Is Income Volatility Really Rising? For Whom?, by Justin Wolfers: Jacob Hacker’s Great Risk Shift described rising income risk over recent decades as an important and quite general phenomenon. While there’s been plenty of controversy around that claim, the most careful analysis I have seen roughly supports Hacker’s contention. …
What Hacker actually shows is that the average level of income volatility is rising. But we know that an average can hide as much as it reveals. And this is the point brilliantly developed in a provocative new working paper by my Wharton colleague Shane Jensen, and my former colleague Stephen Shore (full paper available here; warning, there are some econometric pyrotechnics involved).
Income volatility is not a single number — some people’s incomes move around over time more than others. And while Hacker and others have documented a rise in the average level of income volatility, Jensen and Shore document changes in the entire distribution of different people’s income volatilities.
A stock market analogy might be useful: some stocks are more volatile, some are less, and it is interesting to see what is happening to the volatility of different types of stocks, and not just some mythical “average stock.”
The Jensen-Shore findings are pretty stark and are sure to stir the policy debate: Despite sharp growth since the 1970’s in the average level of income volatility, median income volatility is basically unchanged. (There are some differences in samples and methods…, but I would be surprised if that explains much.)
Indeed, there’s been no change in income volatility for most of the distribution: Here’s the punch line:The key driver of rising average levels of income risk is that life among the already risky has become even riskier. Indeed, you really need to look to the riskiest 5 percent of the distribution to find the rise in income risk. And this rise in risk among the already risky is so great as to be responsible for nearly all the rise in average income volatility. And who are these riskiest 5 percent? Jensen and Shore find that they are particularly likely to be self-employed. The Jensen-Shore analysis yields an interesting scorecard: Hacker was right on average, but wrong for 95 percent of us. …Perhaps the debate about the Great Risk Shift isn’t such a big deal after all: the best argument for a social safety net is that there is too much risk, not that risk has grown.Full details, including technical wizardry, here.
I’ll keep an eye out for any response from Jacob Hacker, but let me anticipate what he might say. This is from an email he sent in response to earlier questions about his work (the email addresses questions raised by a CBO report that comes to different conclusions about income volatility, something Justin Wolfers discusses in parts of the post above that I didn’t include, and something that Jacob Hacker and Elisabeth Jacobs discuss and attempt to resolve here). I think Jacob Hacker would argue that income volatility is just one dimension of the risk shift he was talking about:
[F]amily income volatility is scarcely the only measure of economic insecurity or the “risk shift” that I and others have discussed. Only one chapter in my book is about family income instability. The rest are about pensions, health care, the decline in traditional job security, the increasing debt burdens reflected in families’ financial balance sheets—in short, about the whole range of economic risks that Americans face. Many of these risks, such as health costs, retirement insecurity, bankruptcy, and mortgage foreclosure, either do not show up in the incomes of working-age people or show up only weakly.
As I put it in The Great Risk Shift, “The up-and-down movement of income among working-age families is a powerful indicator of the economic risks faced by Americans today. Yet economic insecurity is also driven by the rising threat to families’ financial well-being posed by budget-busting expenses like catastrophic medical costs, as well as by the massively increased risk that retirement has come to represent, as more and more of the responsibility of planning for the post-work years has shifted onto Americans and their families. When we take in this larger picture, we see an economy not merely changed by a matter of degrees, but fundamentally transformed—from an all-in-the-same boat world of shared risk toward a go-it-alone world of personal responsibility.”
Originally posted at Economist’s View and reproduced here with the author’s permission.