To better understand the science behind some of the key issues brought up by President Obama in his 2014 State of the Union Address and by Representative Cathy McMorris Rodgers in her response, we caught up with Harvard Business School Professor Michael Norton, whose research has focused on income inequality, the minimum wage, and the relationship between money and well-being. In our conversation about the State of the Union Address and Republican Response, we discussed the social science research surrounding the minimum wage, inequality, retirement, and healthcare.
The Minimum Wage
Evan Nesterak: In his address, President Obama stated he will issue an Executive Order to raise the minimum wage for federal contract workers to $10.10 per hour. He then called on Congress to raise the minimum wage to $10.10 per hour for the entire nation. Can you describe some of your research on the perceptions and attitudes surrounding the minimum wage and discuss a few of the potential consequences that may come from his Executive Order?
Michael Norton: We have a new working paper actually, where we got data from a survey of about 40 countries. In the survey they asked people some questions about how much they think people should be paid. They asked for an average laborer, a CEO, a doctor, and a cabinet minister. They asked them: How much they think they’re paid? and How much they think they should be paid? What we can do in all these 40 countries is look at the ratios of those things–what do people think the ratio of CEO pay to the average laborer’s pay should be?
It turns out that in every single country that was surveyed, people think that the ratio of pay should be smaller than it actually is. Now, they don’t think that CEOs and the average laborer should make the same amount of money by any means. In no country is it even close. Everyone agrees that CEOs should make more than the average person, but they think that the ratio is much-much higher than they would like it to be ideally.
It turns out that in every single country that was surveyed, people think that the ratio of pay should be smaller than it actually is.
The way to fix that problem of course–to the extent that we think that these ratios should match people’s preferences–is either to decrease the wages of the wealthy or increase the wages of the average laborer. And that’s exactly what President Obama is calling for. When people seem to be saying there’s too big a gap between rich and poor, one of the ways to [address] that is to mandate that the ratio changes by increasing the minimum wage for lower wage people.
EN: Can you describe your research of people’s perceptions of the minimum wage when they’re making just above the minimum wage?
MN: There’s a curious finding, often in the literature and also in public opinion polls, that sometimes people who make the minimum wage or around the minimum wage actually don’t support policies that appear beneficial to them, like an estate tax on the wealthy. They seem to be opposed to higher taxes on the wealthy, and they even sometimes seem to be opposed to increases in the minimum wage. You would think that if you’re making close to the minimum wage, you’d want the minimum wage to be increased because ideally then everybody’s wages would go up and you would win.
In fact, if you look at the data that we’ve collected, it’s absolutely the case that if you make below the minimum wage you would really-really like the minimum wage to increase. If you make well above the minimum wage you actually kind of still think the minimum wage should be increased–a lot of people in America think the minimum wage should be increased. But we saw this interesting kink that people who make just above the current minimum wage are oddly opposed to increases in the minimum wage. We call that phenomenon last place aversion.
The idea is that when you’re very-very close to the bottom of a distribution you’re focused much less on the people at the top and you’re focused much more on just being sure that you don’t drop to the bottom. That means that if you’re making just above the minimum wage, it’s risky to support an increase in the minimum wage because it might mean that you end up tied for last with everybody else. We see this both in laboratory experiments and when we look at real data toward real changes of the minimum wage. Even though it seems to be general consensus that people think the minimum wage should be higher, these people, who we would expect to support it, actually display this last place aversion and be more opposed than we would think.
EN: Obama stated “Inequality has deepened. Upward mobility has stalled.” Can you describe your work on income inequality and social mobility, and how Americans perceive these issues?
MN: A few years ago we ran a large survey of about 5000 Americans and we asked them some very simple questions. We basically said, imagine that America is divided into 5 quintiles of people. We asked people to estimate how much wealth the top quintile–the richest 20% of Americans–owned, and the second richest quintile, and the third, and the fourth all the way down to the poorest quintile–the poorest 20% of Americans. We also asked them what do you think they should own if you could start over from scratch and decide on a distribution of wealth.
