The Model to Beat: Status Rank

There’s been much discussion of income inequality over the last few years. However, I just randomly came across what should be a seminal related result, published in 2010 but mostly ignored. Let me do my bit to fix that.

People often presume that policy can mostly ignore income inequality if key individual outcomes like health or happiness depend mainly on individual income. Yes, there may be some room for promoting insurance against income risk, but not much room. However, people often presume that policy should pay a lot more attention to inequality if individual outcomes depend more directly on the income of others, such as via envy or discouragement.

However, there’s a simple and plausible income interdependence scenario where inequality matters little for policy: when outcomes depend on rank. If individual outcomes are a function of each person’s percentile income rank, and if social welfare just adds up those individual outcomes, then income policy becomes irrelevant, because this social welfare sum is guaranteed to always add up to the same constant. Income-related policy may influence outcomes via other channels, but not via this channel. This applies whether the relevant rank is global, comparing each person to the entire world, or local, comparing each person only to a local community.

That 2010 paper, by Christopher Boyce, Gordon Brown, and Simon Moore, makes a strong case that in fact the outcome of life satisfaction depends on the incomes of others only via income rank. (Two followup papers find the same result for outcomes of psychological distress and nine measures of health.) They looked at 87,000 Brits, and found that while income rank strongly predicted outcomes, neither individual (log) income nor an average (log) income of their reference group predicted outcomes, after controlling for rank (and also for age, gender, education, marital status, children, housing ownership, labor-force status, and disabilities). These seem to me remarkably strong and robust results. (Confirmed here.)

The irrelevance of individual income and reference group income remained true whether the group within which a person was ranked was the entire sample, one of 19 geographic regions, one of 12 age groups, or one of six gender-schooling groups. This suggests that the actual relevant comparison group is relatively narrow. If people cared mainly about their global rank in the whole sample, then analyses of rank within groups should have missed an effect of the rank of the group, which should have appeared as an effect of reference group income. But such effects weren’t seen.

It these statistical models were the correct model of the world, then income policy could only include influence social welfare via the control variables of age, gender, education, marital status, children, housing ownership, labor-force status, and disabilities. You couldn’t improve social welfare directly by redistributing income, though redistribution or taxation might help by changing control variables.

But even that conclusion seems premature. The key idea here is that people care about their social status rank, and income should only be one of many factors contributing to social status. So we should really be looking at models where all of a person’s observable features can contribute to their status. For each feature, such as personality or marital status, we should ask if our data is best described as that factor contributing directly to social status, which is then ranked to produce individual outcomes, or whether that factor also influences individual outcomes via some other channel, that doesn’t pass through social status. It is only effects via those other channels that might change overall social welfare.

This seems a straightforward statistical exercise, at least for someone with access to relevant data. Who’s up for it?

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  • This seems to beg the question of the existing incomes policy and whether it would matter if it did not exist. If the thermostat keeps an even temperature, that doesn’t mean it is unneeded and turning it off or changing the temperature won’t matter. It also seems a inadequate model of the problems of inequality which can easily affect cohesion, political power, and growth and bear on the appropriate counterfactual and what the best measure should be.

  • If only rank matters and not absolute income, then should we care less about economic growth?

    • You’d have to care about growth, or any factor, because of some other channel to outcomes.

  • Peter McCluskey

    Is it impossible for everyone in the relevant reference group to have exactly equal incomes? Or is it merely very hard?

  • conchis

    Haven’t checked the paper yet, but
    1. The empirics are challenging here for a few reasons, which you’d want to be comfortable the results are robust to:
    (a) income coefficients in the BHPS tend to be very sensitive, and ‘better’ methodological choices typically make them larger. E.g. instrumenting in the BHPS typically raises the coefficient on income by an order of magnitude, as does using measures of consumption rather than income
    (b) Relative income effects also depend heavily on methodolical choices, in particular specifying the reference group differently (or again, switching from reference income to reference consumption) in other contexts can even change the sign of the effects
    (c) your final request is the right question, and given the extent to which other desirable markers of social status tend to correlate with material factors, I suspect it wouldn’t change your answer much. However, it’s not a simple statistical exercise: you’ll need plausible exclusion restrictions and/or strong functional form assumptions for identification, both of which are very tricky with swb.
    2. Assuming the strong finding that ONLY rank matters holds up, you’re right that this leaves no room for income policy to affect an instantaneous swf, but if your inter temporal swf is prioritarian or otherwise cares about inequality over time, then there is still a benefit from increased mobility so that people experience different ranks over the course of their lives. (Note that there’s also some support for the claim that higher perceived mobility can support a positive effect of others’ income on swb: because people take it as a sign that their prospects are improving, but this is inconsistent with the ‘only rank matters’ finding.

