We’re Bad at Measuring Inequality—Here’s Why That Matters
Stefanie Stantcheva, economist at Harvard University, founded the Social Economics Lab to study inequality, our feelings about it, and how policies influence it. She says when we estimate how much money our colleagues make or how much taxes impact us, we are often very far off from the truth. Her research also shows that our misconceptions are often linked to political beliefs. She argues that we need to be more aware of the realities of inequality if we want to create better economic opportunities.
CURT NICKISCH: Welcome to the HBR IdeaCast from aHarvard Business Review. I’m Curt Nickisch.
It’s pretty natural to compare ourselves to other people, whether it’s our coworkers or our neighbors or celebrities, many of us spend a lot of time judging what people have or get, in relation to ourselves. And while we do this all the time on the fly, we don’t always get a reality check on whether we’re seeing things right. Like, are we giving too much weight to differences for instance, and overlooking similarities? Are the measurements and assessments we’re making spot on, or way off?
Today’s guest studies the way we view inequality of all kinds. And her research shows that well, we’re actually pretty bad at judging it accurately. She says there are all kinds of misperceptions out there, many influenced by political leanings that end up hobbling us in ways we don’t expect, because those comparisons we make can have a big impact on the kind of policies we support in our communities, as well as in our workplaces.
Stefanie Stantcheva is a professor of economics at Harvard University and the founder of the Social Economics Lab. Stephanie, thanks so much for joining us.
STEFANIE STANTCHEVA: Thank you for having me.
CURT NICKISCH: So where did your interest in studying inequality come from?
STEFANIE STANTCHEVA: Well, I myself have lived in many different countries and seen very different economic and social systems, and from early on noted the very different circumstances in which people live; the very different incomes they have, the different living standards, and so it’s something that has been very salient to me from a pretty young age. Inequality is rising in many countries across the world along many different dimensions. So witnessing this in my own life and in the research that I was reading, it seemed like a very important area to work on.
CURT NICKISCH: And so inequality is a problem, to improve the broader economy. Is that why getting to the heart of inequality and also understanding people’s perceptions about it is a key way to try to improve it.
STEFANIE STANTCHEVA: Yeah. So when we look at inequality and trying to devise better policy solutions, we cannot just study what the effects of policies are, which is of course very important, but we also need to understand how people think about them. In a sense, when people decide what policies they want to support, what policies they want to have and accept, there are a lot of perceptions, a lot of concerns that go into that, and understanding those is really critical in order to actually be able to implement good policies.
CURT NICKISCH: One of the interesting things of your research is that you take really large data sets that are at a country level or across demographies, and you combine that with very individual surveys, where people are talking about their percept of things, and you put that together to come up with these insights. What is the strength of that research and what do you think it is contributing, that we haven’t had before in this space?
STEFANIE STANTCHEVA: Yeah, so the projects we do at the Social Economics Lab, and by the way, we call it social economics, because it is about how people form views on economic issues and think about economic topics, but taking into account social phenomena and the broader social context. The method we use is a new generation of surveys and experiments that we try to leverage, to understand how people think about the economy and economic policy. And surveys like this are really a key you research tool because they’re a way of getting into people’s minds, and sort of listening to their thoughts and their reasoning.
And they have of course existed for a long time, but historically, they’ve mainly been used to measure things like income, employment, et cetera, that are now still sometimes measured with surveys, but in general, much better measured in administrative high quality data. And surveys today are still key because there’re some things that are invisible in any other data, even great data. Things like perceptions, attitudes, knowledge and views. And so this is the goal here, is to really try to understand people’s mental models and their reasoning, and really try to get into their minds with these methods.
CURT NICKISCH: So let’s start with some research that you did at a level that we understand pretty well here at HBR, which is coworkers and social position. What do we know about how people perceive the income of people around them, like in their own communities or their own circles?
