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Inequality, mobility, opportunity

January 31, 2012

Alan Krueger, Chair of President Obama’s Council of Economic Advisers, gave a talk a few weeks ago on inequality. Krueger described the sharp increase in income inequality in the United States since the 1970s and discussed some undesirable consequences it may have. One of those consequences is reduced intergenerational mobility (relative intergenerational income mobility, to be more precise). Krueger provided a graph showing that nations with greater income inequality tend to have a stronger correlation between the earnings of parents and their children (less mobility). This has sparked a wide-ranging discussion about the link between income inequality and mobility (Winship, Corak, Winship, Corak, Cowen, Yglesias, Wolfers, Smith, Winship, Quiggin, Cowen, Quiggin, Bernstein).

Here’s what the pattern looks like according to Miles Corak, the source of Krueger’s data (enlarged version here). The vertical axis in the chart is immobility; lower means more mobility. The horizontal axis is income inequality a few decades earlier.

Nations with lower income inequality tend to have more intergenerational mobility, and the association is quite strong. There are concerns about the data. But suppose the data are accurate, and suitable for testing this link. What does the association depicted in this chart tell us about the magnitude of inequality’s impact? How much would reducing income inequality in the United States help?

For most, the aim isn’t high intergenerational mobility per se; it’s low inequality of opportunity. Mobility serves as an indicator (not perfect, but not bad) of equality of opportunity.

Money ought to be good for children’s opportunity. Kids growing up in households with higher incomes are more likely to have good health care, low stress, learning-centered preschools, good elementary and secondary schools, extracurricular activities that promote cognitive skills and earnings-enhancing noncognitive traits, and access to a strong university. It would be surprising, therefore, if inequality of parents’ incomes did not contribute to inequality of opportunity among their children.

But how large is the effect? After all, money isn’t the only thing that matters; a good bit of our abilities and motivations when we reach adulthood stem from nonmonetary influences such as genetics, in-utero developments, our parents’ habits and behaviors, and peers. Also, there are diminishing returns to money; beyond a certain point, more parental income probably helps only a little, if at all.

Yet the graph suggests a large impact. Apart from data concerns, is there any reason to question this? I think so. First, let’s set aside the low- and middle-income countries (Argentina, Brazil, Chile, China, Pakistan, Peru, Singapore). Mobility processes in these countries may or may not be comparable to those in the rich nations. Next, notice that inhabiting the lower-left corner of the chart are the four Nordic nations: Denmark, Finland, Norway, and Sweden. These countries have been providing affordable high-quality early education to a substantial portion of children age 1 to 5 for roughly a generation. James Heckman and Gøsta Esping-Andersen, among others, have argued that early education is perhaps the single most valuable thing a society can do to equalize opportunity. These countries also feature late tracking in elementary and secondary schools and heavy subsidies to ensure college is affordable for all. These public services, rather than low income inequality, might be the chief reason the Nordic countries have such high intergenerational mobility.

What would that imply for the cross-country association between income inequality and intergenerational mobility? As the following chart shows, if we leave out the Nordic nations the association is still there, but the countries are widely dispersed around the line, suggesting weaker grounds for confidence that the association is a strong one. (For the statistically inclined, the r-squared is .47 with the Nordics included and .16 without them.)

Is it possible, then, for a country to have high income inequality but also low inequality of opportunity? John Quiggin is skeptical. He suggests the UK experience has debunked this “third way” notion. I’m not so sure. Imagine a rich nation with America’s income inequality and Nordic public services: affordable high-quality early education, K-12 schooling with late tracking and equal funding, and widespread access to good-quality universities. And perhaps also comprehensive prenatal care. Would its opportunity (mobility) structure look more like America’s or more like Sweden’s?

But, some will respond, you can’t get those services if income inequality is high. The rich will block the heavy taxation needed to fund them. Maybe. But income inequality has been rising in Sweden. In fact, in the late 1990s and mid 2000s the top 1%’s share of income (including capital gains) in Sweden was about the same as in the 1970s United States (see figure 7 in this paper by Atkinson, Piketty, and Saez). So far this hasn’t undermined Swedish taxation, though it’s probably too soon to draw any firm conclusions.

Suppose income inequality continues to rise in Sweden but its public services hold up. Will Sweden’s intergenerational mobility a few decades from now look like ours does today? I’d predict no. I suspect opportunity-enhancing programs can overcome a good bit of the harm done by income inequality.

