What are relative income effects?
The many ways in which having a lower income than your neighbor can hurt
[The following is a heavily popularized version of part of my PhD thesis]
Relative income effects are effects on your happiness based on how your income stands in relation to the income of other people. If I am sad not so much because I have don’t have enough money, but because I have less money than Tom, I am suffering a negative relative income effect.
There is a perception that relative income effects are petty, ignoble, or mere envy. Some economists have even argued it is ill-advised to consider them in the context of economic policy-making for that reason. I wanted to take on that argument here by imagining many different ways your relative income might plausibly affect your happiness. As we will see, the vast majority are not envious or ignoble, at least at first glance.
A) Alexandria is less happy due to relative income effects. Because she is poorer than most of her neighbors, the thinning of the bottom section of the market for many commodities has reduced the variety of goods available for her to purchase. A greater portion of products sold in her area (or perhaps even her country) is aimed at the top of the market. For example, she can’t find many restaurants or clothes shops in her area that cater to her price bracket. She is particularly worried about gentrification. If her neighborhood becomes further gentrified, she may be pushed out of her home of many years, unable to afford the rent.
B) Jason is unhappy because his low relative income means that he is regularly disrespected for the “shabby” standards of his clothes, house, absence of bed-frame, etc.
C) Isabel is similar to Jason, but she doesn’t care about being disrespected per se, she’s concerned about how that disrespect will affect her goals- like finding a partner, securing a job, being taken seriously in civil society etc.
D) Ebony is upset by relative income effects because she believes that income is a form of social recognition. Her relatively low income means she is not being justly recognized by society. In particular, she works as a hospital cleaner and does a lot of unpaid reproductive labor at home as well. Ebony feels that the millions of people like her deserve more. What she perceives as unjust pay stings her sense of self-worth.
E) Xi is upset by the high relative income of others because he believes these incomes give the rich disproportionate power, undermining democratic decision-making. This undermines his confidence.
F) If Xi’s hunch is right, differences in income may mean he will be negatively impacted by decision-making which favors the rich- even when it doesn’t show up in changes to absolute income (e.g.- decisions about everything from health policy to public park placement which will not affect income, but which will favor the poor over the rich- a relative income effect on welfare).
G) Marco is upset by certain very high incomes because he feels they have not been justly earned. He feels that the real contribution of, say, advertising executives to society – which may even be negative at the margin- is not at all proportional to their large salaries.
H) Theodora feels that huge disparities in income, and a focus on the top end of the market, mean she doesn’t see enough depictions of people like her in the media.
I) Bob is concerned that the low relative income of his ethnic group contributes to stereotyping and prejudice against them.
J) Jessica is concerned about her low relative income because it means that she can only afford to put her children in a residualised school. Since schooling is more stratified by income in more unequal societies, and more prestigious tertiary education institutions tend to select students from more prestigious secondary schools, this will put her children at a disadvantage. Note that this is strictly about relative income- it’s about the quality of the schools relative to each other, not their absolute quality. (Morgan 2021- personal communication)
K) Jennifer is lonely because she can’t afford to participate in the social activities of their peer group. When they go out drinking, her low relative income means she can’t join them. (Dannaher 2021- personal communication)
L) Simae feels instinctively humiliated by seeing many people of a much higher status than him, through a kind of automatic evolutionary reflex, or perhaps a response developed in early childhood. Noble or not, he can’t control this reflex.
M) Lisa is concerned about her low relative income because she believes that her unique entrepreneurial genius in starting a jet ski dealership in Florida has not been recognized.
Of these feelings, I think only Lisa’s can clearly be equated with envy. Some seem like clearly reasonable concerns, at least as far as they go, others will have to be debated on their own merits. Marco’s claims about the salaries of advertising executives, for example, can be debated, but to treat them as obviously malicious envy seems wrong.