STEFANIE STANTCHEVA: Yeah, that’s a great question because in the policy debate, an issue that comes up a lot is about relative incomes and how you perceive yourself relative to others. So it’s not just about how much do you make in absolute, what’s your absolute income level, but also about where are you relative to others around you? And that can shape people’s fairness considerations and views on policies. And so we were interested in finding out how much people actually know about how they rank relative to others, and we’re interested in various, what you may call, reference groups. So various groups that may be relevant to your perceptions, like people with the same age as you, people who live in your city, people with the same level of education or in the same sector of work, but also smaller groups like your immediate neighbors or your coworkers at your workplace, even your former schoolmates you went to school with, et cetera.
And what we see is that in general, there’s this systematic misperception whereby people who are lower in any given group tend to place themselves higher. And the reason they do this is because they do not realize how high the incomes of others are. So if you yourself are lower income, you’ll tend to think everyone else has lower too. And on the contrary, if you are a higher ranked person in a group, you will wrongly tend to think that everyone else is richer too, and so you will tend to place yourself lower.
This misperception is actually particularly stark when you try to rank yourself in your own sector of work, or among people in your workplace, among your coworkers. So people are particularly bad at ranking themselves among coworkers in their sector or firm. In fact, they’re better at ranking themselves among their former schoolmates that they went to school with, or among their neighbors or people in their city, than they are at ranking themselves among people in their firm or sector.
CURT NICKISCH: What worries you about this? Both from a research perspective, but also a policy perspective.
STEFANIE STANTCHEVA: So from a policy perspective, it is interesting that this type of misperception which we call center bias, because you will tend to think you’re closer to the center in any group than is actually the case, it appears systematically. So it is largest within sector or within firm, but it’s also there when you ask people to rank themselves in their cohort, among other people in the country, among people in their city, et cetera. And so there is this consistent pattern whereby your own income really shapes your views on others’ incomes.
So someone who’s poor will tend to think everyone else is poor too. And so that has implications for what policies you may want to support. In particular, if you do not realize the extent to which others in the country, in the firm, in the city are making more, you may actually want to support less redistributive policies, because you do not grasp the extent of inequality there is.
CURT NICKISCH: And when you’re saying redistributive policies, you’re not talking about within a company, but free college, or more paid healthcare, or that type thing?
STEFANIE STANTCHEVA: By redistributive policies, we really mean our progressive tax system and social insurance policies, like transfers towards lower income households, including food stamps or cash transfers. So all this bundle of policies to essentially equalize outcomes, equalize incomes a bit more.
CURT NICKISCH: Yeah, but it could apply within firms, right?
STEFANIE STANTCHEVA: So within firms and within sector, it is definitely something interesting because it could certainly affect what wages people ask for, how they negotiate, and also what opportunities they look for. So by not realizing in a sense how low paid you are relative to others, you may not be seeking out these opportunities. So that is definitely something to think about within firm and within sector.
CURT NICKISCH: Yeah. Now this study happened in Denmark, right? But do you think it’s generalizable? Would it apply elsewhere as well?
STEFANIE STANTCHEVA: I think the core results are probably quite generalizable. So Denmark is certainly a more equal country, and it has some different policies in place than the US, but this basic pattern, we have reasons to think that it would also hold in the US, and it would probably have similar strong implications. Your position among others actually really shapes your views on fairness and on what you want to do about inequality.
People who are ranked higher and perceive themselves as being ranked higher, think that inequality is also more fair. They tend to think that inequality in incomes is more due to things you can affect, to your merit, to your effort, rather than to adverse or circumstances or luck. They also support less progressive policies on average, and they’re also more satisfied with life. So, all these things are quite strongly correlated with your position among others, and we think that these results are generalizable to some extent at least, in other countries like the US.
CURT NICKISCH: What is the danger or downside of people, not understanding how much people around them make, and why does that matter for leaders and managers?
