catallaxy files

catallaxy in technical exile

Objective vs. subjective income position

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Many people think that there is something to the ‘relative income hypothesis’: that poor people’s feelings of relative inferiority means that their happiness does not increase over time, even though their income does go up. People I will call the left-utilitarians see this as a justification for reducing income inequality – the poor won’t feel so bad if the rich are taken down a notch or three by high taxes, and they will feel better still if the money is redistributed to them through welfare and social services.

One difficulty with this argument is that it assumes that a change in objective circumstances (ie, income) will translate into a change in subjective feelings (ie, how people feel about their position in society).

Research has consistently shown that people aren’t very good at locating their economic position. In his book The Ends and Means of Welfare, tax-and-spend Peter Saunders has a table of mid-1990s survey results in which people were asked which income quintile they were in, which Saunders then compared to ABS data. Of the respondents with incomes placing them in the poorest quintile, just under a quarter realised that they were in fact part of the poorest 20% in Australian society. Nearly half thought they were in the second quintile, and another quarter promoted themselves to the middle quintile.

But compared to the well-off, the poor had a firm grip on reality. Of the respondents with incomes in the top 20% of the actual income disribution, 2% correctly located their relative income position. Just over half thought they were in the middle, and an entirely deluded 11% thought they were in the second-poorest quintile.

In the 2005 Australian Survey of Social Attitudes we can see that the self-deception continues. It used more expressly relative language: below average, average, above average, etc. This seems to have improved accuracy somewhat (there is a fair bit of clustering in the mid-range of the income data that could contribute to wrong quintile guesses), but there is still significant error. For example, about 30% of people with family incomes $20,000 or more a year below the actual average family income thought that they were ‘average’. And again the well-off were less aware of their true position than the poor, with 36% of those in households earning $20,000 or more a year above the actual average thinking that their income was only ‘average’.

How do people get it so wrong? Partly I think it is the very conspicuous consumption at the very top of the income distribution. Families bringing in $100,000 a year don’t feel rich when they see the huge houses, flash cars, luxurious yachts and private jets of the mega-rich, but don’t allow (or allow enough) for how unusual this kind of earning and spending actually is. And because the poor and even the ‘battlers’ are often near-invisible to the middle class they have no real conception of how numerous they are. Housing segregation means that people whose income is in fact high by national standards can feel ‘average’ in their neighbourhood, and they may well be right in that narrow sense. And perhaps the poor locate their position more accurately because there is less of a possible gap between themselves and desitution than there is between those on $100,000 a year and those on $1,000,000 a year.

From a policy perspective, these patterns of delusion mean that objective changes won’t necessarily alter subjective perceptions. Indeed, the upper quintiles may suffer even more from relative income effects than they do now, since their lifestyles will fall even further behind the truly rich. And since many poor people already think that they are average, they won’t necessarily change their subjective perception when they receive the cash once earned by families on $100,000 a year plus. So it is possible that more equal income distribution could even exacerbate levels of resentment about relative income position.


Written by Admin

July 3, 2006 at 6:39 pm

Posted in Uncategorized

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