Rationale: Experts often blame income inequality for a wide range of social ills. They usually calculate its severity using special statistical indices drawn from official tax data or large-scale surveys of individual households. Such analyses create an objective picture and indicate the degree of inequality and the basic factors behind it.
A number of economic and political theories hold that the level of income inequality affects people’s self-perceptions and behaviours. When inequality is high, people are more likely to demand a redistribution of wealth. They also tend more towards conflict, are unhappier, and so on. However, the first step is for people to have a clear understanding of income distribution and their place in that spectrum. Sometimes, the numbers indicate that income inequality is high, even though most people think it is low. Conversely, people sometimes think they are poorer or wealthier in relation to others than they actually are.
In fact: It turns out that people’s subjective perceptions of inequality influence their behaviour and views more than do objective indicators. Experimental studies also show that, because people have a poor understanding of the severity of income inequality, additional information on the subject can influence the decisions they make. Recent research on the perception of inequality confirms that people hold a ‘triple delusion’. That is, they are misinformed as to the following:
income distribution in their country;
how income inequality changes over time;
where they are located on that scale.
The question arises: How do individuals gauge their own place on the income spectrum and why do they get the statistical picture wrong?
Subjective perceptions differ from the official figures in many countries, and Russia is no exception. HSE University economists Vladimir Gimpelson and Evgenia Chernina have shown that only 10% of Russians can accurately gauge where they stand on the income scale. The rest either underestimate or overestimate by placing themselves just a little below the median.
‘Imagine a staircase of ten stairs, each with 10% of the country’s population on it. The lowest step holds the poorest 10% of families, the top step the richest 10%. On which of those steps does your family stand?’ This was one of the questions posed in the HSE Russian Longitudinal Monitoring Survey (RLMS-HSE) in 2016. Vladimir Gimpelson and Evgenia Chernina analysed the answers of 10,000 Russians, comparing into which decile respondents placed themselves against where they actually stood according to the income data they provided.
The researchers measured the income per family member using a variety of alternative indicators. These included consumer spending and the asset index that takes the ownership of homes and durable goods into account. Researchers also looked at variables that could explain the discrepancy between subjective and objective assessments of well-being. These included socio-demographic and economic characteristics (gender, age, employment, education, place of residence, etc.), the dynamics of past income and the respondent’s psychological state.
By placing themselves in specific deciles, respondents thought about their personal well-being, not in the abstract, but concretely, considering it relative to their fellow citizens. The result:
only 4.7% of those who constitute the poorest decile placed themselves in this group;
only 10% of those who, by the numbers, belong in one of the five wealthiest deciles, saw themselves in that group;
most respondents (70%) placed themselves close to the center or just below it in the 3rd, 4th or 5th deciles.
Only 11% of respondents were able to gauge their position accurately. Two-thirds of those surveyed underestimated their position and placed themselves one step lower than they actually were, and 20% overestimated their income relative to others. On average, respondents were off by two full deciles, although as many as 22% were off by five.
People generally misjudge their place in the income distribution spectrum and errors of perception are common, the authors conclude. The challenge was to figure out why.
It turned out that socio-demographic factors play a role. For example:
Place of residence. Among those with identical incomes, people living in small towns displayed the largest gap between their subjective and objective status. Residents of Moscow and St. Petersburg were best at gauging their actual position. Other factors being equal, residents of these two cities were also more satisfied with their position due to the greater opportunities and better services to which they had access;
Age and health. The older the respondent and the poorer their health, the more likely they were to underestimate their level of income. Such pessimism might stem from the greater expenses they have for healthcare, the resultant lower standard of living and, consequently, the level of well-being;
Education. The more educated respondents were less likely to underestimate their positions, but a gap remains. ‘More education’ does not translate into ‘more accurate information.’
The researchers found no significant differences based on gender. In addition, people whose incomes had risen or fallen did not see themselves as correspondingly more or less financially secure. The exception is the respondents with the highest level of happiness. Such ‘optimists’ respond to positive long-term changes in income and have a more pronounced positive relationship between subjective and objective assessments of their position.
In fact, the subjective attitude toward such changes is important. An improvement in a person's financial situation causes them to place themselves higher on the income scale, while a worsening of that situation — including the expectation that it will worsen — tends to lower that position. The experience of such mobility sends a signal that affects perception. It elicits what U.S. economist Albert Hirschman referred to as the 'tunnel effect.' According to this theory, when those who are stuck in a tunnel see others nearby starting to move, they hope for the best and anticipate a positive dynamic.
It is widely held that deep inequality threatens stability, that in societies with a large income gap, people are more likely to protest and demand a redistribution of wealth. However, researchers found practically no direct correlation between such behaviour and the size of the gap between rich and poor: more conflict was not observed where income inequality was higher.
The fact that perceptions of inequality are subjective is one of the factors explaining this. What motivates people is not objective information — that not everyone has or knows — but subjective perceptions of reality, and one’s place in that reality. However, science still knows very little about how such perceptions are formed and to what extent they correspond with reality.