Using Expectations Data to Study Subjective Income Expectations

Abstract

We have collected data on the one-year-ahead income expectations of members of American households in our survey of economic expectations (SEE), a module of a national continuous telephone survey conducted at the University of Wisconsin. The income-expectations questions take this form: “What do you think is the percent chance (or what are the chances out of 100) that your total household income, before taxes, will be less than Y over the next 12 months?” We use the responses to a sequence of such questions posed for different income thresholds Y to estimate each respondent's subjective probability distribution for next year's household income. We use the estimates to study the cross-sectional variation in income expectations one year into the future. We find that the estimated subjective interquartile range (IQR) of future income tends to rise with the estimated subjective median, but more slowly than proportionately. There is substantial variation in the estimated subjective IQR among respondents with the same estimated subjective median; thus respondents appear to have fairly heterogeneous perceptions of the one-year-ahead income uncertainty they face. Much of the cross-sectional variation in the central tendency of income expectations is associated with realized income, and some of the cross-sectional variation in income uncertainty is associated with realized income, age, and employment status.