealth households rely on favor exchange at the cost of having tightly limited long-term wealth. As a result, initial wealth disparities persist and can even grow worse. We then explore how communities and policymakers can overcome this obstacle. Using simulations, we show that community benefits and place-based policies can stimulate both saving and favor exchange, and in some cases, can even transform favor exchange into a force that accelerates wealth accumulation.

To Be or not to Be like the Joneses: Effects of 'Income Transparency' on Consumption Attitude and Behavior among Low-Income Consumers
Xinghui Chen, Debabrata Talukdar & Indranil Goswami State
University of New York Working Paper, May 2022 


Human beings have a fundamental desire to seek social and economic status. Individual income is an essential determinant of economic status, but income information is typically private. As a result, people often strategically consume certain goods and services to signal their income and the concomitant economic status to others. This research investigates how the emerging practice of income transparency affects consumers’, especially lower-income individuals’, judgment and decision to seek status from what they consume. Drawing insights from multiple approaches – viz., a primary survey of private and public-sector employees, analyzing revealed market data, and conducting seven experiments (N = 2541; 3 preregistered), we find that consumers facing income transparency versus income privacy show a systematically lower preference for conspicuous economic status consumption. This differential effect is mediated by a reduced perception of “Spending Implies Income.” The research also identifies several individual and situational factors – viz., status-seeking motivation, multiple income sources, variability in earned income potential – that moderate when and for whom the observed differential effect is most likely to occur. The findings make a case for the positive impact of a workplace-related policy in nudging consumers towards less economic status-enhancing consumption, resulting in potentially more personal savings among lower-income consumers.

Sophisticated deviants: Intelligence and radical economic attitudes
Chien-An Lin & Timothy Bates
Intelligence, November–December 2022 


Conservative economic attitudes have been theorized as symptoms of low cognitive ability. Studies suggest the opposite, linking more conservative views weakly to higher, not lower, cognitive ability, but with very large between-study variability. Here, we propose and replicate a new model linking cognitive ability not to liberal or conservative economics, but to economic extremism: How far individuals deviate from prevailing centrist views. Two large pre-registered studies in the UK (N = 700 & 700) and the British Cohort Study dataset (N = 11,563) replicated the predicted association of intelligence with economic deviance (β = 0.4 to 0.12). These findings were robust and expand the role of cognitive ability from tracking the economic consensus to influencing support for (relatively) extremist views. They suggest opportunities to understand the generation and mainstreaming of radical fringe social attitudes.

Who's on first? People asymmetrically attend to higher-ranked (vs. lower-ranked) competitors
Evan Weingarten, Shai Davidai & Alixandra Barasch
Journal of Experimental Social Psychology, forthcoming


Rankings, hierarchies, and competitions are an integral part of peoples' personal and professional lives and knowing one's standing vis-à-vis others helps employees decide how to outdo higher-ranked colleagues and how to refrain from being outdone by lower-ranked others. But whom do people attend to when considering these rankings? In seven studies (and five supplementary studies; N = 4496) we document a robust asymmetry in attention to higher-ranked versus lower-ranked competitors. First, using unobtrusive measures, we show that people attend more to and exhibit better memory for their higher-ranked (vs. lower-ranked) peers. Second, we demonstrate that this asymmetry is reduced when attention is shifted to lower-ranked competitors, and is moderated by participants' own standing. Finally, we find that asymmetrically attending to higher-ranked others leads people to overestimate minority representation in rankings and to make suboptimal financial decisions. We discuss implications for social comparison theory, workplace rankings, and the psychology of competition.


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