That’s not to say we shouldn’t also try to reduce income inequality. I think we should. The point is that if we want to reduce inequality of opportunity, reducing income inequality isn’t the only way, and perhaps not even the best way, to do it.

Posted in Inequality, Mobility | 9 Comments »

How rich countries lift up the poor

December 11, 2011

That’s the title of a short article of mine in the current Pathways magazine. Pathways ought to be on the reading list of anyone interested in living standards, poverty, inequality, and mobility. And it’s free.

A few other worthwhile recent reads on these topics:

Jared Bernstein’s blog

CBO, Trends in the distribution of household income

Center on Budget and Policy Priorities, A guide to statistics on historical trends in income inequality

OECD, Divided we stand: why inequality keeps rising

Scott Winship, Mobility impaired

Miles Corak, The decline of the American dream

Reihan Salam, Understanding America’s income mobility problem

Mike Brewer and Liam Wren-Lewis, Why did Britain’s households get richer?

James Plunkett, The potential for female employment to raise living standards in low to middle income Britain

Posted in Inequality, Living standards, Mobility, Poverty | 1 Comment »

Winner-take-all financial incentives, Steve Jobs, and the living standards of ordinary Americans

December 3, 2011

I’ve just finished Walter Isaacson’s fascinating book on Steve Jobs’ fascinating life. Among the many intriguing things about Jobs’ story is that it may shed some light on a particular interpretation of America’s economic performance over the past generation.

Between 1979 and 2007, inflation-adjusted hourly wages for Americans at the median and below were essentially flat. Household incomes in the lower half increased, but not very much. Both wages and incomes for many ordinary Americans trailed far behind growth of the economy. At the same time, the earnings and incomes of those at the top exploded (see here, here, here, here).

One story sometimes told about the 1980s, 1990s, and pre-crash 2000s links these two developments to offer an optimistic verdict on the evolution of living standards for America’s lower half. The story goes something like this: A winner-take-all economy reduces income growth for low-to-middle Americans. But it nevertheless produces a substantial rise in living standards for them. It does so by increasing financial incentives for inventiveness and hard work, which yields leaps in consumption that aren’t reflected in the price data used to measure changes in the cost of living.

To put it more precisely, the story has four parts:

1. Returns to success soared in fields such as entertainment, athletics, finance, and high tech, as well as for CEOs. These markets became “winner-take-all,” and the amounts reaped by the winners mushroomed.

2. For those with a shot at being the best in their field, this increased the financial incentive to work harder or longer or to be more creative.

3. This rise in financial incentives produced a rise in excellence — new products and services and enhanced quality.

4. These improvements haven’t been satisfactorily captured in the price index by which we assess changes in the cost of living. Watching Michael Jordan or LeBron James play basketball is a qualitatively superior experience relative to what came before in a way that isn’t reflected in the price of a ticket or of a cable TV subscription. Similarly, the Macintosh, iPod, iTunes, iPhone, and iPad are so different from and superior to anything that preceded them that what they add to living standards isn’t likely to be adequately measured.

I think there’s a good bit of truth to parts 1, 2, and 4 of this story. But I’m skeptical about part 3.

This brings me to Steve Jobs. Apple and its delightful, user-friendly, (eventually) affordable gadgets play a key role in this story. The question is: Would Jobs and his teams of engineers, designers, and others at Apple have worked as hard as they did to create these new products and bring them to market in the absence of massive winner-take-all financial incentives?

In the things-have-improved-more-than-the-income-data-make-it-seem story, the answer is no. The financial incentive is the critical spur to inventiveness and hard work.

But I don’t find anything in Isaacson’s account of Jobs that supports this view. Jobs himself seems to have been driven mainly by a passion for the products, for winning the competitive battle, and perhaps for status among peers. The satisfaction of achieving excellence and of beating one’s opponents appears to have been far more important than monetary compensation. Excellence and victory were their own reward, rather than a means to the end of financial riches. In this respect Jobs was little different from scores of inventors and entrepreneurs over the ages, or for that matter from Bill Russell, Larry Bird, and Michael Jordan.

The rise of winner-take-all compensation occurred simultaneously with surges in innovation and productivity in certain fields, but that doesn’t mean it was the cause of those surges.

