31/07/2013 § Leave a comment
I’m in the middle of Inequality: A New Zealand Crisis. An issue that is bothering me is the use of quintiles for talking about inequality, income and opportunities. There are actually two parts to my problem — a measurement issue and a normative one.
I’ll start with the measurement issue. Quintiles divide the sample into five groups, ranked in some order (say, smallest to largest). As such, it is necessarily a zero-sum game. For every person who leaves the bottom income quintile to join a higher one, someone else must fall back into the lowest quintile. Even if we were to lift everyone out of absolute poverty, we could still create income quintiles and have a lowest and a highest. We would always find inequality because the metric itself in a sense creates the inequality.
There is also no measure of dispersion or variance in quintiles. Now, I should mention that Inequality also uses Gini coefficients, which are all about measuring income distribution. The two measures together are useful. But quintiles themselves just show that one number is greater than another, without indicating how much greater.
The second issue with quintiles is the normative one: what do we want them to look like? What is the ideal towards which we are aiming? One of the uses of income quintiles is assessing intergenerational income mobility. Ongoing research in the US is using new datasets to create fine-grained maps of income mobility. Mobility varies tremendously, suggesting that where you were born is important to your economic fortunes. Of course, that’s true in all sorts of ways.
As I already pointed out, if the economy rewards talent and skill and they have some genetic basis, then class or income mobility will be limited. How limited depends on the relative rewards and genetic basis.
As a reductio ad absurdum, consider this alternative: perfect mobility. What if parents’ income had no correlation with children’s income? There are two clear problems with that situation. First, it suggests that incomes would be randomly assigned, which then suggests that incomes wouldn’t have anything to do with talent and skill (and hard work). Secondly, it also suggests that parents would not be able to influence their children’s outcomes. All the money spent on elocution lessons and finishing schools, all the time spent on proper use of knives and forks — all wasted. That situation would diminish the incentives for parents to invest in their children. Reducing the pay-offs to intergenerational investment would only serve to increase short-term thinking and create a sort of social Prisoner’s Dilemma.
Income quintiles are rhetorically useful, as a King of the Hill metaphor for people who prefer Parachute Games. For policy, though, they need to say what they really mean. What do they want the world to look like?