Scott Sumner  

More Ginis please

Cruise Ships and Private Plots... AARP on Drug Prices...

The Gini coefficient is a popular tool used by economists to measure economic inequality. Unfortunately, economists tend to rely on income data, which is not a very good measure of economic well being. Conceptually we'd like to use consumption data, but that is more difficult to measure.

This article caught my attention:

In Real Wage Inequality (PDF), author Enrico Moretti looks at cost-of-living data in U.S. cities from 1980 to 2000 in order to determine whether growing nominal wage inequality is really indicative of a growing disparity in living standards. Because college-educated workers are more likely to live in cities with higher costs of living, especially higher housing costs, some of their newfound income gains must go toward paying for life in these expensive areas. The growing disparity in wages that we observe is partially an illusion.

Whether the wage inequality we see in the data translates into actual inequality in standards of living turns on a key question: are college-educated workers grudgingly relocating to expensive cities because that's where they can be the most productive and earn the most? Or is it because they really like those cities and are willing to pay more to live there?

If the former is true, high-skill jobs in sectors like finance and technology just happen to be concentrated in coastal cities that are not especially attractive places to live, but do have high housing costs. In this scenario, high-skilled workers are unlucky in where their jobs are located, and inequality is not as severe as it appears from income data alone.

If the latter is true, then living in these expensive cities is a sort of luxury good that is increasingly only affordable for the well-educated. High-skilled people choose to relocate there because they can command high incomes to afford the higher rents. Meanwhile, low-skilled people living in these cities face rising rents and may have to move away.

These possibilities are not mutually exclusive, and there is probably some truth to both stories.

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I find a third hypothesis to be more plausible. I believe that residents of 2000 sq. foot condos on the Upper East Side are better off than they would be living in a 2000 sq. foot home in Kansas. And I also believe that residents of 2000 sq. foot homes in Kansas are better off than they would be living in a 2000 sq. foot condo on the Upper East Side.

Tastes differ, and people sort into areas where they prefer to live. Of course I'm staking out an extreme position, and there are obviously lots of exceptions. But that's also true of the other two hypotheses.

It would be very interesting for someone to take a data set like Zillow and compute the Gini coefficient for the value of housing units, and another one for the size of housing units. The value of house Gini would probably show much less inequality than income Ginis, and the size of house Gini would show even less inequality. Unfortunately, this only deals with owner occupied units, so another technique would be needed for apartments.

I also believe that the value of house Gini would be a decent proxy for nominal consumption inequality, as consumption is often roughly proportional to housing costs. In one sense it would underestimate housing inequality----richer people often own multiple homes. But in another sense it would overestimate housing inequality, as "life cycle changes" result in measured inequality even in a society where everyone has the same lifetime consumption. I.e., I consume much more housing than when I was 20 years old. My hunch is that these two biases roughly offset, leaving value of housing unit inequality a pretty good proxy for nominal consumption inequality.

And I'd say the same about the Gini for housing size. I'd guess this is much lower (i.e. more equal) than the Gini for housing values, and I'd also guess that this reflects the fact that real consumption inequality is not as bad as nominal consumption inequality. Residents of San Francisco may consume more than residents of Kansas, but their extra consumption is much less in real terms than in nominal terms.

These are all guesses on my part, and maybe someone has already studied this type of inequality data. It's not my area of expertise. But if I did focus on inequality, housing data would interest me far more than income data.

HT: Tyler Cowen.

Comments and Sharing

COMMENTS (8 to date)
Colin W writes:

Scott, have you seen this paper: ?

It takes a different approach towards measuring consumption inequality, but it seems to be the most careful about measurement issues.

Shane L writes:

"...are college-educated workers grudgingly relocating to expensive cities because that's where they can be the most productive and earn the most? Or is it because they really like those cities and are willing to pay more to live there?"

Unquestionably the former for me. I find city life depressing, but this is where the work is. Having to pay vast sums of money for the privilege of living somewhere I don't want to live does gall, but for the moment my qualifications match me to jobs that coalesce around the city.

Scott Sumner writes:

Colin, Yes, I do recall that paper. Am I right that it focuses on nominal inequality?

Shane, I don't doubt that there are many people like you. That is a potential problem for studies such as the one cited by Colin.

Cullen writes:

To offer an anecdote on the other end of Shane's, I moved to central Illinois from Chicago. Pay was good, especially for the area, and rent is laughably cheap by comparison. A couple years later I move back to the city for another job. Pay is better but basically completely wiped out by the cost of living adjustment. But to me that's fine, Chicago offers a lot more to do in my free time than Bloomington-Normal. To me, a twenty-something college educated person, the thought of living in the suburbs or a small town seems brutally boring and I don't even go out that much compared to most people I know.

Colin W writes:

Here is the relevant quote from the Aguiar and Bils paper:

"Income, saving, and household total expenditures are expressed in constant 1983 dollars using the CPI-U. Note that we use the aggregate CPI to deflate total expenditures, and do not deflate separately by expenditure category. This keeps all elements of the budget constraint in the same units. All results based on individual expenditure categories are expressed for one set of households relative to others (e.g., high versus low income) at a point in time, so price deflation is not an issue."

So it wouldn't fully control for the point raised about strictly cross-sectional differences, if I am understanding everything correctly (which is a big if...).

Scott Sumner writes:

Colin, Yes, it's the cross sectional differences that interest me. And the differences in tastes.

Hazel Meade writes:

I agree. House Gini would be a better measure of net wealth - real estate. Even better would be net equity in housing, to account for the fact that some people may owe more and have less equity in their homes than others.

Cullen, I felt the same way in my 20s, but now that I have kids, suburban life is more appealing. Suburbs have nice parks and playgrounds and swimming pools and lower street traffic, lower crime, better schools, etc. etc. All nice stuff for children.

Urban areas have bars and restaurants and clubs and shops - nice stuff for single people in their 20s.

Hazel Meade writes:

Hmm. Apparently someone already did this.

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