Reimagining the Economy

Research suggests we’re misperceiving the inequality around us

David Brancaccio and Daniel Shin Mar 25, 2021
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Recent research suggests people's perceptions of their own economic status, as well as the status of people in their social or work circles, aren't as accurate as they might think. Timothy A. Clary/AFP via Getty Images
Reimagining the Economy

Research suggests we’re misperceiving the inequality around us

David Brancaccio and Daniel Shin Mar 25, 2021
Heard on:
Recent research suggests people's perceptions of their own economic status, as well as the status of people in their social or work circles, aren't as accurate as they might think. Timothy A. Clary/AFP via Getty Images
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How well do you know your class? Would you consider yourself lower-, middle- or upper- class? What about your neighbors,’ your co-workers’ or your friends’ class status?

Recent research suggests people’s perceptions of their own economic status, as well as the status of people in their social or work circles, aren’t as accurate as they might think.

“The goal of this was to see how, where we think we stand relative to others, shapes our views on fairness and what ultimately should be done about inequality,” said Harvard economics professor Stefanie Stantcheva, who co-authored the study.

Stantcheva, along with co-authors Kristoffer Hvidberg and Claus Kreiner, collected tax and income data from thousands of residents in Denmark and asked them to rank themselves among various groups of people in their city, in their workplace, with similar levels of education and more.

“People who are actually ranked toward the bottom of the income distribution tend to think they’re ranked higher than they truly are,” Stantcheva told “Marketplace Morning Report” host David Brancaccio in an interview. “And those who are ranked toward the top believe they’re ranked lower than they actually are.”

The following is an edited transcript of the interview, which features more details about the study, how the perception of inequality changes among various classes of people and the results’ potential implications for issues like workplace pay equity.

David Brancaccio: There’s been writing, I mean, at least a perception in the past that everybody thinks they’re middle-class, even if they’re low-income or maybe quite affluent. But your current research here suggests that broadly, we kind of know where we stand?

Stefanie Stantcheva: Yes, that’s true. So we have this new project where we match people to their tax returns, so that we can see exactly where they rank relative to others, including other types of groups, like people with the same education, or people who work in the same firm, or people in the same sector, in the same city, even their neighbors. And we asked them to rank themselves among these various groups. And on balance, people are quite accurate. But this pattern that you mentioned, namely that we tend to think we’re more middle-class than we actually are, is still there. So people who are actually ranked toward the bottom of the income distribution tend to think they’re ranked higher than they truly are. And those who are ranked toward the top believe they’re ranked lower than they actually are.

Brancaccio: So we know ourselves to some extent, with some exceptions that we could talk about, but how are we guessing how others are doing? I suppose it varies depending on if you’re just asking random other people or if they’re part of some kind of cohort or group?

Stantcheva: That’s exactly right. So in fact, we’re much more accurate when we’re asked to rank ourselves among people broadly of the same age or people who have the same place of living, of residence. But we’re not good at all when we are asked to rank ourselves among others who work in the same firm or in the same sector or with the same level of education. So one of the big patterns that we see is that we don’t quite realize how much more others in our firm or in our sector or with the same education are making. So that’s a bias that’s there and could be explained in several different ways. But the key is that, you know those who make, for instance, the least in a given firm don’t quite realize they’re the ones who are making the least.

Brancaccio: So interesting. When we make assumptions, if two people have a master’s degree, the first person thinks the other person’s kind of making what they are, and they may not be?

Stantcheva: Exactly. And the bias is systematically in the direction that we tend to underestimate, you know, how much others are making.

Brancaccio: And I was interested [in] when you go up the income scale, you start making more, or maybe things fall apart and you start sinking — that changes your perceptions of all this?

Stantcheva: That’s right. So in fact, the goal of this was to see how where we think we stand relative to others shapes our views on fairness and what ultimately should be done about inequality. And what we can see is that the higher ranked you are in a given group, the more you think that inequality within that group is fair. There’s a very strong correlation between how highly you rank and how fair you think inequality is. And beyond that, you also change your views on what’s causing inequality. So if you’re ranked higher in any given group, you’re much more likely to believe that it’s effort and [your] own merit that leads to someone doing better rather than luck and circumstances outside of our control. So clearly, where we stand or where we think we stand, relative to others, is quite important in shaping our views of fairness and what’s causing inequality.

