Wednesday, January 4, 2012

Relative deprivation, reference groups and the assessment of standard of living

This paper proposes two new indices of relative deprivation, derived from an extension of the concept of the generalized Gini for the measurement of distributional change. Population- and income-weighted relative deprivation indices are then defined and, using panel data from the Consortium of Household Panels for European Socio-Economic Research, this paper checks which of the various ways of defining individual deprivation best fits the answers given by individuals on the degree of their satisfaction with income. The analysis finds that the deprivation indices proposed are consistently and negatively correlated with income satisfaction as reported by respondents, that income weighted measures fit better than population weighted measures, and that this fit improves with countries that experienced deep institutional changes such as the transitional economies of Eastern Europe.

Sociologists have for a long time made the assumption that individuals are concerned about their relative status. Such an emphasis may be found in the writings of Karl Marx who wrote that "our desires and pleasures spring from society, we measure them therefore by society and not by the objects which serve for their satisfaction. Because they are of a social nature they are of a relative nature" . This idea of relative concern is also at the basis of the concept of relative deprivation which was introduced originally by Stouffer et al. (1949) and systematized by Runciman (1966) who also stressed the
importance of reference groups. He argued that there does not seem to be a strong correlation between the level of "class-political discontent" and objective indicators of material deprivation so that this discontent is rather related to the gap which exists between one's economic and social conditions and the perceived conditions of some reference group.

Economists have also quite a long tradition of including relative income or status in models of utility maximization but for many years those taking such a point of view were the exception. Duesenberry (1949), for example, assumed that individuals have a desire for self-esteem and as a consequence they tend to imitate the consumption patterns of those who have a higher socioeconomic status. Similar ideas may be found in the works of Hirsch (1976) who coined the term "positional goods", Frank (1985) and in numerous papers analyzing in recent years the determinants of happiness (e.g.,Blanchflower and Oswald, 2004, Clark, 2003, Ferrer-i-Carbonell, 2005). More recently Hopkins (2008) in a paper on happiness and relative concerns argued that there are at least three reasons why concern for relative position seems to be so deeply rooted in human behavior. His first explanation, which he calls the "rivalry story", stresses the fact that, in ancient times, men who were successful (e.g. in hunting) would use their prestige and assets to dominate their companions, in particular in having priority in access to women. The second explanation seems to have been suggested by Samuelson (2004) and Rayo and Becker (2007) and was called the "information story" by Hopkins.

Here the idea is that the conduct of individuals who are successful will be imitated. In other words "evolutionary selection has given you concerns about others in order the give you an incentive to gather useful information about potentially profitable activities" (Hopkins, 2008). Finally a third explanation, labeled the "perception story" by Hopkins, stresses the fact that in the same way as our evaluation of the taste of a given orange depends on the overall distribution of the taste of oranges, our satisfaction with a specific income depends on the overall distribution of incomes.

World Bank. Author: Silber, Jacques ; Verme, Paolo. Document Date: 2012/01/01.Document Type: Policy Research Working Paper.Report Number: WPS5930

Relative deprivation, reference groups and the assessment of standard of living x

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