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Say It Ain’t So, Cbo

I have received numerous queries about a recent post on the Congressional Budget Office's (CBO) blog that indicates that the CBO has examined the instability (also known as "volatility" or "variability") of U.S. family incomes from 1984/85 to 2001/2002 and, in preliminary results, has found no consistent increase over that period.  

This preliminary finding obviously runs counter to the results that I present in my book, The Great Risk Shift (revised and expanded, 2008), for the 1973-2004 period. In the revised edition of the book, and a forthcoming brief from the Economic Policy Institute, written with Elisabeth Jacobs of the Brookings Institution, I show that the volatility of family incomes has roughly doubled over the 1973-2004 period--a finding that is closely in line with a number of other recent studies.

To see a graph showing the rise in family income volatility between 1973 and 2004, click here. For the methodological fine points of this analysis, click here.

To jump to a summary of recent studies, click here.

I have also prepared a graph that compares these recent studies on similar terms, which can be accessed here.

So why might the CBO be finding something different?

To fully answer that question, I will need to gain access to the CBO's underlying analysis, which I have requested. However, what I know of the analysis leads me to believe that there are some straightforward reasons why the CBO results differ from all prior analyses, including my own--and reasons why my analysis is likely to be a more accurate depiction of the nature of family income instability over the last three and a half decades.

These reasons are elaborated in an extended post on my website. But for those looking for a quick and dirty answer to the question of why the CBO's findings differ from mine (and nearly all of the other empirical work on family income volatility conducted to date), I offer two relatively straightforward reasons.

First, the CBO analysis begins right after two deep recessions, and after fifteen years in which (according to my analyses) family income volatility has already risen dramatically.

Second, the CBO adjusts the data in a way that is likely to lead to spurious results. The basic dataset that it uses is the Survey of Income and Program Participation, or SIPP--a different source than I employ (the Panel Study of Income Dynamics). Other researchers have found an increase in family income volatility between 1984 and 2002 using the SIPP. However, the CBO attempts to match people in the SIPP with Social Security wage records. This might sound like a clever way of verifying people's reports of their own earnings--except that it results in exclusion of a substantial share of people in the SIPP (more than 40% of those in the SIPP in 2002, up from around 15% in 1984). There is every reason to think that it is the exclusion of such a large share of the sample (and an increasing share over time) that is driving the CBO's findings.

A fuller discussion of these issues and others will appear in my forthcoming brief for the Economic Policy Institute with Elisabeth Jacobs. In addition, upon release of that brief, I plan to make available at all of the codes and data we used in reaching the conclusions reported in the brief.

--Jacob S. Hacker