What you think is fair, depends on how much money you make

Everybody is talking about inequality and how unfair it is that some people make millions while others struggle to make ends meet. I am of the firm belief that equality of income or wealth is not a desirable goal for society. Instead, we should aim for equality of opportunity so that everyone can live up to their potential. One day, I will have to write a piece on why I think the entire push for lower income inequality on the left of the political spectrum is totally misguided, but that will have to wait for another day. 

But I recognise that my views on inequality may be shaped by the fact that I have a high level of educational attainment and a job that pays quite well (I would never admit that to my bosses and if they read this, I will deny ever having said that…). And how fair or unfair society is depends to a much larger degree on your income than you think. 

The charts below are from a new study amongst Danish citizens. They show on the horizontal axis the relative income of individuals within a specific peer group (defined by birth year, gender, educational attainment, etc.) and on the vertical axis the relative position these individuals think they are in. All data is based on tax forms of Danish citizens so no cheating on income is possible. I have written before, how especially people with a higher income tend to underestimate their relative position in society, while people with a lower income tend to overestimate their position. The same is true in this study. 

Actual vs. perceived relative income across different peer groups

Source: Hvidberg et al. (2020).

Note, however, that people tend to overestimate their relative position most if they compare themselves to people with similar education or who are working in the same sector. In other words, bankers with low income overestimate their income relative to other bankers more than people who are aged 40 to 45 with a low income relative to other people of the same age cohort.

This is problematic because the study found that people who are among the lower ranks of income tend to believe that their position in society is unfair, while people with higher incomes tend to think that it is entirely fair that they earn the income they do. Similarly, people with a higher income tend to think that their position in society is more due to effort rather than luck, and people with higher income tend to be more on the conservative side of the political spectrum (what a surprise…). As I said last year, evolution has programmed us in such a way that what we think is fair depends very much on what we own – and how big our biceps is.

Relative income and views on fairness and politics

Source: Hvidberg et al. (2020).

But if we tend to be particularly ill-informed about how much money we make compared to people with similar education or who work in the same sector as we do, then correcting this perception might trigger particularly strong feelings of unfairness. And that is exactly what the study found. Unfairness is particularly ill-received when people learn about big pay gaps relative to other people who work in a similar position in a similar company. And no political redistribution measure is ever going to solve that problem. In other words, political efforts to reduce income or wealth inequality are probably not only economically ineffective but miss the mark psychologically as well.