Tax data vs survey data

Prof. Delong links to Brad Setser who a couple months ago was lamenting over this chart:

Notice the negative growth numbers for the bottom 90th percentile.

The data are from Piketty and Saez. Curiously, these authors don’t analyze the income shares of the bottom 90th percentile. They say this is because before 1945 most people were exempt from filing tax returns except top earners. But I suspect they think these data are a bad measure of bottom 90th percentile even after that because in the working paper, the published paper, the comment and the “summary for the broader public” the shares of the bottom 90th percentile are never reported. In any case, this means whoever at the WSJ that created the chart extrapolated from Piketty and Saez’s data on top income shares and didn’t take the data directly from them.

Tax data have a number of problems, all addressed in their paper. There’s evasion, exemptions, and income shifting. Also, because most taxes are filed by family instead of by individual, tax data can only be used to look at family incomes. This means some of the trends will be the result of demographic changes (i.e. families differentially getting smaller in each income percentile).

But Piketty and Saez use tax data, instead of survey data (e.g. Census), to analyze top income shares because given there’s no random sample, the top of the top have a proper representation in the data set. In a random survey, its unlikely you’ll end up surveying one of the 14,836 families that make up the top 0.01% earners. They’re using the right data for the job, but the job isn’t to analyze shares of the bottom.

That’s why we have survey data. And I happen to have survey data, the 2000 Census and the 2006 CPS, sitting on my desktop. By my figuring, wages of the bottom 90th percentile went up by 5% between those years.

So, we should fight over what data is better, but its at least important to know that survey data gives a different answer than tax records. Its a bit premature to conclude, as Setser did, “Most Americans didn’t benefit from the expansion of the past few years.” That said, a 5% increase is meager over 6 years. I won’t be throwing any parties.

More evidence markets are locally irrational

Check out this comment thread:

I have a master’s degree in computer science and an MBA on the accounting track, and I’m delivering pizzas. Maybe if I’d moved to India I would have a better chance at getting a job.

Also, there’s this great line: “The whole H-1B is a joke – a rape of the American tech professional!”.

For the thousands of engineers that develop on the platforms invented by foreign guest workers (e.g.) its not quite a rape. I suspect those folks wouldn’t get worked up enough to post vitriol (“Will Wilkinson is clueless, and has no data to base his delusional ideas on. According to this idiot…”) on a web page, though.

Does College make you smarter?

That which shall not be named has been decreasing among college students graduates over time.

This might be due to decreasing quality of college. Assuming college is productive, as Prof. Clark says ((i.e. it changes TWSNBN, i.e. it makes people smarter)), decreasing efficiency of educational productivity would produce graduates with less smarts. Or it may also be due to people with lower I… a lowering quality of the supply of college students. Garbage in, garbage out.

On a completely unrelated note… I totally love my students at UC Davis!!!11!!

What do egalitarians care about?

I dunno, but if its “capabilities” or equality of opportunity then tracking income inequality between various income percentiles is the wrong measure to concern themselves with.

Income is a flow. Its tenuous. Its dynamic. It does not determine the size of your budget set; it does not determine your capabilities or opportunities.

If you doubt this, talk to Dell about the new computer I just bought on credit ((I know, I know… Cash flows are very irregular for grad students and I got a good price on the computer with zero interest)). Talk to the Bank where I took out my student loans.

If you care about the size of budget sets, then you care about lifetime income (and access to the credit market, but I don’t think this is a problem in the U.S.). This is because if someone has earning potential (let’s say they’re a college student or they’re just starting their career) then lenders will loan them money, even if they have low income today, because the lenders know their earnings, and thus their ability to pay the lenders back, will increase over their lifetime.

Is current income at least a good measure for lifetime income? Nope. Early in careers, there’s little correlation between current earnings and total lifetime earnings ((see this paper for a nice discussion of the issues involved in measuring lifetime income. They use some really, very cool Swedish data to estimate the relationship between current income and lifetime income.)). This picture shows the ratio between current and permanent income (annualized):

So, why do egalitarians seems to care so much about (current) income inequality dynamics?

Opinions on inequality

I really enjoy Lane Kenworthy’s blog. He writes mostly on inequality and he tilts a little too towards advocacy for my tastes, but he always brings a lot of data to the discussion.

He posted on international opinions of inequality the other day. People say they prefer a normal distribution of income rather than one that has overall more income, but skewed towards the rich.

He suggests this means that people care more about inequality than efficiency. The problem is that people may have a some sense of diminishing returns to income in their minds when they answer these questions. There may be more income overall, but some lower income groups have lower incomes in the skewed distribution (see the forth and fifth rows in distribution E). If those groups suffer more from there losses than the rich gain, then preferences for efficiency would suggest the normal distribution over the higher-income skewed distribution.

A more careful study of social preferences — answering the question, do people care about efficiency or inequality (or reciprocity)? — is Rabin’s Understanding Social Preferences with Simple Tests (pdf) ((There’s about a billion citations to this paper at Google scholar, too. Go crazy, but be sure to report back.)). Virtues: doesn’t use survey data and it is careful to identify particular social preferences. Vices: relatively small sample size and only American and Spanish college students.

UPDATE: I got the interpretation of the diagrams a little goofed up in this post. The intuition remains the same though. My misinterpretation is evidence of measurement error inherent in surveys like these, so I’ll refrain from editing.

Americans work more than Europeans…

or do they?

The conventional view is that Americans work longer hours than Germans and other Europeans but when time in household production is included, overall working time is very similar on both sides of the Atlantic. Americans spend more time on market work but German invest more in household production. This paper examines whether these differences in the allocation of time can be explained by differences in the incentive structure, this is by the tax wedge and differences in the wage differentials, as economic theory suggests. Its analysis of unique time-use data reveals that the differences in time-allocation patterns can indeed be explained by economic variables.

This means its not culture.

(h/t The Economist)