Arnold Kling  

Russ Roberts vs. the Great Whatever

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He writes.

So my challenge to Tyler is to tell me what he thinks the stagnation in median income signifies. Has there been a change in the returns to education or creativity? Or is it mostly a statistical artifact? Whichever answer he gives, I would like to see him reconcile it with the panel data-the surveys of economic information that follow the same people over time.

Just about every journalist, and even most economists, talk about cross-sectional slices of the income distribution at different points in time as if they were trends among cohorts. Thus, if you say that "real incomes of workers with only a bachelor's degree declined over the past ten years," that sounds as if a particular cohort of college graduates experienced a decline in real income. In fact, what it says is that in a cross-section of workers in 2010, those with a college education have lower average real incomes than those in a cross-section in 2000.

In theory,the following could have happened:

1) The real income of every single college-educated worker went up between 2000 and 2010.

2) However, many high-income college-educated workers aged out of the labor force over that period and many moderate-income college-educated workers joined the labor force.

If the effect of (2) overwhelms the effect of (1), the data would show that "the real incomes of college-educated workers declined." It could turn out that, when all is said and done, the current cohort of college-educated workers will have lifetime incomes that far exceed those of those who retired over the past ten years.

The longer the time interval that you are comparing, the more serious this issue becomes. I do not think it distorts comparisons of 2010 with 2000 by very much.* But I think comparing 1973 to 2010 using cross-sectional slices is really hazardous.

(*You can argue that 2000 is a cyclical peak and 2010 is close to a cyclical trough, and that is a problem. That is, you can argue that. Not me. The PSST perspective is that the economic restructuring is the story of the decade, not some temporary shortfall of aggregate demand.)

My list of data points for the Great Factor-Price Equalization would include:

--rising incomes in developing countries, even in Africa.

--a dramatic slowdown in the earnings gains of all but the very-highly-educated in the U.S. I believe this data point can survive the not-a-cohort critique given above.

--polarization of incomes occurring in other OECD countries, not just the U.S.

--manufacturing output rising in the U.S. while manufacturing employment is flat

--anecdotal evidence of the pattern of creative destruction: Borders bookstores closing while sales of books on e-readers soar; video streaming displacing physical movie rentals; etc.

Where I disagree with Tyler is on the "stagnation" interpretation. I agree that as a society, we are throwing away a lot of money in our health care, education, and homeland security sectors, and we are probably not getting much return on that. But in spite of all that waste, I think there is still considerable technological progress. I am inclined to agree with Russ that the plight of the not-highly skilled worker in the U.S. these days is a symptom of the rapidity of technological progress, not a slowdown.

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CATEGORIES: Income Distribution

COMMENTS (8 to date)
R Richard Schweitzer writes:

Does anyone look at this "stagnation" as possibly part of a broader stagnation of Western Civilization, which has ceased to expand?

Are we not seeing some evidence of that broader stagnation in the conflicts of the past century and currently in the deterioration of the peripheral areas?

BD writes:

I agree with the analysis. But the value of technological progress is ephemeral. What value does Facebook really have? It's enjoyable, but if it were shut down tomorrow what would you do differently? Rather than earnings per household or earnings per capita, why not focus on CEO vs. line worker earnings? The norms of society are based on relative as well as absolute value. The elites need to realize that revolution comes from the upper-middle who are the ones that realize the situation and can do something about it.

8 writes:

The stagnation begins right at the start of feminism. As one blogger put it, women are in the workforce so that their grandfathers can play golf. Earlier retirement for the higher earners.

Also, consider the racial makeup of the median male worker in light of immigration, compared to statistics on average income by race.

joecushing writes:

If you are going to compare income over time, it's best to pick an age bracket rather than a cohort. Only using age brackets, can you tell if incomes are rising and falling. If you follow a cohort, you'd say that income is increasing because people earn more with experience. Meanwhile, the cohort could be earning more or less than their parrents at the same age.

Lord writes:

Your theory would require significant shifts in population structure, more than has actually been occurring.

Dave Schuler writes:

An alternative explanation is that total compensation has risen with much of the increase being taken in the form of higher priced healthcare insurance. The more education, the greater the likelihood that healthcare insurance will be part of the compensation package.

kyle8 writes:

In my view statistical analysis across time usually does not do a good job of fully taking into account the actions of government.

Not just taxes, but also regulatory environment, and hostility/non-hostility to commerce. These things wax and wane with differing regimes.

Vincent writes:

Make me think those compiling the statistics should present them in a way that makes it more difficult for the media/politicians to miss represent.

" I agree that as a society, we are throwing away a lot of money in our health care, education, and homeland security sectors, and we are probably not getting much return on that. "

What if want to spend a lotnof money on this. Does this then mean it is not wasted? How do you define a good as waste? It is not clear to me that it actualy matters what we spend moony on but rather if we freely spend it or must spend it.

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