Does the CBO Report on Income Volatility Undermine Jacob Hacker's "The Great Risk Shift"? No it Doesn't...

Ever since this CBO report on individual earnings volatility came out, there have been questions raised about whether it undermines Jacob Hacker's work in The Great Risk Shift showing increases in economic insecurity over time. For example, this article by David Leonhardt in the New York Times highlights the CBO results, Greg Mankiw notes the results here, and Tyler Cowen says:

Leonhardt agrees with my view that the recent CBO report effectively counters Jacob Hacker on "the great risk shift." Until we see further evidence to the contrary, that thesis belongs in the "simply isn't true" pile.

However, the CBO results do not effectively counter Jacob Hacker. By email, Jacob explains why:

Jacob Hacker: I have received many questions about the Congressional Budget Office’s (CBO) recent report that finds that individual earnings volatility, while extremely high, has not risen since the 1980s. Although this new research significantly expands what we know about individual earnings volatility, it does not challenge my contention that family income volatility has grown, nor is it at odds with my larger argument that the level of economic risk that families face has risen dramatically.

The distinction between individual earnings and family income is often missed, so it is important to emphasize that there’s no reason why trends in individual earnings instability and trends in family income instability need to match up. Unlike earnings volatility, family income volatility hinges on (1) the joint labor supply decisions of workers in the family; (2) family formation, expansion, contraction, and dissolution; (3) the earnings and losses of family-owned businesses and capital holdings; and (4) government taxes and benefits. Each of these could cause individual earnings volatility and family income volatility to follow different paths.

In fact, it’s been clear for some time that family income volatility and individual earnings volatility have followed different paths. For example, Peter Gottschalk and Robert Moffitt, in their pioneering work on male earnings instability, have shown that there has not been a secular rise in male earnings instability since the early 1980s—a finding confirmed by the CBO study (which, because of data limitations, was not able to look at earnings instability among all workers before 1981). Since I essentially adapted Gottschalk and Moffitt’s technique to look at family incomes, it’s not surprising that in my own analyses of individual earnings volatility (not reported in my book, The Great Risk Shift), I too did not find a consistent rise in individual earnings volatility since the early 1980s—even as I did find a consistent rise in family income volatility.

It is enormously valuable that the CBO is looking into this subject and bringing new data to bear on it. We are continuing to see that the United States has extremely high levels of personal financial instability, especially given how favorable and stable our macroeconomic indicators have been. And, in the process, we are gaining a rich new picture of the economy that’s much closer to the lived experience of Americans.

We are also learning much more about the strengths and weaknesses of alternative sources of evidence and alternative techniques—and I have been incorporating what we have learned into a major reanalysis of family income volatility currently underway at Yale, which will incorporate newly available data as well as refine my original estimates. I hope to be able to release all my updated findings soon.

Nearly all research on family income dynamics, including my own, has relied on the Panel Study of Income Dynamics, a longitudinal survey that has followed a nationally representative sample of American families since the late 1960s (with an initial over-sample of low-income respondents). The PSID is unmatched as a source of long-term data on the over-time income dynamics. Still, the PSID is a survey, and thus has the weaknesses all surveys do: people may misreport their income, they may not be reachable, and so on. Fortunately, there is little reason to think these weaknesses have grown over time, so we can be pretty confident that trends in income instability are caused by real changes, rather than changes in the accuracy of reporting.^*

By comparison, the CBO’s data source, Social Security wage records, should be more accurate. For this reason, it is good news that the CBO analysis of Social Security wage data finds the same basic trend in individual earnings instability that researchers using the PSID have found. However, Social Security wage records don’t permit examinations of total family income. This is a big shortcoming, because family income is ultimately what most of us care about. We are interested in earnings dynamics, to be sure, but ultimately we want to know how those dynamics affect family’s resources and well-being. How do government taxes and benefits and the joint labor supply decisions of working family members respond to earnings shocks and other income risks? Have they cushioned individual earnings shocks as well as in the past? What the PSID evidence suggests is that they have not—family income instability has risen despite the lack of a clear trend in individual earnings instability.

Finally, while the PSID evidence indicates that family income volatility has gone up, family 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.”
_________________________________
* As Peter Gottschalk and Robert Moffitt explain in a seminal 1994 paper on earnings variance, while estimates of earnings instability based on PSID data are “unquestionably biased upward, the issue is whether the bias has changed over time. We know of no evidence that it has…[N]or is there any reason to suspect that respondents themselves have become more erroneous in their reporting over time; in fact, most survey research indicates that respondents become more accurate the longer they remain in the survey.”

One more note. Jacob tells me, as he notes above, that he is working on new estimates for public release that take account the questions he has received on his work. So if what Jacob has written above does not leave you convinced, I urge you to withhold judgment until you’ve seen the new work.

---

Update: Two more notes on interpreting the CBO results. First, the CBO report doesn't include self-employment earnings, which are probably more volatile. This is worth noting because rates of self-employment trended upward through the mid-1990s. That is, the CBO data excludes a source of increasing volatility and therefore likely underestimates both overall volatility and the change over time.