Posted in Inequality, Living standards | 11 Comments »

Reducing relative poverty

June 5, 2011

Reducing poverty is widely viewed as a key objective of a good society. The U.K.’s Labour government set a formal poverty reduction target in the late 1990s, and the European Union recently did so as well. In the United States, public opinion surveys consistently find a solid majority saying government spends too little money on assistance to the poor.

The standard poverty measure in comparisons of rich nations is a “relative” one. The poverty line for each country is set at a percentage, usually 60% or 50%, of that country’s median household income.

Which countries have been most successful in reducing relative poverty in recent decades? And how have they done it? Here’s what the picture looks like for twenty affluent nontiny longstanding democracies. The data are from three sources: the Luxembourg Income Study (LIS), considered the most reliable for comparative purposes; the European Union’s Statistics on Income and Living Conditions (EU SILC), which covers recent years for EU countries; and the OECD.

As it turns out, there is hardly any success to explain. In almost every one of these nations the relative poverty rate was no lower in 2007, the peak year of the pre-crash business cycle, than at the end of the 1970s. The only clear exception is Ireland. Denmark also reduced poverty according to the LIS data, but the OECD data suggest little or no change. Portugal is another possibility. A few countries succeeded in reducing relative poverty during certain portions of this period, such as the U.K. in the early 2000s.

What accounts for this near-universal failure?

A relative measure of poverty is essentially a measure of inequality in the lower half of the income distribution. A nation’s relative poverty rate is determined largely by three things: wage inequality among individuals in the bottom half of the distribution, employment inequality among households in the bottom half, and the generosity of the public safety net. The wage distribution has become more unequal in many countries, though by no means all. This owes to a host of developments, including globalization, deregulation of product and labor markets, manufacturing decline, weakening of collective bargaining, and increased immigration of people with language barriers and/or limited job skills. The trend in employment likewise has tended to be inegalitarian, depending on the magnitude and character of the rise in single-adult households, the movement of women into jobs, and government efforts to promote employment. Government transfers have increased in a number of countries, but often only enough to offset the rise in market inequality. And in a few nations transfers have stagnated or decreased. (More discussion here, here, here, here, and here.)

I prefer a focus on absolute incomes and living standards rather than on relative poverty, and that approach yields a very different conclusion about progress in recent decades. Still, the widespread failure of rich countries to make any headway in reducing relative poverty rates is striking.

Posted in Inequality, Poverty | 6 Comments »

Inequality and mobility at the top

March 8, 2011

Income inequality in America has soared over the past generation. But some see little cause for concern. One reason is that our inequality statistics — Gini coefficient, share of income going to the top 1%, and so on — are calculated based on households’ income in a single year. This misses the fact that people move up and down over time. Our incomes in any given year may be more dispersed now than several decades ago, but if many of us are switching places from year to year, why the fuss?

Two claims need to be distinguished here. One says there’s enough movement up and down in the income distribution over time (in technical lingo, relative intragenerational income mobility) that we needn’t worry about single-year inequality at all. It doesn’t matter whether inequality is high or low; it doesn’t matter whether it’s rising or falling. Single-year income inequality is simply irrelevant, on this view, because there is a lot of mobility. Since “a lot” and “enough” are in the eye of the beholder, evidence can’t confirm or refute this claim.

A second claim says that the rise in income inequality has been offset by a rise in mobility. Here we can look to the data for a verdict. Has income mobility increased?

For the bulk of the population — everyone but the richest — we have multiple sources of mobility data. One is the Panel Study of Income Dynamics (PSID); another is earnings records from the Social Security Administration. Both indicate that there has been no increase in income mobility in recent decades (see also here).

What about at the top? A good bit of the past generation’s rise in inequality consists of growing separation between the rich, especially the top 1%, and the rest of America. But has this been accompanied by increased churn among those at the top? In 2007 the Treasury Department released a study based on analysis of tax records. It included data on movement out of the top 1% over two nine-year periods: 1987-1996 and 1996-2005.

Single-year income inequality rose sharply during these two periods. The share of income going to the top 1% of households jumped from 11% in 1987 to 14% in 1996 to 18% in 2005. The Treasury study found that mobility, by contrast, was essentially unchanged.

The large increase in income inequality has not been offset by a rise in mobility at the top.