STEFANIE STANTCHEVA: So I’m very much a proponent of providing accurate information to citizens, to voters, to of people. So one of the goals of this research is to see where misperceptions are, and to the extent possible try to correct them, at least in the people that we can survey and that we have in our samples. So, I very much believe in giving people the tools to make the best decisions for the themselves. And when it comes to your income, pay policy, taxation and other important policies, it’s things that affect our daily lives. And so it’s things that really matter, and it’s important that we are well informed so that ultimately we can decide what’s it’s best for us and make the right decisions. So I’m a very big believer in more information, and sort of more education on economic issues.
CURT NICKISCH: Okay, so let’s talk about the American Dream quote unquote, which is in a lot of ways related to income and social standing, and mobility. What misconceptions did your research find that US Americans have around the idea that you can kind of start with nothing and work hard, and create a really nice life for yourself?
STEFANIE STANTCHEVA: So in general, in the US, people tend to be over optimistic in their belief about the American Dream. So the data does not show that mobility is that high in the US, the way people believe it. And this is important because, when you believe in equality of opportunity, that everyone has equal chances to start with, and that everyone can make it, then you’re more willing to tolerate inequality in incomes. Because if everyone has the same opportunities to start with, then the outcomes are more likely to be the result of individual merit and effort, and people tend to think they’re more fair in that case. And so if people’s perceptions of mobility are not in line with reality, ultimately their views about how fair outcomes are, will also be affected.
And so we did this very large study in five countries, which are France, Italy, Sweden, the UK, and the US, and we actually asked people to tell us what they know about social mobility. So in a sense, if you take children who grow up in different families with different levels of incomes, where will those children on average, land when they grow up? So what is the link between parents’ incomes and children’s incomes? And so what we see is that in general, in European countries, people are more pessimistic than in the US about mobility, but what’s more striking is that they’re too pessimistic relative to reality. So they tend to overestimate, especially the chance of staying stuck in poverty, if you’re born in poverty. So this is something very stark in Europe.
On the other hand, in the US, people are in general pretty accurate about mobility, but they really overestimate this idea of the American Dream, this idea of making it from rags to riches. So when you ask them about how many children who are born towards the bottom of the income distribution will actually end up making it to the top, they really give a much higher number than is the case. And this is very correlated with ultimately what people want on policies. So people who are more pessimistic about mobility, who think that chances are less equal, they support more progressive taxes, more social insurance, and especially more equality of opportunity type policies such as spending on education and health. And the opposite happens for people who are more optimistic about mobility and believe in the American Dream.
CURT NICKISCH: How much do some of those differences in optimism and pessimism breakdown by political lines?
STEFANIE STANTCHEVA: So in most of the studies we have, there are some pretty stark divides by political affiliation or political leanings. And that’s true not only in the US, it is true in many of the countries that we studied. So on mobility for instance, there is a quite stark divide by political affiliation in the perception of mobility. So in general, people towards the left politically tend to be much more pessimistic about mobility. So they think the chances of making it are, if you’re born in a poor family, are lower. And people on the right in general, tend to be more optimistic about, if you put in the effort, you will make it. And in addition, the solutions that people perceive to a lack of mobility are very different. There’s a ton of bipartisan agreement that more mobility is desirable, so in general, people very much agree that it’s not great if children’s outcomes are very correlated with their parents’ income.
So in general, people are worried about lack of social mobility and in quality of opportunity, but the favorite solution to the problems look very different on the left and the right. So on the left, people who are more pessimistic about mobility, want more government policies to help more progressivity, more equality of opportunity policies. On the right, actually the view is more that the government may be part of the problem rather than the solution, and sort of the preferred solution is less government intervention, rather freeing up the economy, letting businesses do their job, and actually viewing that as a better way to improve equality of opportunity. So there’s certainly a divide in both the perception of the reality of mobility and also in the preferred solution to lack of mobility.
CURT NICKISCH: You just illustrated the difference in misperception between the left and right, and I’m curious if you see that same kind of thinking when it comes to income levels.
