Practice Job Talk: Unpacking the Causal Relationships between Income and Psychological Well-Being

• Development Workshop

Date and Location

Tuesday, October 17, 2017, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

Estimating the causal relationships between psychological well-being and income is fraught with difficulties due to endogeneity - especially reverse causality. In this paper, I use panel data from South Africa and a novel panel GMM setup to estimate a system of equations that captures the effect of psychological well-being on an individual's income and the reverse causal link - that of income on measures of mental well-being. I find evidence for heterogeneous impacts in both directions. The results suggest that psychological well-being, as measured by changes in the Center for Epidemiologic Studies Depression (CES-D) scale, affect income when near the threshold that is used by psychologists to screen for depression. Estimates of the reverse causal link show that changes in income affect CES-D for the poor but do not have an effect for the wealthy. While understudied in economics, these results suggest that psychological well-being is a dimension of poverty that may play a significant role in determining an individual's ability to exit poverty.