Second, there is an additional source of volatility excluded from the CBO report. The year-to-year change of labor earnings doesn't capture big periods out of the workforce, because you just disappear from the dataset. Family figures will capture that because you're likely to have some other income (family members, benefits, etc.). This is likely important because of the rise of long-term unemployment, structural displacement, etc.

Comments

[knzn]

I wish he would give some more particular examples, or intuitive stories, of how family income volatility could differ from individual income volatility. My first thought regarding joint labor supply was that, with women more available for work, family income volatility should have gone down: if the husband’s income goes down, the wife is more likely to be able and willing to take up the slack. Then it occurred to me, that describes the situation at the beginning of the study, when women’s labor force participation was more of a maybe – perhaps if one were comparing the 1980s and the 1960s. Today, the wife probably already works full time, and if the husband’s income declines, there is no possibility to replace that income.

[robertdfeinman]

I think a study of attitudes would be interesting. I think that people feel less secure these days than they did in the "job for life" period.

Having an economic reversal happen personally or seeing it happen to someone that one knows well must have some psychological impact. This has to lead to increased stress and, perhaps, even to a change in attitude.

The results could be counterintuitive. For example a fear that one may face hard times later may inspire people to live for today on the theory that one should spend it while one has it. Certainly we see this type of behavior frequently in lottery winners.

Conversely the uncertainty may make some people more conservative and increase the chances that they will become more religious, for example. If this life is going to be tough why not focus on the hereafter instead. This trend has also been noticed in the past.

Another alternative is to give people a feeling of hopelessness and thus make them more politically disconnected. Thomas Frank's question as to why those in the working class weren't more outraged by their status could be answered by examining the level of despair. The lack of a populist movement in the face of the rise in inequality has been one of the puzzles of our time.

Not everything can be measured by using economic data, but attitudes are difficult to determine and their effects even more so. This doesn't mean that they aren't important.

[anne]

Remembering Mark Thoma's gratefulness for safety regulation:

http://www.nytimes.com/2007/04/25/washington/25osha.html?ex=1335153600&en=5f7c9be56bc00099&ei=5090&partner=rssuserland&emc=rss

April 25, 2007

OSHA Leaves Worker Safety in Hands of Industry
By STEPHEN LABATON

WASHINGTON — Seven years ago, a Missouri doctor discovered a troubling pattern at a microwave popcorn plant in the town of Jasper. After an additive was modified to produce a more buttery taste, nine workers came down with a rare, life-threatening disease that was ravaging their lungs.

Puzzled Missouri health authorities turned to two federal agencies in Washington. Scientists at the National Institute for Occupational Safety and Health, which investigates the causes of workplace health problems, moved quickly to examine patients, inspect factories and run tests. Within months, they concluded that the workers became ill after exposure to diacetyl, a food-flavoring agent.

But the Occupational Safety and Health Administration, charged with overseeing workplace safety, reacted with far less urgency. It did not step up plant inspections or mandate safety standards for businesses, even as more workers became ill.

On Tuesday, the top official at the agency told lawmakers at a Congressional hearing that it would prepare a safety bulletin and plan to inspect a few dozen of the thousands of food plants that use the additive.

That response reflects OSHA's practices under the Bush administration, which vowed to limit new rules and roll back what it considered cumbersome regulations that imposed unnecessary costs on businesses and consumers....

[anne]

http://www.nytimes.com/2007/04/27/opinion/27fri2.html?ex=1335326400&en=c35970d795bae7b5&ei=5090&partner=rssuserland&emc=rss

April 27, 2007

Crippling Government From Within

The Bush administration has proved indefatigable at finding industry foxes to upend the regulatory chicken coops. The result has been an undermining of restraints on everything from strip miners to long-haul truckers and corporate executives intent on consumer-unfriendly mergers.

One of the most zealous of the antiregulatory ideologues is Edwin Foulke, tapped by President Bush last year to run the Occupational Safety and Health Administration. As South Carolina's Republican Party chairman and an anti-union stalwart, Mr. Foulke worked tirelessly to weaken the agency's enforcement authority on workplace safety. Now that he is OSHA's chief, he is moving even more aggressively away from regulations in favor of corporations' pledges to police themselves....

[Bruce Wilder]

I suppose my sympathy with the devil is just coming up short, this morning, but what Tyler Cowan wrote just reinforces my feeling that he is an untrustworthy narrator.

Leonhardt's article was far more careful. Leonhardt notes that individual income volatility is not the same as family income volatility. And, Leonhardt never doubts the phenomenon -- that people feel squeezed and at risk -- even if he isn't sure how it relates to the statistics.

Jacob Hacker is able to reiterate his thesis, pretty easily: "it does not challenge my contention that family income volatility has grown, nor is it at odds with my larger argument that the level of economic risk that families face has risen dramatically."

Really, how hard is it to remember Hacker's thesis?

knzn fumbles around a bit on the implications of two-income households, but it seems to me, that, if you focus on economic risk, it is not that hard. Back in the day, households whose economic life was built on expectations regarding one spouse's income, had the insurance option of substituting the other spouse into the workforce. Households that depend on both incomes, are vulnerable to either (or both, simultaneously) losing income.

