Inequality at the Threshold

January 2, 2011
Posted by Jay Livingston

Economic inequality in the US has been increasing, but mostly because of sky’s-the-limit incomes at the top. The relative inequality among the rest of us, the bottom 95% or even 99%, has remained fairly stable. But the six-figure income of thirty years ago has become a 7- or 8- figure income today.

(Click on the graph for a larger view. The original, via Lane Kenworthy, is here. )

Tyler Cowen, in a recent article that’s been getting some attention, says that our biggest concern, morally and economically, should be with the elephantine incomes of people in the financial sector.

In short, there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. This is not good.

Today’s greedy Gordon Geckos game the system. As we saw in the 2008 meltdown and bailout, it’s heads they win, tails we lost. This view, though, turns out to be politically controversial. Blaming the system (unregulated speculation, no downside risk) and the greediest doesn’t sit right with conservatives.

But how then to explain the inequality at the top? By blaming those who are just not greedy enough.

Seriously. Reihan Salam at National Review Online reads Cowen’s article and homes in on a what Cowen calls “threshold earners . . . . someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often.”*

Cowen also says that

any society with a lot of ‘threshold earners’ is likely to experience growing income inequality . . . If the percentage of threshold earners rises for whatever reasons, however, the aggregate gap between them and the more financially ambitious will widen. There is nothing morally or practically wrong with an increase in inequality from a source such as that.

Cowen doesn’t offer any evidence, probably because it would be very hard to measure the threshold attitude. Nor does he even guess as to how much inequality it accounts for. But Salam uses the idea to argue that when we look at the graph we should see not the outcome of an economic and political system. Instead, it’s a matter of personal preference – the personal choice not to earn as much as possible.

The measured stagnation in wages and to a lesser extent in compensation is thus seen as an artifact of political economy rather than a phenomenon that is driven in no small part by changing preferences.** [emphasis added]

For conservatives, the individual-preference model accounts for inequality at the bottom as well as at the top. They see unemployment, for example, as individuals choosing not to work. That, plus unemployment compensation – the princely $300 per week (“paying people not to work” in the words of The Wall Street Journal) that subsidizes the choice to avoid working. (As Dave Barry says, I am not making this up. See my earlier post on this is here.)

The trouble is that we don’t know much about threshold earners. As Salam says, “this has been a pretty darn un-rigorous discussion, as we’re talking about phenomena that are hard if not impossible to measure.”

Even so, I don’t see the logical connection between the threshold orientation and inequality. My first guess was that threshold earners would decrease inequality, not increase it. Andrew Gelman thought so too.

Both Gelman and Salam quoted a paragraph from Cowen’s article that begins

The funny thing is this: For years, many cultural critics in and of the United States have been telling us that Americans should behave more like threshold earners. We should be less harried, more interested in nurturing friendships, and more interested in the non-commercial sphere of life.

Cowen says that such cultural change will increase inequality. Again, we have no evidence. But when I read those sentences, I kept hearing the word that dare not speak its name – France. Or Europe generally. That’s where people spend less time working and more time enjoying life. (The French, on average, spend a full hour per day more than we do à table – and not just because their food is better.) Nearly all Europeans, on average, spend more of life in the non-commercial sphere. This mentality extends, or possibly even begins, in the upper reaches of the income scale. Yet European countries have much less inequality than does the US. As I recall, Tyler Cowen spent some time last summer in Germany, so I find it especially curious that in his article, he makes no cross-national comparisons.

*Anyone who took Sociology 100 knows that threshold earners. are nothing new. In The Protestant Ethic, Weber writes of the frustration of employers who try to get more worker output by offering piece-work incentives rather than a flat hourly wage. This strategy runs into

a peculiar difficulty: raising the piece-rates has often had the result that not more but less has been accomplished in the same time, because the worker reacted to the increase not by increasing but by decreasing the amount of his work. [The worker] did not ask: how much can I earn in a day if I do as much work as possible ? but: how much must I work in order to earn the wage, 2 ½ marks, which I earned before and which takes care of my traditional needs? [Chapter II, online here.]

Weber, lacking the vocabulary of modern economics, referred to these workers not as “threshold earners” but as “traditional.”

**The passive voice (“is thus seen as”) obscures Salam’s point – two points really. First, that the usual ways of measuring income inequality are not “useful,” and second, that what drives inequality is individual preference, in this case, preference for things other than income.