Subjective Economic Welfare

39 Pages Posted: 20 Apr 2016

See all articles by Martin Ravallion

Martin Ravallion

Georgetown University

Michael Lokshin

World Bank - Development Research Group (DECRG); National Research University Higher School of Economics

Date Written: April 1999

Abstract

As conventionally measured, current household income relative to a poverty line can only partially explain how Russian adults perceive their economic welfare. Other factors include past incomes, individual incomes, household consumption, current unemployment, risk of unemployment, health status, education, and relative income in the area of residence.

Paradoxically, when economists analyze a policy's impact on welfare they typically assume that people are the best judges of their own welfare, yet resist directly asking them if they are better off. Early ideas of utility were explicitly subjective, but modern economists generally ignore people's expressed views about their own welfare. Even using a broad set of conventional socioeconomic data may not reflect well people's subjective perceptions of their poverty.

Ravallion and Lokshin examine the determinants of subjective economic welfare in Russia, including its relationship to conventional objective indicators. For data on subjective perceptions, they use survey responses in which respondents rate their level of welfare from poor to rich on a nine-point ladder.

As an objective indicator of economic welfare, they use the most common poverty indicator in Russia today, in which household incomes are deflated by household-specific poverty lines.

They find that Russian adults with higher family income per equivalent adult are less likely to place themselves on the lowest rungs of the subjective ladder and more likely to put themselves on the upper rungs. But current household income does not explain well self-reported assessments of whether someone is poor or rich. Expanding the set of variables to include incomes at different dates, expenditures, educational attainment, health status, employment, and average income in the area of residence doubles explanatory power.

Healthier and better educated adults with jobs perceive themselves to be better off, controlling for income.

The unemployed view their welfare as lower, even with full income replacement.

Individual income matters independent of per capita household income. Relative income also matters. Living in a richer area lowers perceived economic welfare, controlling for income and other factors.

This paper-a product of Poverty and Human Resources, Development Research Group-is part of a larger effort in the group to better understand the relationship between objective and subjective economic welfare. The study was funded by the Bank's Research Support Budget under the research project Policies for Poor Areas (RPO 681-39).

Suggested Citation

Ravallion, Martin and Lokshin, Michael, Subjective Economic Welfare (April 1999). World Bank Policy Research Working Paper No. 2106. Available at SSRN: https://ssrn.com/abstract=569202

Martin Ravallion (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Michael Lokshin

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-1772 (Phone)
202-522-1153 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/mlokshin

National Research University Higher School of Economics

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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