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Thursday, September 07, 2006

The Middle Class Risk-Return Tradeoff

The American Prospect is running a series on the middle class:

Debating the Middle, American Prospect: TAP Online is hosting an ongoing exchange about the economic state of the middle class and the right political appeal to reach middle-income Americans. Stephen Rose and Lawrence Mishel kicked things off with opening articles on Monday, and initial responses from others are included below. This page will be continuously updated as new contributions are added.

Because the topic of risk has come up in comments a few times today, and because I agree with what is said, let me highlight and say a few words about the paper by Jacob Hacker:

The Real Issue is Risk., by Jacob S. Hacker, American Prospect: ...I ... [believe] that political candidates and leaders should, first and foremost, offer a message of truth. And the truth is that, after a generation in which more and more economic risks have been shifted onto the shoulders of hardworking middle-class Americans, the middle class is insecure and in need of a serious agenda of economic change.

Rose offers up a good deal of statistics to show that American incomes are higher than in the past -- which is hardly in dispute (though I am not sure how cheered most middle-class families will be to discover that their incomes would have risen by less than 10 percent in a quarter century if family work hours had stayed constant.) But, ironically, ... Rose is almost completely silent about the biggest and most important trend: the rising risk to the economic well-being of families posed by the post-1970s transformation of our economy, including the substantial decline of employer and governmental policies of insurance (which Rose vastly understates). ...

[T]he size of year-to-year swings of family income has skyrocketed since the early 1970s. Meanwhile, the chance that families will experience large income drops has risen dramatically. Indeed, this sort of instability -- how far people move up and down the income ladder over time -- has grown much faster than income inequality -- the gap between people on different points on the income ladder. And while low-skilled workers have long borne the brunt of these changes, the educated are getting hit harder and harder. People who went to college now experience as much income instability as people without a high-school degree did in the 1970s.

This risk is completely invisible in most of the statistics that Rose cites (and, indeed, in most of the statistics that economic commentators routinely throw about). But it is at the heart of the increasingly negative verdict of most Americans -- and, yes, married Americans with degrees and kids -- about the direction of the economy. And it is the issue with the greatest potential to unify Americans across lines of class, race, and education behind a new economic agenda that provides a basic foundation of security so as to guarantee true opportunity. It is also, not incidentally, the issue with the greatest potential to create a powerful new coalition behind the Democratic Party...

That is the point I was trying to make here in response to a paper presented here awhile back and noted by Greg Mankiw more recently showing that mean job tenure has not changed for some groups. Unchanged or rising means does not tell us that volatility - i.e. risk - is also unchanged or falling. There is no reason to presume that a rising standard of living necessarily corresponds to workers being better off if risk is also increasing. In financial terms, the increased expected return from employment may not compensate for the increased risk. Thus, although much of the debate has centered around whether measures such as real compensation have increased over time, if rising risk is an important feature of changes since the 1970s, and there is reason to think that it is, those who only look at means will likely remain puzzled as to why families do not report improved economic conditions.

    Posted by on Thursday, September 7, 2006 at 02:58 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (21)

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