Brancaccio: So I understand this better, if you’re wealthier, you start to think it’s more because of your own magnificence and therefore, you think things are more fair and equal. But if you’re not doing that well, comparatively, you tend to see more inequality and unfairness around you. Am I getting that right?

Stantcheva: So what we do see is that people who are ranked higher tend to think that having inequality is fair, yes. So if you say, I think I’m higher ranked among people with my level of education, you say having inequality, even among people with the same level of education, is more fair. You will say that relative to others who are ranked lower. That’s consistently true across all possible rankings that you could think of within your city, within your neighbors, within your education, within your firm, etc. And then it’s also shaping your views of what’s causing this inequality. So people who, in any given group, are ranked higher tend to think it’s the result of effort and it’s the result of [their] own merit that some people do better than others within that group. So clearly, our position is very much shaping our views on the fairness and on what’s causing inequality.

Brancaccio: So if people are off in perceiving inequality around them or where they stand, as you do this experimentation, do you ever tell them what the truth is? And if so, how do they react?

Stantcheva: We do, since we have the information of where they actually rank among people in the same city, in the same or the same education and same sector, we can tell them that information. And when we do, what we see is that people who are told that they actually rank lower than they thought — so who were initially too optimistic about their own position — those people now start to think inequality is much less fair. So there’s a big effect in that direction. On the other hand, it seems that bad news weighs much more heavily than good news because the people who are told that they rank higher than they thought, those people don’t change their views. So bad news is very salient and seems to really affect people. Good news, not so much here.

Brancaccio: That’s in keeping with what little I know about human beings. Now, the research we’re talking about here was done in Denmark. Maybe this applies only to Danes. What do you think?

Stantcheva: So the research was done in Denmark because there’s this great opportunity to send out surveys to people that you can then match to all their Social Security and tax data, go back in time, follow them through their history, see the incomes of everyone around them. So there’s a wealth of information to be had there. But I think many of the patterns that we uncover here are quite fundamental patterns, which may not apply exactly 1 for 1 in the U.S., but I think would still apply to a large extent. So this finding that we care deeply about how we rank relative to others is, in my view, something that’s quite generalizable across countries. You know, we have this expression here, “Keeping up with the Joneses.” That’s where it stems from, for instance. And I think this is a very fundamental pattern that’s likely to hold. The fact that when you’re told you’re ranked lower than you thought you were, the fact that this shapes your views on fairness, is possibly also quite generalizable beyond Denmark. And the fact that when we are ranked higher, we think that things are more the result of own effort and merit rather than luck, and when we were ranked lower, we think it was mainly by luck in adverse circumstances, I also think that’s a quite core pattern that’s probably true across many countries.

Brancaccio: Why do you think it helps us to study this more about perceptions of inequality and fairness?

Stantcheva: It’s a very long-standing question, whether we only care about how well we’re doing, you know, in the absolute, or whether we care about how we rank relative to others. It’s been a long-standing question in many social sciences, and it’s been hard to get concrete evidence on it. And so here we can see that people clearly very much care about not just how well they’re doing overall, regardless of how others are doing, but really explicitly relative to others. And so this has big implications because it means that people will fundamentally care, not just about poverty or levels of incomes, they will also care about inequality, which is the dispersion and the rankings of people relative to each other.

Brancaccio: The research, it seems to me, doesn’t just apply to thinking about broader social and economic questions, but also might be useful at the level of the firm, as companies work more diligently on issues such as equity and fairness of pay and how women are paid, for instance, and people of color within an organization. How we process this and how we often guess wrong could be relevant at that level.

Stantcheva: That’s very true. In fact, our findings show that one of the biggest misperception people have is how they do relative to their co-workers in the same firm. They’re better at guessing how well they do relative to their former schoolmates when they were 15, or relative to their neighbors or people in the same city, than they are at guessing how well they do relative to other co-workers. So this potentially has quite big implications. It means that those who are paid not so much within a given firm don’t realize that they’re not paid as much as the others. So that has implications for career progression and wage setting and could possibly be quite important for firms too.

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