The Paradox of Risk and Mobility

Posted by: Michael Mandel on June 10

Is a riskier society more mobile? Paul Krugman writes in today’s NYT that

…economic security is a thing of the past: year-to-year fluctuations in the incomes of working families are far larger than they were a generation ago. All it takes is a bit of bad luck in employment or health to plunge a family that seems solidly middle class into poverty.

If we take Krugman seriously, then this is an argument that the U.S. is becoming a more mobile society. Let’s we rank order every family in the U.S. by income. Then for every family who is driven down to a lower rung of the income ladder by bad fortune or by the workings of the global economy, someone has to rise to take their place. If there’s more downward relative mobility, there has to be more upward relative mobility as well; that’s simply the way the numbers work.

It should be clear that having more risk in an economy creates more churn and more opportunity for mobility, both up and down. This is not something that either the Republicans or Democrats want to hear.

Consider the following example: Suppose a small economy with 100 workers is ranked by wage, from highest- to lowest-paid. Now let’s suppose that the five best-paid workers are laid off and forced to take much lower-paying jobs. As a result, the people right below them move up in the ranking: No.10 becomes No.5, and so on. This is mobility, as defined by economists, and as the term is used by the journalists who quote them. In other words, a mobile society is one where the order of the income distribution can be rearranged relatively easily.

We can draw a political analogy: In Congress, if the incumbents get re-elected every year, then it’s hard for newer members of Congress to move up to more desirable committee seats (such as the ones that control lots of money). But in a year in which an abnormally high number of incumbents are forced out of office, there’s a lot of upward mobility for the ones who remain.

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Reader Comments

Jack Krupansky

June 10, 2005 04:09 PM

But if there is no monetary benefit (or *any* benefit) to the individual from this "accidental" upward mobility, how is it helpful to the individual at all?

Unlike your congressional example, a worker who is downwardly mobile due to the *elimination* (or offshoring) of their job doesn't free up a "slot" for an upwardly mobile worker to "move" into.

Now, if an organization is *replacing* one type of position (highly paid) with another, *new* (lower paid) position, that *might* in fact provide the upwardly mobile worker with some benefit. Possibly.

Unless you distinguish and measure the distinction between these two forms of downward mobility, I'm not sure what conclusion you can draw, especially relative to Krugman's concern over middle class househoulds which suddenly plunge down to the poverty level and may even face a loss of homeownership.

See, you've got me supporting Paul Krugman again.

-- Jack Krupansky

bhaim

June 23, 2005 04:44 PM

The dissatis-faction resulting from falling wages is usually greater than the satisfaction resulting from rising wages. People are not wrong to be risk-averse; for middle-class Americans, just as for portfolio managers, life consists largely of trying to manage risk. This, the Yale political scientist Jacob Hacker thinks, is the source of middle-class Americans' unease with the current state of the economy—perhaps the primordial form of a sharper discontent to come. "Voters say the economy isn't getting better because, as far as they're concerned, it's not," Hacker writes. "And perhaps the best expla-nation for this perception is that Americans are facing rising economic insecurity even as basic economic statistics improve."

The Atlantic Monthly | January/February 2005

Shaken and Stirred

by Stephen S. Cohen & J. Bradford DeLong


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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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