Posted in Inequality, Mobility | Leave a Comment »

Is winner-take-all bad or good for the middle class? Evidence from baseball

January 11, 2011

A “winner-take-all” market is one in which the top stars get paid much more than anyone else. It’s an apt description of the American economy in recent decades. Top financiers, CEOs, entertainers, and athletes now routinely earn more than ten million dollars a year, and the share of all income (after taxes) going to the top 1% of households jumped from 8% in 1979 to 17% in 2007.

What impact does the rise in the share taken by those at the top have on the incomes of those in the middle? On one view it’s bad: if the additional millions going to the “winners” had instead been spread among those in the middle, the latter would have been better off. Others suggest the impact is good: winner-take-all markets help make the pie bigger than it otherwise would have been, and a larger pie means a larger slice for the middle class in absolute terms, even if that slice has shrunk relative to the slice of those at the top.*

Pay in major league baseball is a good test case. Since the 1970s professional baseball has had the two defining characteristics of a winner-take-all market: owners’ and/or consumers’ judgment that top stars are much more valuable than the next best, and stars’ ability to exit if offered better pay elsewhere. Salaries for baseball’s top players have skyrocketed. Also helpful: unlike in pro football and basketball, baseball teams’ total pay is not limited by a salary cap.

Here are the two contending hypotheses:

1. Winner-take-all is bad for middle-pay players. Stars’ big paychecks come largely at the expense of their teams’ mid-level players.

2. Winner-take-all is good for middle-pay players. Teams that pay big money for top stars enjoy greater revenue growth via higher game attendance, richer TV deals, better jersey and hat sales, and so on. The stars collect a growing share of these teams’ total payroll, but this is more than offset by the degree to which they help boost the payroll. As a result, salaries for the middle players on these teams increase more than on other teams.

Baseball-almanac.com has data on the salaries of all major league players since the mid-1980s. I’ll examine change from 1989 to 2007, as both are business-cycle-peak years. (I exclude the four teams created after 1989. The Cincinnati Reds also are left out, due to missing 1989 salary data.)

Does paying big money for top stars enlarge the pie? On the horizontal axis of the following chart is change in the share of each team’s total pay that goes to its top three players. Consistent with what we would expect in a winner-take-all market, for most teams that share rose. For example, in 1989 the best-paid trio of players on the San Francisco Giants got 22% of the team’s total pay. In 2007 the Giants’ top three got 40% of the total pay, an increase of 18 percentage points. On the chart’s vertical axis is 1989-to-2007 change in each team’s total pay, in millions of inflation-adjusted dollars. The hypothesized positive association isn’t there. Teams that increased the portion of their pie going to their top three players haven’t gotten a faster-growing pie in return.

That points us toward hypothesis 1, which says a rising share of a team’s pay going to its top stars is bad for those in the middle. As the next chart shows, that’s indeed how things have played out. The chart plots the change in pay for each team’s middle five players from 1989 to 2007 by the change in the top three players’ share of the team’s total pay. Middle-player salaries have tended to grow less rapidly on teams in which the top three’s share has risen more.

The following set of charts elaborates a bit. It shows changes in top players’ pay and changes in middle players’ pay for four teams. The first two teams, the San Francisco Giants and Toronto Blue Jays, are on the right side of the second chart above. Pay for their top three players exploded. It rose for their middle players too, but much more modestly. The next two teams, the Baltimore Orioles and Milwaukee Brewers, are on the left side of the second chart above. Pay for their top three players rose sharply, but less than for their counterparts on the Giants and Blue Jays. Their middle players, by contrast, did better.

But that’s not the full story. To the two hypotheses listed above we should add a third:

3. Winner-take-all is bad for middle-pay players, but its harm is outweighed by other developments.

The “other” development that has mattered most is the growth in team payrolls. Total pay for the median team soared from $23 million in 1989 to $89 million in 2007. This has been the key determinant of salary growth for middle-pay major league players. On average, the pay of the middle five players rose by $300,000 less on a team with a ten-percentage-point increase in the top three players’ pay share than on a comparable team with no change in the top three’s share.** But salaries for the middle five players nevertheless increased on almost all teams, in many instances handsomely so. Across all teams, the average increase for the middle five between 1989 and 2007 was $1 million, nearly a 200% rise. Even among the six teams on which the top three players’ share of pay rose the most — those to the right in the second chart: Houston, Pittsburgh, San Francisco, Toronto, Oakland, and the L.A. Angels — the average increase for the middle five players was $540,000.

