It’s often said that after people are wealthy enough to meet their basic needs, they are more concerned about their relative rather than absolute level of well-being. If Smith sees his real income increase by 10% this year, but everyone else around Smith has their real income increase by 20%, Smith doesn’t feel glad that his standard of living has gotten objectively better. Instead, Smith feels despondent that he’s falling behind compared to others.
Bryan Caplan recently posted an argument on his Substack that, contrary to popular belief, people barely care about relative income. His argument is a simple and straightforward one – if people were really concerned with their relative level of well-being, they can easily fix that. In Caplan’s words:
The resolution begins with the observation that each of us possesses a nearly fool-proof short-cut to relative riches. Namely: Move to a poorer area.
If you want to feel superior to your immediate neighbors, move to a poor neighborhood.
If you want to feel superior to people in your state, move to a poor state.
If you want to feel superior to people in your country, move to a poor country.
When we look at human migration, all three of these choices are rare.
He later followed up with an additional post to provide empirical support, courtesy of Professor Douglas Coates of Rutgers University. Professor Coates used Zillow data to see how the price of a two bedroom house is impacted by local inequality. He finds that homebuyers “have a slight preference for locations in communities where high quintile households receive a greater share of community income, not less.” That is, all else equal, people seem to slightly prefer to move to neighborhoods where the top quintile of households makes a larger share of total income.
I don’t find either of these arguments particularly compelling.
First, the empirical evidence offered doesn’t show that people don’t care about relative income. One can easily read the evidence as showing that people’s concerns about relative income can be overcome by other factors. Professor Coates notes that there may be a “preference by relatively lower income home buyers for the values and consumption externalities of their better off neighbors,” for example. That is, there are advantages you might gain by having rich neighbors. It’s entirely possible – and, I think, very plausible – that a person might both care about relative income and feel some discontent at being the relatively poor person in a richer neighborhood, and decide that this is outweighed by other advantages that come with moving to that area. There is a difference between saying a downside can be outweighed by other factors, and saying that the downside doesn’t even exist or barely matters.
As a comparison, suppose Harry has a choice of what college to attend. He can go to Harvard, or the local state college. He’s fully aware that if he goes to Harvard, he will be a pretty substandard student compared to the typical Harvard student. He reasonably expects to be able to graduate, but he will consistently struggle compared to his brighter classmates, and he will feel a good deal of personal embarrassment and unhappiness in seeing how easily most of his peers outperform him. On the other hand, if he attends the local state college, he will be one of the brightest students in his class, and will consistently outperform the other students.
It’s very easy to see why Harry might still choose to attend an elite university – he’ll still have the pride and social clout that comes from being able to identify himself as a Harvard graduate, and a Harvard degree would almost certainly open more doors in his career. But that in no way would suffice to show that Harry (or anyone else) “barely cares” about feeling like the intellectually slowest person in the room, or that struggling to get through classes Harry’s peers coast through just doesn’t matter to him. It just means there are other things to consider than can outweigh this factor.
Second, I think Caplan’s “just move to a poor neighborhood to feel relatively rich” claim misses a fundamental point. It isn’t that people care about their well-being relative to their neighbors. People care about their well-being relative to the people they think of as being their peers – which may or may not include their neighbors. The people you went to school with, the people you know through work, your friends, the people you aspire to have fill your life – these are the people that most have in mind when they are concerned about their relative well-being.
Consider this other hypothetical case. John is a high school athlete. He loves sports, he’s always participated in various sports teams, and his friend group is largely centered around his fellow jocks. However, John has always been a mediocre athlete. Over the years, even though John’s skills have improved, the gap between him and his teammates has only grown. He can still qualify for the team, but he will never be a star player, and often serves as little more than a backup player. The idea that this would be troubling to John isn’t at all hard to believe.
Now, suppose someone came to John and told him that if he really cared about the gap between his athletic abilities compared to others, there’s an easy solution. All John has to do is just start hanging out with the chess team instead! Once he does that, he’ll easily be the biggest, fastest, and strongest person around. Yet, strangely, John never does this. Would this show that in fact, John barely cares about his relative level of athletic performance? No, obviously not, because the people on the chess team are not the ones John sees as his peers! They just aren’t the people John is, or will be, comparing himself to. John could move to a new “social neighborhood” and change his relative athletic status, but that new social neighborhood won’t be filled with the peers with whom John is comparing himself. The move won’t change anything for him in that respect.
Or, imagine there are two towns one can live in – Slumville and Richville. Susie can afford a house in either neighborhood. She’d be at the top end of Slumville, or the low end of Richville. If Susie chooses to live in Richville, does that show she doesn’t care about relative income? Well, that depends. If she doesn’t think of the people who live in Slumville as being her peer group, then the fact that she’s rich relative to her “neighbors” won’t matter to her. And she might easily think about situations where she’d want to invite friends over for social events, or host birthday parties for her kids, and feel embarrassed for her friends and coworkers to come over and find out she lives in Slumville. Meanwhile, Susie’s friends and coworkers coming over to her house and seeing she lives in the Richville neighborhood could easily seem desirable to Susie, even if she’d be at the relatively lower end of the typical Richville resident. This is because she knows by moving to Richville, she can impress her peers.
Caplan’s argument implicitly assumes that if people are concerned with relative income, it must be relative to whomever is physically nearest to them. But I see no reason to think that’s true, and in many real-world scenarios it’s plainly false.
