A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure.
This clearly reflects the pattern of wage dispersion among my friends, particularly those who attended elite secondary schools and colleges and universities. I [Salam] know many “threshold earners,” including both high and low earners who could earn much more if they chose to make the necessary sacrifices. But they are satisficers.
OK, fine so far. But then the claim is made that “threshold earning” behavior increases income inequality. In Cowen’s words:
The funny thing is this: For years, many cultural critics in and of the United States have been telling us that Americans should behave more like threshold earners. We should be less harried, more interested in nurturing friendships, and more interested in the non-commercial sphere of life. That may well be good advice. Many studies suggest that above a certain level more money brings only marginal increments of happiness. What isn’t so widely advertised is that those same critics have basically been telling us, without realizing it, that we should be acting in such a manner as to increase measured income inequality [emphasis added]. Not only is high inequality an inevitable concomitant of human diversity, but growing income inequality may be, too, if lots of us take the kind of advice that will make us happier.
This is a cute idea but I don’t think it’s correct. I’ll explain my reasoning but first one more quote from Salam:
The idea of the “threshold earner” came to mind as I [Salam] read Michael Arrington’s post on “the rise of the gentleman hacker,” who might be understood as souped-up threshold earners, who’ve already climbed various entrepreneurial mountains.
No, I don’t think “threshold earning” increases income inequality
I don’t see how you can get from threshold earners to increased income inequality. It seems to me that threshold earning would decrease inequality, in both the examples that Salam gives. First, you have a well-educated middle class person who could be a high earner but instead gets a more moderate income (perhaps by writing for a political magazine, for example). You’re taking someone who could, perhaps, with sufficient effort make $200,000 a year but instead makes $50,000. This will tend to compress the income distribution, pulling some of the moderate high tail toward the median. Second, you have some who could possibly become a billionaire who decides to be a mere multi-millionaire instead. Again, this compresses the income distribution.
The only way I see threshold earning as increasing income inequality is someone who could earn $20,000 a year instead slacks off and earns $5,000 a year instead. I’m sure there are such people, but given the cost of living, I’m imagining there are a lot fewer people like that now than in the 1960s and 1970s. And these don’t seem to be the people that Cowen and Salam are talking about. Cowen in particular was focusing on inequality in the top 1 percent of the income distribution.
The argument that Cowen seems to be making goes like this: There is some cohort of high-powered people in the workforce who, if they all worked the same amount of effort, would have some spread in their incomes. But then some of these people work 100-hour weeks (and make more money) while others work less hard (the “threshold earners”), and the result is increased variation in incomes.
In the context of the general population, though, I see this threshold earning as a source of decreased inequality (as discussed above) in that it brings some potential incomes high in the tail down toward the median.
Normals, workaholics, and slackers
Imagine a simulation, in which people start by being categorized in percentiles of “potential income,” from the bottom (people who don’t have a serious chance of making much money, no matter how hard they work) to the top (people who could become rich, if they put in the effort and get lucky).
We’ll focus on the top qunitile: the people in the top 20% of the distribution of potential income.
Start with a scenario on which these people work normal hours and have some distribution of income, with some millionaires, some people making less $50,000 per year, and many people in between.
Now imagine that some people in this quintile are “workaholics,” people who work long hours and might become really rich. Taking a normal person in the top quintile and turning him into a workaholic will increase the inequality in the income distribution.
Now turn some normals into “slackers,” who work less hard and make less money. Taking a normal person in the top quintile and turning him into a slacker will decrease the inequality in the income distribution.
To the extent that variation in work habits and money goals is causing income inequality to increase, this is coming from the workaholics, not the slackers. Contrary to Cowen’s claim (see the long quoted paragraph above), if more people in the top quintile are taking the advice to chill out, enjoy their gains, and relax, this should be causing a decrease in measured inequality, not an increase.
(a) I didn’t see the evidence that threshold earning behavior is a bigger deal now than it used to be. (From an economic perspective, threshold earning made a lot more sense in the era when top tax rates were 70% or higher than now when they’re typically below 50%.); (b) I’d guess that threshold earning is compressing the income distribution (it’s people who could be making a lot who are instead closer to the median) and thus reducing the level of measured income inequality.
On the other hand, this is soooo clear to me that it’s hard for me to see how Cowen and Salam could’ve got this “wrong.” Cowen’s So maybe I’m the one who’s confused (in which case I hope someone will do me the favor of explaining the errors in my reasoning).
My friend Ubs is the ultimate threshold earner. At one point he felt he had enough money so he quit his job for a few months ‘cos he didn’t feel like working. I wonder what his reaction would be to all this.
P.S. Here’s how Salam ends his column:
And I [Salam] can’t for the life of me see how housing a somewhat smaller share of the global rich will mean that fewer Americans will spend their prime-age years in prison.
I agree. The percentage of people who are in prison is basically a political decision to lock up convicted criminals for a long time rather than giving them shorter sentences, parole, fines, community service, etc. I’d hope we could have more reasonable prison populations, whatever the tax rate structure happens to be.
P.P.S. Salam has more here. In response to his points: yes, I was using “slacker” in a playful sense to refer to those people who choose less lucrative work options or career paths.