What accounts for the sharp jump in team payrolls? One element is enhanced revenues due to expanded demand for tickets, TV rights, and team paraphernalia. Another is a shift in the balance of power away from owners in favor of players. These developments have enabled some teams — the New York Yankees are the paramount example, as you can see in the second chart above — to concentrate a growing share of pay on their top three ballplayers and simultaneously provide a large rise in pay for their “middle-class” players.

Implications for the broader economy probably are limited. One, though, is that even if winner-take-all hurts middle-class incomes, if we had very rapid economic growth it might not matter much. Alas, figuring out how to get that isn’t so easy. A good substitute might be moderately strong growth coupled with strong unions (as in the 1950s and 1960s) or low unemployment (as in the late 1990s). But I’m not too optimistic about that either.

__________

* Some recent analysis and commentary: Andrews-Jencks-Leigh, Cowen, Drum, Kenworthy, Klein, Thoma, Yglesias.

** This is based on a regression of change in middle-five players’ pay on change in top-three players’ share of team pay, change in total team pay, and 1989 level of middle-five players’ pay.

Posted in Inequality, Living standards, Middle class, Sports | 10 Comments »

Has rising inequality been bad for the poor?

December 14, 2010

Income inequality has risen sharply in the United States and some other affluent countries since late 1970s, with much of the increase consisting of growing separation between the top 1% and the rest of the population.

Has this been bad for the incomes of the poor?

In a relative sense, the answer is yes, at least in the United States. According to the best available U.S. data, from the Congressional Budget Office, the share of income going to households at the bottom has decreased.

What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality. (For more detail, see my piece in the November-December issue of Challenge.)

In some countries with little or no rise in income inequality, such as Sweden, government transfers increased and so did the incomes of poor households. In others, such as Germany, transfers and the incomes of low-end households did not increase.

Among nations with sharp increases in top-heavy inequality, we observe a similar disjunction. Here the U.S. and the U.K. offer an especially revealing contrast. The top 1%’s income share soared in both countries, and through the mid-1990s poor households made little progress, as the following chart shows. But over the next decade low-end American households advanced only slightly, whereas their British counterparts experienced sizable gains. The New Labour governments under Tony Blair and Gordon Brown increased benefits and/or reduced taxes for low earners, single parents, and pensioners. As Jane Waldfogel documents in her book Britain’s War on Poverty, these were big policy shifts, even if not always high-profile ones. They produced a significant rise in the real disposable incomes of poor households.

Rising income inequality has a number of potential consequences — some of them, perhaps many, undesirable. Its apparent lack of impact on the absolute incomes of the poor over the past generation ought not lead us to overlook this. Still, it is noteworthy that some affluent countries have managed to engineer income growth for low-end households despite a significant top-heavy rise in inequality. For American policy makers, that might serve as welcome inspiration.

Posted in Abroad, Inequality, Poverty, Social policy | 5 Comments »

Roundtable on Larry Bartels’ book “Unequal Democracy”

December 6, 2010

At The Monkey Cage over the next few days. It includes comments on the book by Paul Pierson and Jacob Hacker, by Will Wilkinson, and by me, with responses from Bartels.

Posted in Inequality, Politics | Leave a Comment »

Politics and rising income inequality

August 10, 2010

In the current issue of Politics and Society, Jacob Hacker and Paul Pierson offer a political explanation of the top-heavy rise in income inequality in the U.S. in recent decades. Their piece is followed by six commentaries and a response from Hacker and Pierson. The full set of papers is available online for a little while.

Jacob Hacker and Paul Pierson, “Winner-take-all politics: public policy, political organization, and the precipitous rise of top incomes in the United States”

Fred Block and Frances Fox Piven, “Deja vu, all over again”

Andrea Brandolini, “Political economy and the mechanics of politics”

Andrea Louise Campbell, “The public’s role in winner-take-all politics”

Neil Fligstein, “Politics, the reorganization of the economy, and income inequality, 1980-2009″

Lawrence Jacobs, “Democracy and capitalism: structure, agency, and organized combat”

Lane Kenworthy, “Business political capacity and the top-heavy rise in income inequality: how large an impact?”