STEFANIE STANTCHEVA: So what we do see is a strong political divide along many, many dimensions, and it ranges from how you reason about, what policies would do, or what’s desirable, or what’s fair, but it goes all the way to reality. So we actually call that the polarization of reality, because this is really about facts, about plain facts that you can in principle go and search for on Google. And yet we seem to hold different perceptions of them, depending on our political leaning. So something as basic for instance as, what is the top tax rate? Or what is inequality as measured for instance, by the share of income that goes to the top 1%?
These facts, which you can just find on the internet, if you are someone on the left, you will tend to think that taxes are currently lower and less progressive, and that there is more inequality than someone on the right. And while no group is systematically more accurate than the other, the gaps are always in this consistent direction. So our pool political leaning is coloring not only our beliefs about what should be done and what’s fair, but even our basic perception of reality. So we live in this polarization of reality world.
CURT NICKISCH: What have you found in your research and your work with other researchers in terms of misconceptions around racial equality?
STEFANIE STANTCHEVA: So in the US, it’s been long known that attitudes towards race shape people’s support for many policies, including progressive policies. So there have been many studies showing to what extent for instance, people overestimate the amount of government transfers such as welfare payments that go to minorities and specifically to African Americans. So the issues of race and policy views are so deeply intertwined in the US. And we wanted to understand this better, how attitudes towards race and racial inequality actually shape support for progressivity, for redistribution, and so we surveyed many, many non-Hispanic black and white respondents across the US. And we surveyed both adults, but also teenagers aged 13 to 17, to try and understand, what are their perceptions about the economic conditions and opportunities of both their own racial group, and the other racial group? What are their attitudes on various racial issues, and their views on what’s causing racial inequalities? And then their degree of support for both race-targeted policies, so policies that explicitly condition on race, and then more general income-targeted or redistribution policies.
And what we see is that although people perceive the economic conditions and opportunities of black and white Americans quite differently, by far the biggest disagreements between people lie in the perceived causes of these inequalities. And because of that, consequently, they very much disagree on what, if anything should be done about them. So in general, to put it simply, people’s support for either redistribution or race-targeted policies does not really depend on how big they think racial inequalities are, but it really depends on how they explain these gaps to themselves, on why they think those gaps exist. And one of the biggest dividers is actually political affiliation. So if you looked at just the average, for instance, white respondent, you would miss a lot of the picture here because along many dimensions, white Democrats are more aligned in their perceptions with black Democrats, than they are with white Republicans.
And to summarize it, in general, black and white Democratic respondents will tend to attribute racial gaps to things outside of people’s control, like past slavery, longstanding discrimination, racism, and they will tend to support many more redistribution and race-targeted policies. While towards the right, white Republican respondents in particular will tend to view racial inequalities primarily as the result of individual decisions, individual actions, not systemic things. And they’ll be less inclined because of that to support redistribution and race-targeted to reduce racial inequalities.
CURT NICKISCH: What do you hope that people take away from your research into these misconceptions, whether it’s business leaders or individuals, anybody. What do you want people to know?
STEFANIE STANTCHEVA: I think looking beyond just what people perceive, another important dimension is, okay, which of these things matter most, if we try to rank all the various reasonings and perceptions, and attitudes? Ultimately what really matters? And we can see that, the most important concern people have in general when it comes to policy is, “Who wins, who loses from a given policy, and how fair do I think that is?” So to put simply, the core reason people support different policies is not so much because of their different views on the economic situation, or the economic costs and benefits of these policies, it’s really because they have different perceptions of who’s winning, who’s losing from them, and different notions of what is fair. So fairness is in the eye of the beholder. And so this is something I think that’s very important to understand because those are the key perceptions and notions that have to be studied.
CURT NICKISCH: Stephanie, I really appreciate you coming on the show to talk about this.
STEFANIE STANTCHEVA: Thank you so much.
CURT NICKISCH: That’s Stefanie Stantcheva. She’s a professor of economics and the founder of the Social Economics Lab at Harvard University.
And for another conversation with an economist, listen to our talk with MIT’s Duflo about her research on global poverty and how to alleviate it. That’s episode 711.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.