links for 2007-07-06
Advice from Andrew Samwick for Economists Who Want to Advise

Mark Thoma Directs Us to Jacob Hacker on Income Volatility

From Mark Thoma: less of a risk increase than I had thought:

Economist's View: Income Volatility and The Great Risk Shift: Jacob Hacker has revised his estimates of the degree of [the rise in] income volatility:

"Hacker Revises Down Findings on Income Volatility," by Greg Ip: Jacob Hacker, the Yale University political scientist ... caused a stir a few years ago with a study showing that the volatility of household income had tripled between the 1970s and 1990s... Mr. Hacker has reanalyzed the data and concluded volatility rose 85%, instead of more than 200% as he originally calculated....

Both studies were based on the University of Michigan’s Panel Study of Income Dynamics... But Mr. Hacker supplemented the PSID data with another data base, the Cross-National Equivalent File. Mr. Hacker says that step may have artificially boosted volatility. He also agrees... that changes to the PSID in the early 1990s led to an artificial increase in households with zero income. Adjusting for those factors significantly reduces the increase in volatility from Mr. Hacker’s original estimate...

Kudos to Hacker for the reanalysis, which I find somewhat reassuring--but only somewhat. It still looks like there is significant reason for an increase in what Barbara Ehrenreich calls the "fear of falling" out of middle class status.

I still, however, don't have a good handle on how much of the increase in the potential for downward mobility is welfare-enhancing. Divorce can be a good thing or a bad thing for one or both of the spouses. If your income falls but you are, all in all, happy to be free of that cad, should a rise in the divorce rate that produces downward income movements be regarded as a risk? How about surviving a heart attack or a cancer attack that would have killed you a generation ago--your income has fallen, but you have your life?