Relative Deprivation and Well-Being of the Rural Youth Tekalign Gutu Sakketa and Nicolas Gerber Working Paper Series n° 296 June 2018 Improve the QQuality of Life African Development Bank Group 5 for the People of Africa Working Paper No296 Abstract Relative income deprivation is one mechanism employed, the study employs two measurements of through which income or wealth inequality is relative deprivation: objective and subjective, and hypothesized to affect human behaviour, with compere the results from both. Our empirical results consequences on well-being. The study checks these indicate that objective relative income deprivation effects against multiple self-identified reference has a ‘’signal effect’’ or a ‘’positive externality’’— groups using a unique rich panel data set from higher income of others in the reference group Ethiopia, enabling us to examine a broader range of indicate higher prospects for youth (that induce questions related to youth well-being than in motivation), whereas the subjective income RD has previous studies in developing countries. In doing a ‘’status effect’’—higher income of others in the so, the study extends the standard analysis of relative reference group reduces life satisfaction. Both deprivation (RD) from income per se, to consider objective and subjective measures of social and non- social relative deprivation as well as assets (non- monetary RD have a ‘’status effect’’. Our findings monetary) relative deprivation. Since the effects of are robust to different specifications. The policy relative deprivation on well-being are also sensitive implications of the results are discussed. to the kind of measurements This paper is the product of the Vice-Presidency for Economic Governance and Knowledge Management. It is part of a larger effort by the African Development Bank to promote knowledge and learning, share ideas, provide open access to its research, and make a contribution to development policy. The papers featured in the Working Paper Series (WPS) are those considered to have a bearing on the mission of AfDB, its strategic objectives of Inclusive and Green Growth, and its High-5 priority areas—to Power Africa, Feed Africa, Industrialize Africa, Integrate Africa and Improve Living Conditions of Africans. The authors may be contacted at [email protected]. Rights and Permissions All rights reserved. The text and data in this publication may be reproduced as long as the source is cited. Reproduction for commercial purposes is forbidden. The WPS disseminates the findings of work in progress, preliminary research results, and development experience and lessons, to encourage the exchange of ideas and innovative thinking among researchers, development practitioners, policy makers, and donors. The findings, interpretations, and conclusions expressed in the Bank’s WPS are entirely those of the author(s) and do not necessarily represent the view of the African Development Bank Group, its Board of Directors, or the countries they represent. Working Papers are available online at https://www.afdb.org/en/documents/publications/working-paper-series/ Produced by Macroeconomics Policy, Forecasting, and Research Department Coordinator Adeleke O. Salami Correct citation: Sakketa T. G. and N. Gerber (2016). Relative Deprivation and Well-Being of the Rural Youth,Working Paper Series N° 296, African Development Bank, Abidjan, Côte d’Ivoire. Relative Deprivation and Well-Being of the Rural Youth Tekalign Gutu Sakketa and Nicolas Gerber1 JEL classification: D31, D63, I31, Z13 Keywords: Objective relative deprivation, subjective relative deprivation, income, non-income, social capital, subjective well-being, rural youth, Ethiopia 1 Tekalign Gutu Sakketa and Nicolas Gerber are staff of the Department of Economic and Technological Change, Center for Development Research, University of Bonn. Walter-Flex str.3, Bonn, Germany. Tele: +49 15222 975295. Email: [email protected]/ [email protected] 1 1. Introduction Concern for status (or relative deprivation) is one mechanism through which income or wealth inequality is hypothesized to affect population well-being, such as health, happiness, or human capital formation (Stark and Taylor 1991; Graham, Nikolova, 2015). Extensive research carried out in developed countries has shown the importance of relative deprivation (RD)for individual well-being and behavior, since the time of Adam Smith (Alpizar, Carlsson, and Johansson- Stenman 2005; Smith 2010). More recently, this analysis has extended to empirically testing the importance of both subjective (stated) and objective (revealed) RD (Easterlin 1995; Clark et al. 2008; Akay and Martinsson 2011). Surprisingly, there is only scarce empirical evidence of the impact of household relative income (RD), relative consumption (consumption deprivation), and relative social prestige (social deprivation) on well-being in developing countries (Salti 2010). Existing literature on RD focuses on the adult or mature population. In the context of sub-Saharan Africa (SSA), where more than 65 percent of the population is 25 years old or younger, this is a clear knowledge gap. The recent Arab uprisings and emerging empirical evidence also suggest that a concern for RD is more pronounced among the youth, and that this is not limited to richer countries (Pingle and Mitchell 2002, for the latter). What is evident across existing studies is that people do have status concerns that, in turn, affect their well-being and aspirations. Social comparison among youth (as individuals or as groups) is at the heart of RD. Relative deprivation may affect the well-being of people, in general, and youth, in particular, in several ways. “First, well-being is maximized when people live under conditions that mimic those under which humans evolved’’ (Chen 2015). For instance, hunter-gatherer societies punished those who deviated from customary practices of equal sharing of food (Deaton 2001). Second, studies have shown that RD undermines the protective role of the biochemical system of stress response against wide range of human diseases. Third, rank, rather than absolute possession of resources (money) itself, may determine power and access to (exclusion of) material goods and services (Eibner and Evans 2005). A good example here is the occupational status, which may determine the degree of control people have over others. Fourth, empirical evidence has shown that RD affects health and happiness—the two most common indicators of well-being (Kondo et al. 2008; Subramanyam et al. 2009). Finally, RD can foster life satisfaction by promoting a stronger pursuit for status. Stark (2004) showed that increase in inequality of wealth prompts a stronger quest for status, which, in turn, fosters the accumulation of wealth. Thus, such feelings of RD diminish or enhance an individual’s well-being. Youth 2 population groups are usually responsive to such feelings of RD. Such behavioral responses often force individuals to shift their allocation of resources from meeting basic needs to the purchase of positional goods, such as mobile phones or expensive clothes, even though their absolute income remains low. It may also induce individuals to work harder in order to achieve the higher living standard that others in the reference groups have achieved. Despite increasing coverage of research on RD, four issues remain unclear in the literature that tests the relative deprivation hypothesis in relation to population well-being: (1) the choice of an indicator (which indicator or object of social comparison—income, consumption, wealth, housing facilities, social capital, political connections) that an individual or a group uses to compare himself/herself against their reference group; (2) the choice of reference group (whether to use geographic proximity, such as village or region; demographic characteristics, such as age, gender, ethnicity, relatives, workplaces, peers, and religion; or economic reference groups, such as occupation, size of land holding, number of livestock holdings); (3) efforts to establish stronger causal designs (need for longitudinal studies with careful control for confounding by individual or household income and other indicators of socioeconomic position); and (4) inadequate research to advance innovative approaches to operationalize measurement of RD, including the measurement of RD in dimensions other than income (Adjaye-Gbewonyo and Kawachi 2012). To our surprise, the existing literature in economics relies on limited measure of relative income deprivation—a “unidimensional” measure of RD (those derived uniquely from income); and no adequate empirical work has been carried out beyond the income-based approach to measure RD in other dimensions. The objective approach widely used in economics literature uses income as an object of social comparison to test the RD hypothesis while explicitly, or implicitly, assuming individuals compare themselves with individuals within the same reference group (comparison groups). Measuring RD is not easy and an elusive issue (Adjaye-Gbewonyo and Kawachi, 2012). There are two analytical approaches to test the effect of RD on well-being. The first approach uses a revealed preferences approach based on survey data, employed here, using subjective and objective measures. In this paper, we employ both measures by disaggregating RD along different dimensions, and compare the results of the two measures. The objective measures of RD is common in economics literature, while the second measures is extensively