Jacob Hacker and Paul Pierson, “Winner-take-all politics and political science: a response”

Here’s a summary of the lead article:

The dramatic rise in inequality in the United States over the past generation has occasioned considerable attention from economists, but strikingly little from students of American politics. This has started to change: in recent years, a small but growing body of political science research on rising inequality has challenged standard economic accounts that emphasize apolitical processes of economic change. For all the sophistication of this new scholarship, however, it too fails to provide a compelling account of the political sources and effects of rising inequality. In particular, these studies share with dominant economic accounts three weaknesses: (1) they downplay the distinctive feature of American inequality — namely, the extreme concentration of income gains at the top of the economic ladder; (2) they miss the profound role of government policy in creating this “winner-take-all” pattern; and (3) they give little attention or weight to the dramatic long-term transformation of the organizational landscape of American politics that lies behind these changes in policy. These weaknesses are interrelated, stemming ultimately from a conception of politics that emphasizes the sway (or lack thereof) of the “median voter” in electoral politics, rather than the influence of organized interests in the process of policy making. A perspective centered on organizational and policy change — one that identifies the major policy shifts that have bolstered the economic standing of those at the top and then links those shifts to concrete organizational efforts by resourceful private interests — fares much better at explaining why the American political economy has become distinctively winner-take-all.

Posted in Inequality | 6 Comments »

The best inequality graph, updated

July 20, 2010

Why this graph? See here.

A pdf version of it is here.

Posted in Inequality | 73 Comments »

The politics of helping the poor

July 1, 2010

Slides from my talk at the Luxembourg Income Study conference on “Inequality and the Middle Class.”

The conference papers are available online.

Posted in Abroad, Inequality, Middle class, Politics, Poverty | 1 Comment »

Prosperity in America

March 8, 2010

Lecture slides for the “Prosperity in America” section of my Social Issues in America course this semester:

Middle America’s standard of living

Inequality

Opportunity

Economic security

Poverty

Happiness

Posted in Inequality, Living standards, Middle class, Poverty | 8 Comments »

Inequality as a social cancer

January 18, 2010

Income inequality makes a lot of things we care about worse, according to a new book, The Spirit Level: Why Greater Equality Makes Societies Stronger, by Richard Wilkinson and Kate Pickett. Looking across 20 or so rich nations and across the 50 American states, Wilkinson and Pickett find that countries and states with greater income inequality tend to have lower life expectancy, higher infant mortality, more mental illness, more obesity, higher rates of teen births, more murder, less trust, and less upward mobility.

The following plot of life expectancy by income inequality shows a pattern that appears again and again in The Spirit Level.

“The problems in rich countries,” Wilkinson and Pickett conclude, “are not caused by the society not being rich enough (or even by being too rich) but by the scale of material differences between people within each society being too big. What matters is where we stand in relation to others in our own society” (p. 25).

The book has received a good bit of attention. It’s been reviewed in a number of major newspapers and been the focus of events at progressive think tanks in London and Washington, DC. It’s easy to see why. Many progressives worry about inequality. Here is a book, referencing hundreds of social scientific studies and making extensive use of quantitative data, which says, in effect, that many of our social problems can be significantly eased by reducing income inequality.

Is it correct? I was initially skeptical, and after reading the book I remain so.

What’s the causal link?

It wouldn’t be surprising to find that inequality in the income distribution contributes to inequality in health, education, and so on. And there’s plenty of evidence that it does. Wilkinson and Pickett make a different claim: income inequality worsens the average level of health, education, safety, trust, and other good things. How does it do that?

Wilkinson and Pickett say high inequality increases status competition, which in turn increases stress and anxiety, which leads to social dysfunction.

“Greater inequality seems to heighten people’s social evaluation anxieties by increasing the importance of social status…. If inequalities are bigger, so that some people seem to count for almost everything and others for practically nothing, where each one of us is placed becomes more important. Greater inequality is likely to be accompanied by increased status competition and increased status anxiety.” (pp. 43-44)

Here’s how they see stress as the link between income inequality and a key health outcome, lower average life expectancy:

“One of the most important recent developments in our understanding of the factors exerting a major influence on health in rich countries has been the recognition of the importance of psychological stress…. The most powerful sources of stress affecting health seem to fall into three intensely social categories: low social status, lack of friends, and stress in early life…. Much the most plausible interpretation of why these keep cropping up as markers for stress in modern societies is that they all affect — or reflect — the extent to which we do or do not feel at ease and confident with each other. Insecurities which can come from a stressful early life have some similarities with the insecurities which can come from low social status, and each can exacerbate the effects of the other.” (p. 39)