What we find is a couple of things. First off people really-really underestimate the current extent of wealth inequality in the United States. Estimates vary, but the top 20% of americans have about 80% to 85% of the wealth. Our respondents thought they had about 60%. So they’re 25% of all the wealth incorrect in their estimate. But in addition, when we asked them what they thought that distribution should be, they thought [the richest 20%] should have about 40% of the wealth. So Americans don’t want equal by any means. They want wealthy people to be wealthy and poorer people to have less money. But their ideals are much more equal than what they believe things to be, which is actually already much more equal that it actually is.
The idea that both parties are actually proposing changes to try to address inequality is a real change in the conversation.
The other thing that we found in that survey which was very important was people tended to agree more than they disagreed. In other words when we asked rich and poor americans, or Republicans and Democrats–yes, on the margin it is true that Republicans are comfortable with more inequality and Democrats less inequality–but every single group we surveyed, Democrats, Republicans, rich and poor–all wanted a distribution of wealth that was more equal than they thought it was. All of them therefore really wanted a distribution that is more equal than it actually is right now.
EN: In the Republican response, Representative Cathy McMorris Rodgers spoke of the gap in opportunity rather than the gap in income. What is your take on the opportunity gap vs. the income gap?
MN: It’s tricky. They’re related in one way or another. When income and wealth inequality is very extreme it’s much harder for people to move into the top quintile. So when the top 1% of Americans have 25% of the wealth it becomes more and more unlikely that someone in the bottom quintile will ever end up in the top quintile. At the same time there are policies that can affect the current distribution of wealth that don’t affect mobility and vice versa.
There is some data now that in addition to underestimating the extent of wealth inequality people also underestimate social mobility. So they believe that in America it’s quite common to go from rags to riches, and while it is possible for sure it’s much less likely than people seem to think.
EN: In his address, President Obama announced the MyRA program, a retirement program designed to help Americans, whose employers don’t provide retirement plans, save for their retirement. One of the points you and Liz Dunn make in your book Happy Money is that paying up front and consuming later has a positive impact on well-being. While the financial benefits might be readily apparent, what are some of the psychological benefits of such a program?
MN: I think in general when we can encourage people to limit their consumption now and save for later they’re doing two things: one is, as we have shown, when people spend all their time on stuff for themselves it’s not bad for their happiness but it doesn’t really do a lot for their happiness, and in addition when you spend now, of course you are taking money from your future self. So these kind of policies–that incentivize us to think not just of what we can consume now, but [about] setting aside things for our future selves–are very valuable. Both perhaps in decreasing consumption now, which could be good for happiness, [but] also allowing us later on [to] have the kind of money we need to do the things we really enjoy.
EN: Obama used the phrase “peace of mind” when he described that every American should now be covered by health insurance. Does the line of thought you just used when describing the myRA program (pay now, consume later) relate to the healthcare debate?
MN: If you look at the negative predictors of well-being it’s things like poor physical health–so getting divorced and losing your job are very bad for your well-being–but the other big-big predictors are poor physical health and debt. And if you think about what happens when you or family member get sick. First off you actually have worse physical health which decreases your well-being and if you don’t have health insurance you would immediately go into debt, which is an additional hit on your well-being. If you think about just maximizing people’s happiness, then in this way improving people’s physical health not only improves their well-being, because they’re actually physically healthier, but it can also save them the cost of going into debt which is a whole other drag on well-being.
What caught your attention?
EN: Was there anything about any the address or responses that especially caught your attention?
MN: The only thing that I would say is that I think it’s quite interesting that both parties are now discussing inequality, which has not always been in the political conversation for the last several elections. Certainly it’s come up, and we saw with Occupy Wall Street, the 47% and those sorts of things that people have been concerned about these things.
But the idea that both parties are actually proposing changes to try to address inequality is a real change in the conversation. Now they disagree of course about how to do that, which is what we would expect and it’s probably good to have a healthy debate about how to address these changes. But it does suggest that there’s been a change in the zeitgeist that there’s consensus that inequality is a problem and that something needs to be done to address it.
Disclosure: Michael Norton is a member of The Psych Report‘s Advisory Board.