In 1966, Walter Runciman coined the concept of relative deprivation: being dissatisfied with your income is heavily dependent on the perception that people surrounding you are better off. Results of a recent empirical research using German data confirm the theory.
We are often confronted with the question: “Am I satisfied by my income level?” We might be satisfied in absolute terms, but frequently our level of satisfaction depends from what see around us. The welfare we perceive is a relative, rather than absolute, concept: the income of our neighbors, colleagues, and friends is important in determining the social status that we feel we have reached. Traditional models have excluded status considerations from the analysis of individual welfare, although the majority of economists don’t think such exclusion is theoretically warranted. As a result, individual welfare is normally assumed to be a function of individual income. But empirical investigations have repeatedly proved otherwise, by showing that preferences are interdependent, i.e. that they are made by making comparisons with others.
Walter Runciman first coined the concept of relative deprivation in 1966. He noted that there are four preconditions of relative deprivation (of object X by person A):
· A does not have X
· A knows of other persons that have X
· A wants to have X
· A believes obtaining X is realistic
And he concluded that the magnitude of relative deprivation is the difference between the actual and the desired situation. Thus if we look around and find out we have a lower income with respect to an individual belonging to our reference group, we feel deprived with an intensity which is proportional to the difference between the two income values. Overall individual deprivation is just the averaged sum of these differences.
In 2006, Conchita D’Ambrosio and Joachim Frick tested the validity of relative deprivation theory for Germany between 1990 and 2004. By using socio-economic panel data on 24,000 German citizens aged at least 17,
they found that the level of income satisfaction is positively correlated with the education level and negatively correlated with age. New couples with or without kids tend to be more satisfied, and so are home owners. On the other hand, the unemployed are naturally dissatisfied by their financial situation. As far as income is concerned, it turns out to be more highly dependent on relative deprivation, whose coefficient has a negative and significant sign, rather than absolute income levels.
Summing up, the more we look around, the more we want for ourselves... In fact, Runciman argued that people that don’t have expectations of upward mobility tend to be content with what they have. In contrast, people comparing their lot with better off communities will keep being dissatisfied until they fill the income gap.
by Pietro Muliere,
Full Professor of Statistics, Università Bocconi
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Conchita D'Ambrosio,
Associate Professor of Economics, Università Milano-Bicocca