“So how do the stresses of adverse experiences in early life, of low social status, and lack of social support make us unwell? … The psyche affects the neural system and in turn the immune system — when we’re stressed or depressed or feeling hostile, we are far more likely to develop a host of bodily ills, including heart disease, infections and more rapid ageing. Stress disrupts our body’s balance, interferes with what biologists call ‘homeostasis’ — the state we’re in when everything is running smoothly and all our physiological processes are normal.” (p. 85)

Here’s the hypothesized link with obesity:

“People with a long history of stress seem to respond to food in different ways from people who are not stressed. Their bodies respond by depositing fat particularly round the middle, in the abdomen, rather than lower down on hips and thighs…. The body’s stress reaction causes another problem. Not only does it make us put on weight in the worst places, it can also increase our food intake and change our food choices, a pattern known as stress-eating or eating for comfort.” (p. 95)

And educational achievement:

“New developments in neurology provide biological explanations for how our learning is affected by our feelings. We learn best in stimulating environments when we feel sure we can succeed. When we feel happy or confident our brains benefit from the release of dopamine, the reward chemical, which also helps with memory, attention, and problem solving. We also benefit from serotonin which improves mood, and from adrenaline which helps us to perform at our best. When we feel threatened, helpless and stressed, our bodies are flooded by the hormone cortisol which inhibits our thinking and memory. So inequalities of the kind we have been describing in this chapter, in society and in our schools, have a direct and demonstrable effect on our brains, on our learning and educational achievement.” (p. 115)

Other mechanisms are discussed at various points in the book, including oppositional culture, perceived expectations of inferiority, and humiliation. But stress is the key.

An important question here, which Wilkinson and Pickett don’t address, concerns the tightness of the link between the degree of income inequality in a society and the degree of status competition. The United States has the most unequal income distribution among rich countries, but I’m not certain this results in it having more status competition than other countries. Some European nations with less income inequality have a long history of class divisions. American culture is relatively informal, and Americans tend to be optimistic about the possibility of upward mobility. As a result, perceptions of status divisions may be less pronounced in the U.S. than in some other nations. The same is true for the American states. The states with the highest income inequality include Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, and Wyoming. Is status competition greatest in these states? I’m not sure.

How strong is the effect?

Wilkinson and Pickett are convinced that the effect of income inequality on social well-being is real, and perhaps it is. But if so, how strong is the effect? Social scientists frequently discover statistically significant effects that turn out to be trivially small in magnitude.

Look again at the chart above, which shows life expectancy by income inequality across affluent nations. If you follow the regression (“best-fit”) line, you’ll see it suggests that going from very high income inequality to very low income inequality will increase life expectancy by approximately two years (from about 77.5 to 79.5). The same is true across the 50 U.S. states. Is that a large impact?

One way to think about this is to consider how much life expectancy has changed in these countries over time. Let’s compare 1980 to 2006. I got data for these two years from the OECD for 21 of the 23 countries included in Wilkinson and Pickett’s graph. In 1980 the average life expectancy in these countries was 71 years. By 2006 it had jumped to 78 years. This increase is not simply a function of the poorer countries making huge leaps. In the three richest countries — Norway, the United States, and Switzerland — life expectancy rose by five or six years. The smallest rise, in the Netherlands, was four years.

If Wilkinson and Pickett’s estimate of the impact of income inequality is correct, reducing inequality in the United States to Sweden’s level would improve life expectancy by two years. Yet in the past generation life expectancy in the U.S. increased by more than twice that amount. By this gauge, inequality’s effect isn’t an especially large one.

Are the correlations true?

The point-in-time associations in Wilkinson and Pickett’s graphs are their key piece of evidence. Are they accurate? In studies such as this, there almost always is reason to worry about data and measurement choices. I’ll mention just one here. Wilkinson and Pickett measure income inequality for countries using data from the United Nations’ Human Development Report. It’s not a bad choice, but a more reliable source when comparing across nations is the Luxembourg Income Study (LIS). The LIS has data for fewer countries, but if an association is genuine it ought to hold for a subset of the countries examined by Wilkinson and Pickett.

The following chart plots life expectancy by income inequality as of 2005, using LIS data for inequality. There is no association.

