Identifying Welfare Effects from Subjective Questions
Ravallion, Martin
March 2000 - In subjective surveys, people who become ill or lose their jobs report reduced well-being, even if they later get a job. Perhaps their exposure to uninsured risk outside the formal employment sector reduces their expectations about future income. Do potential biases cloud the inferences that can be drawn from subjective surveys? Ravallion and Lokshin argue that the welfare inferences drawn from subjective answers to questions on qualitative surveys are clouded by concerns about the structure of measurement errors and how latent psychological factors influence observed respondent characteristics. They propose a panel data model that allows more robust tests. In applying the model to high-quality panel data for Russia for 1994-96, they find that some results widely reported in past studies of subjective well-being appear to be robust but others do not. Household income, for example, is a highly significant predictor of self-rated economic welfare; per capita income is a weaker predictor. Ill health and loss of a job reduce self-reported economic welfare, but demographic effects are weak at a given current income. And the effect of unemployment is not robust. Returning to work does not restore a sense of welfare unless there is an income gain. The results imply that even transient unemployment brings the feeling of a permanent welfare loss, suggesting that high unemployment benefits do not attract people out of work but do discourage a return to work. This paper - a product of Poverty and Human Resources, Development Research Group - is part of a larger effort in the group to understand the relationship between subjective and objective economic welfare. The authors may be contacted at mravallion@worldbank.org and mlokshin@worldbank.org