    • I’m eager to see replications here, especially exploring some of the issues your outline.

  • David

    Looked through a status rank and other Hansonian perspectives (as far as I understand them): the Soviet revolution

    The struggle of the hard core serves as an in-group status competition for the members to play (it defines and stabilizes the Ingroup), but the general euphoria, the perceived equality of the members and the vision of a better future disables the normal life dissatisfaction that limited rank would get them, making them temporarily more effective, than they otherwise would be, because they are not occupied with signaling as much (some revolutionaries actually get shit done, instead of arguing about dialectics all day).
    Or maybe revolutionaries are about as dissatisfied with their lifes as non-revolutionaries and expected a higher life satisfaction from achieving the revolution (and feel entitled to it).

    Once they win, the euphoria is gone and people are unexpectedly dissatisfied with their life again (or still are) which hurts. The hard core is unexpectedly emotionally worse off now, than during the struggle, so they capture and redistribute many more leadership positions amongst themselves, than they originally planned (guess the ‘workers’ don’t get any after all, guess this was just signalling, oops).

    The assignment is mostly ignoring competence and qualifications, because effective revolutionaries must be a very similar bunch, otherwise their group couldn’t have been so effective to begin with, but that means they share broadly the same stengths and weaknesses as well.

    Now the members of the hard core (or rather those who survived the internal distribution fights) are installed in unassailable leadership positions, at the top of their own small hierarchy, maxing out their status rank. Life satisfaction achieved for everybody! At least for everybody that matters.
    Because only their own Ingroup (the hard-core) truly matters. The former government and it’s structure are the Outgroup (the oppressors!) and the workers are the Fargroup (noble savages, just not leadership material, at best, promptly part of the Outgroup, if they don’t cooperate with the noble cause). Anyone who remembers their ideals or cares about something else than power anymore (like Trotzki noticing the economy now being mismanaged and people beginning to starve) and protests this process is a traitor.

    All the bad things ‘happening’ to the fargroup (the now starving workers and farmers) are now the fault of the next Outgroup (the imperialist swine!). And the harder they signal that nonsense, the more they might even be able to delude themselves and not feel bad about it (everyone believes this after all).

    How did I do, Sensei?

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  • arch1

    Apologies if the following is orthogonal to the OP, but even if only income ranks (not absolute or relative magnitudes) matter, it naively seems that the the *kinds* of factors (e.g. race vs ability vs chance vs level of initiative vs …) which determine one’s initial rank and its course over the lifespan would significantly influence perceived fairness, and thus individual happiness and overall political stability.

    Put another way: An income policy which ensures e.g. that only star-bellied sneetches rank high seems likely to yield less social welfare than one in which sneetches are ranked on (say) productivity.

    • Ways in which features of the entire system make people happier are of course not revealed in data on individual variation with a system.

  • Sid

    I’m uncomfortable with their equating utility with self-reported life-satisfaction.

    If I’m losing utility from inequality due to, say, loss of political power, but this doesn’t show up in my self-reported life-satisfaction because my lost political influence is not something that I think about when I think about how my life is going, then, it’s wrong to conclude that that’s not a channel through inequality matters.

    More broadly, it’s worth looking at Tim Scanlon’s recent book, “Why Does Inequality Matter?” for a philosophical investigation of all the possible channels through which inequality makes a difference.

  • Ah, the idiocy of the privileged, who have no grasp of the consequences of poverty, especially on children.

    • Dave Lindbergh

      I think you’re confusing “income” with “income inequality”.

      This is about differences in income. Poverty is about the amount of income.

      • That comment is an order of magnitude more idiotic than the idiocy I referred to earlier.

  • Riothamus

    > The key idea here is that people care about their social status rank, and income should only be one of many factors contributing to social status.

    The intuition seems supported by people getting jobs like priest, soldier, or teacher when these are not the highest-paying positions available to them.

    I wonder about the extent to which we can use this to compare with other cultures that are less thoroughly commercialized, or with historical information. The trope of marriages between aristocracy and merchant families seems a direct trade of income-rank for social rank.

  • Marius Catalin

    If Lacan is right that human desire is always desire of the Other, desire for the Other, desire to be desired by the Other, and desire for what the Other desires than nothing can be done about it and what the paper conclude is a direct consequence. I argue that the case is for more income equality

  • Nelson Billing

    With hindsight, and thinking about why stress and satisfaction might exist biologically, this isn’t surprising. Robert Sapolsky explores this a bunch in the later chapters of Why Zebras Don’t Get Ulcers, from the perspective of how stress impacts health outcomes across one’s lifetime and how status plays a huge role in that. He also comes to the conclusion that wealth/income is a minor piece of the puzzle– mostly important at the extreme ends of the spectrum.