Actually, this isn’t so much because of the difference in data source; it’s mainly a function of the particular countries that drop out when switching to the LIS data. The association in Wilkinson and Pickett’s chart rests heavily on the position of Japan, Singapore, and Portugal, none of which are in the LIS database. A small number of countries, often the United States and Japan, exert a good bit of influence on the patterns in a number (though not all) of Wilkinson and Pickett’s scatterplots. This is worrisome.

Are cross-sectional point-in-time associations the appropriate empirical test?

Patterns of association across countries or states at a single point in time may be very useful evidence. Or they might not. With this kind of evidence, we worry about other ways in which countries differ from one another that could be the true drivers of the observed association.

To supplement cross-sectional snapshots, we can, where data availability permits, look at what happens over time. Wilkinson and Pickett presumably would think this a good idea. In the book’s final chapter they note that the level of income inequality has changed in a number of these countries over the last few decades. And in the conclusion to an article that summarizes the book, they say “Standards of health and social well-being in rich societies may now depend more on reducing income differences than on economic growth without redistribution.” If income inequality is reduced, they’re suggesting, life expectancy and other social outcomes should improve; if inequality rises, outcomes are likely to worsen.

Yet The Spirit Level includes virtually no analysis or discussion of over-time developments. There is one over-time chart in the chapter on trust, a brief discussion in the chapter on crime, and a few references to other studies in a summary chapter. But as best I can tell, that’s all.

This is an important omission, because researchers who have examined over-time relationships between income inequality and average levels of health have tended to find no support for the hypothesized link (Jennifer Mellor and Jeffrey Milyo; Jason Beckfield; Andrew Leigh, Christopher Jencks, and Tim Smeeding). Here’s one way to see this. The following chart plots life expectancy on the vertical axis and income inequality on the horizontal. Each country is shown at two points in time, around 1980 and around 2005. For each country, a line connects the two data points. In most of the countries income inequality has increased and yet so has life expectancy. That’s not what Wilkinson and Pickett’s argument and findings would lead us to expect. Moreover, in the two countries where inequality was already low and then decreased, the Netherlands and Denmark, life expectancy rose the least.

I haven’t looked carefully at over-time data for the other outcomes Wilkinson and Pickett examine. But a few trends in the United States seem problematic for their argument. Average educational achievement has improved over the past generation even while income inequality soared. Violent crime began increasing in the mid-1960s, well before the rise in inequality, and it has dropped considerably since the early 1990s. Trends such as these don’t necessarily mean inequality has had no effect, but at the very least they call into question its magnitude.

Interestingly, Wilkinson and Pickett report that anxiety, the mechanism through which they believe income inequality causes social dysfunction, has been increasing steadily in the United States and other rich nations over the past half-century. But as they note, that isn’t due to rising income inequality: “That possibility can be discounted because the rises in anxiety and depression seem to start well before the increases in inequality which in many countries took place during the last quarter of the twentieth century. (It is possible, however, that the trends between the 1970s and 1990s may have been aggravated by increased inequality.)” (p. 35). This leaves us with an important unanswered question: Why would income inequality be a key determinant of stress across countries at a point in time, as Wilkinson and Pickett posit, but not within countries over time?

In sum, longitudinal developments offer further grounds for skepticism about the effect of income inequality on average levels of health, education, safety, and other social goods.

What to do

Improving social outcomes is certainly a worthwhile aim. What’s the best way to do it? According to Wilkinson and Pickett,

“Attempts to deal with health and social problems through the provision of specialized services have proved expensive and, at best, only partially effective…. The evidence presented in this book suggests that greater equality can address a wide range of problems across whole societies.”

I wish it were that simple. I share Wilkinson and Pickett’s conviction that it would be good for America and some other affluent nations to reduce income inequality, but this book hasn’t convinced me that doing so would help us to make much headway in improving health, safety, education, and trust. To achieve those gains, my sense is that our best course of action is greater commitment to specialized programs and services, coupled with poverty reduction.

Then again, I’m not certain that Wilkinson and Pickett are wrong. I’ve focused here mostly on the effect of inequality on life expectancy, because that is the social outcome for which the hypothesized causal link (stress) seems most plausible and because it has received the most attention in prior research. I’m skeptical that income inequality has much of an impact on average life expectancy. But perhaps life expectancy will turn out to be the exception to the rule.

Posted in Book reviews, Health, Inequality | 22 Comments »

Consider the Evidence