Thursday, November 21, 2013

Family Structure and Income Statistics

Russ Roberts linked to a nice paper he did laying out some of the problems with statistical income trends.

Here is a table from page 18 of the paper:

This is a classic Simpson's Paradox situation, which shows up again and again in these income time series.  Poverty rates within each family structure have fallen tremendously.  But over the same period of time, Americans have chosen increasingly to populate the most vulnerable family structures, so the aggregate poverty rate has not dropped very much.

Why does this paradox show up so much in these statistics?  I think it is inevitable.  It's because people have agency, and the statistical aggregation is confused by that agency.  It's similar to the effect of safety mechanisms in cars, where drivers adjust their driving to be more aggressive when they feel safer, so that the new mechanisms tend to reduce injuries, but by a lower amount than what one would have predicted.  Helmets on football players are another example of this issue.

It doesn't matter which way the causation goes.  These statistics are a refutation of the standard haves-and-have-nots, stagnation and bifurcation story that seems to be conventional these days.  That narrative would cause one to expect households to move into structures associated with more social support and lower poverty.  We would see higher poverty levels within each structure, and more households in the married couples with children category, staying together for economic reasons.

If the causation is that fewer married households and more children with single parents leads to higher poverty levels, then this supports the conservative moralistic narrative.  If the causation is that more wealth and income leads to families that are more willing to make trade-offs which result in more vulnerable family structures associated with lower incomes, then this supports an optimistic narrative that broad-based improvements in standards of living have increased the choices available to households.

In any case, the large changes in family structure and the tremendous reductions of poverty levels within each family type point to a society that continues to offer greater opportunity over time to its households.  Just as drivers demonstrate the existence of a variety of priorities when they choose to trade new standards of safety for savings of time, etc., households demonstrate a variety of priorities in addition to household income.  This includes households who have income levels some of us would consider unacceptable or marginal. (I don't intend to paint a portrait of households making coldly rational decisions.  I am sure that many of the priorities and trade-offs that households consider are vastly different than the ones I would consider, and I am sure that many of these choices are demonstrably detrimental.  I don't wish to judge the choices.  I'm just pointing out that they must exist to a much greater extent than they did previously.)

The single women with children category presents a good example.  In 1967, 3.2% of households were poor families in this category (6.2% * 51.2%).  In 2003, 4.4% of households were poor families in this category (11.9% * 37.3%).  So, the net change over 36 years is an addition of 1.4% of poor single mother households.  But this 4.4% can be divided into 2.3% (6.2% * 37.3%) which would have been the total number of poor single mother households if the proportion of household types had been stable, and 2.1% (4.4% - 2.3%) of households who have been induced into this vulnerable household type.

3.2%     Percent of Total Households in 1967 who were poor, headed by single mother
-.9%      Reduction in poverty for existing single mother households from 1967-2003
+2.1%   Additional poor families due to increase in single mother households from 1967-2003
4.4%     Percent of households in 2003 who were poor, headed by single mother

So, a skeptic or moralist might say that this shows how all the social support programs and broad improvements in economic opportunity are fruitless when there are groups of people hurting their own chances for success.  A progressive might look at the aggregate poverty measure and say that this shows how the economy has not provided any improvements for the most vulnerable families.

Those reactions are both short-sighted.  Some of those 1967 households had income problems and some other set of larger problems.  In 2003, those families had fewer income problems and more manageable trade-offs for their other problems, so they addressed those other problems in ways that required a change in family structure and a reduction in income.  We can infer that even though those families show up as poor single mother families, this is a preference over being a non-poor married family.

Some of this growth in vulnerable household types is clearly a reaction to some of the perverse incentives created by public poor relief policies.  This is inevitable in coercive public programs.  It is very difficult to ensure an honest accounting regarding the effects of these policies.  Some of these problems were addressed in the Clinton/Gingrich welfare reforms, and it is disappointing to see some of the current progressive movements against social support programs for the working poor.

All of this suggests that in the battle between agency and structure, agency pulls its share of weight.  We should conclude, then, that the labor market, even at low income levels, is influenced by the demands of laborers.  Pessimism about labor income distribution is overstated, and policies premised on monopsonist low-wage employers are based on inaccurate presumptions.

Of course, there are many improvements to make.  The point isn't to deny the existence of suffering or poverty.  The point is to make sure that we understand what we are dealing with and to use the right tools to create progress.  Further, if seemingly marginalized families do retain influence over their quality of life, then public policy that is premised on a lack of agency will not only be damaging, but it will also deny dignity to the very families that it is meant to support.

The solution isn't to remove choices so that vulnerable women are again forced into unpalatable marriages for economic reasons.  But the solution also isn't to remove choices for the working poor because their choice set is unpalatable to us.  Minimum wage laws, occupational licensing rules, and other limits on freedom in employment contracts reduce the choice set.  Support for some of these laws presumes a lack of choices for poor laborers, so that, in the name of that inaccurate presumption, we limit the choice set even further.

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