Is It Real? Inequality and Self-Perception

Formal models as well as rather descriptive works set forth the changing consumption habits under increasing inequality as an endogenous macroeconomic risk (Rajan, 2010; Fitoussi and Saraceno, 2010). While the formal variants model a household comparing themselves with households of higher income and wealth, to match their consumption patterns (König and Größl, 2014), the story of relative consumption describes a more complex social process including not only income and wealth, but also social status, education and institutional factors that matter for the scope of the comparison and the size of the consumption copying mechanism (Veblen, 1899; Frank, 2014). The big question that remains is which dimensions of inequality really matter and how country-specific institutions define the extend of relative consumption?

By assuming inequality as an endogenous risk, the recognition and perception of inequality becomes an essential part, which will determine the behavior of individuals. Recent papers have shown that individuals subjective perception about the magnitude of inequality and their own position within society does not match with quantitative measures of income or wealth (Engelhardt and Wagener, 2014; Niehues, 2014). While those authors call this a bias due to missing information, I will argue that individuals use factors as for example education or social status to assess their relative position within society (Goldthorpe, 2010; Bourdieu, 2006).

Using a cross-sectional micro survey of 17 European countries (ISSP, 2012), the individual perceptions of inequality are treated as a proxy for the “real” extend of inequality.¹  I test whether those perceptions depend on income and wealth or on other specific individual factors including unemployment, educational attainments or occupation. In addition, the multi-level estimation model allows to investigate the relevance of country-specific institutional settings, such as the educational system, government expenditure in different sectors or political participation, to explain the between-country variation.

The results show that income and wealth play a dominant role in explaining self-perceptions, but the socio-economic status of occupation, education and the current employment status are just as important. In addition, the model shows a strong path dependency with respect to the parental background, but it is not clear whether this effect is attributed to wealth or social capital transmitted by the family. Interestingly, a higher educational mobility within a country also alters the relevance of income as a predictor for inequality perceptions. This suggests a compensation effect of income that can only take place if society permits a certain degree of mobility. While overall public spending measures are insignificant, per capita unemployment benefits increase self-perceptions. All results are robust to recent macroeconomic indicators as for example GDP growth or unemployment rates.

The important conclusions to draw from these results are threefold. First, income and wealth inequality alone are not sufficient to explain self-perceptions. Therefore, formal models as well as estimations of the relative consumption elasticity should at least consider the relative effect of education, occupation and mobility to capture the effect of inequality for relative consumption. Second, with respect to possible redistributive measures I can conclude that monetary redistribution would be not enough to lower perceived inequality and should be supported by additional measures to increase social mobility. Last but not least, a systematical misperception of inequality as highlighted by Niehues (2014) is unlikely as soon as other measures of social inequality are considered.

Notes:

1 The specific question asks: “In our society there are groups which tend to be towards the top and groups which tend to be towards the bottom. Below is a scale that runs from top to bottom. Where would you put yourself now on this scale?”

References:

Bourdieu, Pierre, Die feinen Unterschiede : Kritik der gesellschaftlichen Urteilskraft, Frankfurt am Main: Suhrkamp, 2006.

Engelhardt, Carina and Andreas Wagener, “Biased Perceptions of Income Inequality and Redistribution,” Discussion Paper 526, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, Hannover 2014.

Fitoussi, Jean-Paul and Francesco Saraceno, “Inequality and Macroeconomic Performance,” Documents de Travail de l’OFCE 2010-13, Observatoire Francais des Conjonctures Economiques (OFCE), Paris 2010.

Frank, Robert H., “Expenditure Cascades,” Review of Behavioral Economics, January 2014, 1 (1-2), 55–73.

Goldthorpe, John H., “Analysing Social Inequality: A Critique of Two Recent Contributions from Economics and Epidemiology,” European Sociological Review, January 2010, 26 (6), 731–744.

ISSP, “International Social Survey Programm 2009: Social Inequality IV,” GESIS Data Archive ZA5400 Data file Version 3.0.0, International Social Survey Programme, Cologne 2012.

König, Nadja and Ingrid Größl, “Catching up with the Joneses and Borrowing Constraints: An Agent-based Analysis of Household Debt,” Macroeconomics and Finance Series 4/2014, University of Hamburg, Hamburg 2014.

Niehues, Judith, “Subjektive Ungleichheitswahrnehmung und Umverteilungspräferenzen – ein internationaler Vergleich,” IW Trends, 2014, (2).

Rajan, Raghuram G., Fault Lines: How Hidden Fractures still Threaten the World Economy, Princeton University Press, 2010.

Veblen, Thorstein, The theory of the leisure class, New York: Dover Publications, 1899.