Practice Job Talk: Income, Psychological Well-being, and the Dynamics of Poverty

• Development Workshop

Date and Location

Tuesday, October 23, 2018, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

Evidence across disciplines suggests that economic well-being affects an individual's psychological well-being, and also that psychological disorders can have substantial negative effects on individual income. Together, these studies suggest a feedback loop that may trap some in poverty. However, estimating these causal links is difficult due to this simultaneous causality. In this paper, I overcome this endogeneity concern with a panel GMM approach that estimates a dynamic system of equations where income and psychological well-being are simultaneously determined. Using a nationally representative panel dataset from South Africa, I find evidence of impacts in both directions with important heterogeneity. The average effect of changes in psychological well-being on income is mainly driven by a large effect among those near the clinical depression threshold where I estimate that a one standard deviation decrease in psychological well-being leads to 17\% loss in earnings. Meanwhile, the effect of changes in income on psychological well-being is especially pronounced among the poor, indicating the possibility of a strong feedback loop among an especially vulnerable subgroup -- the poor with low levels of psychological well-being. An impulse response function analysis indicates that this bi-directionality can nearly double the long-term impact of shocks, while simulations show that this relationship can explain prolonged poverty spells and low resilience to shocks. A formal test for poverty traps shows that individuals with low levels of psychological well-being exhibit markedly different income dynamics that suggest the existence of a multi-equilibrium poverty trap.