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Thursday, 21 October 2010

The Politics of Envy

by Laura Rowley

A new study provides more evidence that when it comes to well-being, it's not the amount of money you make that matters, but whether you make more than your peers.

For the study, economists at the University of California at Berkeley and Princeton made use of a court decision that allowed the Sacramento Bee newspaper to create a Web site in 2008 listing the salaries of all state employees, including faculty and staff at the University of California. The researchers contacted a random subset of employees at three UC campuses, informing them about the existence of the site. Some 80 percent of those contacted checked out colleagues' wages.

A few days later the researchers surveyed all campus employees about their use of the site, their pay and job satisfaction, and how likely they were to search for a new job. They compared the answers from workers in the treatment group (who were informed of the site) with those in the control group (who were not). Then they matched survey responses to the salary data.

For people below the median income in their department or work unit, knowing what others earned made them less satisfied with their earnings and jobs overall, and increased the likelihood of searching for a new job. "By comparison, those who are paid above the median experience no significant change in any of these outcomes," the researchers write.

"People tend to react more to what they perceive as a loss than what they perceive as a gain," said David Card, who co-authored the paper with Enrico Moretti and Emmanuel Saez of Berkeley and Alexandre Mas of Princeton. "If you were unsure about where you stood and you find out you are actually below someone else in the department, that's more salient and causes a negative effect. For those who found out they were above the median, the positive effect was zero."

A number of studies have documented a similar correlation between relative income and job satisfaction, happiness and even health and longevity. For instance, Harvard researcher Erzo F.P. Luttmer studied geographic areas of roughly 15,000 people and found that, other things (like satisfaction with one's health and marital status) being equal, Americans who earned less than their neighbors were more likely to be unhappy.

In a separate study, Andrew Oswald of England's Warwick University and David Blanchflower of Dartmouth found when people make relative-income comparisons, they often look at those who earn more — and get upset when their paycheck compares unfavorably. Brookings Institution researcher Carol Graham has found the same effect among upwardly mobile workers in multiple countries. And researchers in Toronto found that actors who are nominated for an Academy Award and win live four years longer, on average, than those who are nominated and lose. In statistical terms, winning an Oscar is "like reducing your chances of dying from a heart attack from average to zero," writes British epidemiologist Michael Marmot in his book, "The Status Syndrome."

In the Berkeley study, researchers also found evidence that access to information about co-worker pay increases concerns about nationwide income inequality among both low and high earners. Specifically, 86 percent of respondents who were privy to their co-workers' pay increases either agreed or strongly agreed with the statement, "Differences in income in America are too large." Only 11 percent disagreed and 2 percent strongly disagreed.

Victor Claar, associate professor of economics at Henderson State University in Arkansas, argues that those macro income-gap concerns are fueled by the same breed of envy that makes someone want a new job when their pay falls below the median. In a speech at the American Enterprise Institute last month, Claar argued that "envious majorities" can pursue bad public policy to "narrow the gap between them and the targets of their envy."

"In a market you are rewarded according to the value you contribute to that system," Claar said in his speech. "And different individuals are endowed with different resources initially, with different talents, different appetites for risk, some work harder than others; and the outcomes in a market system, because it is a meritocracy, are different. And when there are different outcomes, there is the potential for this sin of envy."

Policies that attempt to address what's really a moral failing can be damaging to employment and economic growth, Claar told me in an interview. Better to address envy in private: "If you feel sad when someone else experiences good fortune, no one is miserable in that story but you, and you need to work that out by talking to your friends or your priest, rabbi or minister," says Claar.

"If our choice is between envy and attempts to fix it by changing rules of the game, I think we've already seen that makes people furious," Claar continues. But if everyone plays by same rules, at least you feel the game was played fairly and the system treated everyone equally, he says.

Therein lies the problem. Not to fuel the populist flame, but many Americans diligently followed "the rules" — getting a college education, working hard in their careers, buying a home with a reasonable down payment, saving for retirement and their children's college, and not treating their house like an ATM. And what they got for their efforts were stagnating wages, unemployment, underwater mortgages and diminished savings. They were plodding along, pursuing the American dream, and they got robbed.

Moreover, their outcomes were different precisely because not everyone played by the same rules. For instance, under the old rules, if you took a big risk that went sour in a market economy, you lost your shirt. Under the new rules, that only applies to people and institutions that aren't too big to fail.

Under the old rules, when you fell, you had to pick yourself up and start from the bottom. Under the new rules, that only applies to people and institutions who aren't the beneficiaries of government largesse. One example is the loosey-goosey monetary policy that has allowed financial institutions to profit and pay a record $144 billion in compensation and bonuses, while doing very little of the lending to individuals and small businesses that the largesse was intended to facilitate. It's worth noting that the banks weren't rewarded with profits for the "value they contribute to the system," as Claar would put it, but because they didn't need to set aside as much to cover loan losses, since they aren't increasing their lending to Main Street.

I believe in the market system, when it really is merit-based, because it fosters economic growth that can lift up the poor. In 1999, when the economy was gangbusters, I volunteered in a program that taught life skills to formerly homeless drug addicts and helped them find jobs — and we could find them for people who'd spent a decade on the streets, and time in jail. They didn't want handouts or bailouts, they just wanted work. And when they found it, the effect on their lives, their confidence and their happiness was profound.

I also think envy is inevitable in a market system, because all earned success contains a measure of good luck. People can start out with the same goals and aspirations and then life intervenes. Two people earn their CPAs and work diligently and honestly, and in 2001 both make partner — one at Ernst & Young, the other at Arthur Andersen. Through a connection, one gets a piece of the Google IPO and one invests with Bernie Madoff. One gets cancer while the other doesn't.

Social comparison, envy and status-seeking have been part of the human condition since Cain and Abel. But that's not the source of the populist anger. It has to do with the glaring disconnect between value contributed and reward received. It's a recognition that the current rules of the game have created perverse incentives and moral hazards. It demands a public discussion about which rules foster an optimal level playing field, which rules serve the free market system best. And it has nothing to do with envy.

1 comment:

Anonymous said...

I definitely want to read a bit more soon. By the way, rather good design you have here, but how about changing it from time to time?

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