And, the economic risk depends not on job income volatility, but on the consequences of income loss and its insurability. Back in the day, health costs were much less in proportion to the average person's income, so even if you were uninsured, the chances of being able to afford a hospital stay or medical procedure were much better. People were not routinely bankrupted by health emergencies, as is now the case. Back in the day, we had usury laws, and the chance that your credit card (or equivalent short-term loan source) was going to bump your interest rate to 33% was nil. And, on and on.

Leonhardt, to his credit, proposes that increasing inequality has something to do with the "squeeze" and anxiety felt by the middle class, even if individual job income volatility is not a major factor. He doesn't do a particularly good job with it, but intuition is not bad.

Income distribution and risk distribution are related in such a fundamental way in economics, that it always amazes me when people glide past it.

[save_the-rustbelt]

If I lose my pension at age 50 how does that fit into the measurement?

Economists crunch a great deal of data but I don't think they see reality, sort of like the old story of the blind men who feel different parts of an elephant and then try to describe what it was.

[spencer]

The point so much of this discussion is missing is the changed nature of lay offs since 1980.

prior to about 1980 the typical mass lay off was a blue collar manufacturing worker. But it was a temporary lay off and most of these people expected to return to the same job after a short period with their seniority and fringe benefits -- including pension -- intact. Now lay offs are not temporary. The laid off employee is permanently gone from their old job and has to find new employment. Moreover, usually at the new job the worker has to start from scratch to reearn the seniority and fringe benefits they had accumulated at the old position.

The studies that simply look at the drop in individuals current income or the number of individuals employed
that we are now discussing are highly biased because they ignore this massive change in the nature of lay offs in the economy over the past quarter century.

[anne]

Now, on reading a series of letters to the New York Times on safety at work and the struggle to gain safety regulation and the several decades of struggle in favor of suspect industry self-regulation, I finally understand this relates directly to Jacob Hacker's fidnings of risk shift to households.

[anne]

http://www.nytimes.com/2007/04/29/opinion/l29osha.html

Protecting Industry, Not Workers

To the Editor:

"OSHA Leaves Worker Safety Largely in Hands of Industry" demonstrates how the voluntary compliance approach favored by business interests and put into effect by the Bush administration fails to protect workers' safety and health.

Labor's movement for safety and health rights was inspired by the civil rights movement of the 1960s and culminated in the passage of the Occupational Safety and Health Act of 1970. For the first time in American history, workers had the right to resist unsafe working conditions, to have OSHA inspect their workplace and to know if the materials they were working with violated OSHA safety standards.

President Bush's voluntary compliance approach is a smokescreen for the evisceration of OSHA. It is tantamount to turning regulatory authority over to business interests, and workers have little choice but to assume the risk of getting injured, ill or killed on the job. Voluntary compliance is nothing more than the rollback of every American's right to safe and healthful working conditions.

Vernon Mogensen
Brooklyn, April 25, 2007
The writer is an associate professor of political science at Kingsborough Community College.

[anne]

http://www.nytimes.com/2007/04/29/opinion/l29osha.html

Protecting Industry, Not Workers

To the Editor:

OSHA's defense of its inaction on behalf of American workers only confirms its insensitivity to the families of the people it is supposed to "protect."

In modern times, when pro-business administrations occupy the White House, they defang the regulatory bureaucracy by wiping out agencies, appointing heads of agencies in bed with the industries under their authority, cutting their staffs as well as budgets and conducting studies to delay taking action.

In the mid-1980s, when I was the mayor of University Park, a suburb of Chicago, I once asked the president of our industrial park's largest corporation about the truth of claims that American industries were subjected to excessive governmental regulation. He responded: "Well, it is not all that bad. When the Democrats are in office we can work it out with them, and when the Republicans are in office, no one comes around."

[anne]

http://www.nytimes.com/2007/04/29/opinion/l29osha.html

Protecting Industry, Not Workers

To the Editor:

Industry influence on OSHA standards did not start in the Bush administration. Since its inception in 1970, industry has fought to weaken OSHA. The standards originally adopted by OSHA were heavily influenced by industry lobbyists.

These original standards have not been substantially updated over the last 37 years to reflect newer scientific understanding of toxic effects. Worse, for 37 years OSHA has consistently ignored recommendations by the National Institute for Occupational Safety and Health to issue new standards or revise existing ones.

Consequently, millions of working people have been and are currently exposed to levels of toxic substances that are known to cause illnesses like cancer, reproductive problems and other often devastating health conditions.

Joel Shufro
New York, April 26, 3007
The writer is executive director of the New York Committee for Occupational Safety and Health.

[paine]

bw
right you are to doubt a tyler cowen story

fortunately
tyler cowen is greg mankiw
with three quarters
of his brain removed
so spotting the deceptions
is fairly easy

viva george mason
may he try to rest in piece given the profaning of his name
by that squalid ding dong college
tyler c here so perfectly embodies

[Barry]

Bruce Wilder says...
"I suppose my sympathy with the devil is just coming up short, this morning, but what Tyler Cowan wrote just reinforces my feeling that he is an untrustworthy narrator."

Go with that feeling; save your sympathy for deserving people.