Why the Middle Class Invests in its Future: An Empirical Test of the ‘Peace of Mind’ Narrative

in Middle Income Countries

Rick Mourits&

Luuk van Kempen

EADI conferenceBonn – June 24, 2014

The ‘Peace of Mind’ narrative (I)

1. Calvo (2008); risk of falling (back) into poverty is “ever-present, oppressing source of stress” for

those just above the poverty line → middle class sufficiently ‘distant’ from poverty line to enjoy

“peace of mind”

2. Banerjee & Duflo (2008; 2011):

“nothing seems more middle class than the fact of having a steady well-paying job”

Job security is crucial in order to avoid being consumed by “existential stress”

Complex survival-oriented tactics imply a drain on mental energy for investment in future

(self) → weak “navigational capacity” (cf. Appadurai, 2004)

3. Psychology of scarcity (Mullainathan & Shafir, 2013; Mani, Mullainathan, Shafir & Zhao, 2013; Haushofer & Fehr, 2014)

Scarcity of money leads to i) cognitive overload, and ii) attentional capture

Lack of “mental bandwith” today compounds tomorrow’s scarcity problem

The ‘Peace of Mind’ narrative (II)

Evidence on supposed inhibition to invest in one’s future, as a consequence of deleterious psychological mechanisms triggered by (near-)poverty, is mostly anecdotal or micro in scope

Our ambition: a broader test whether job (and thus income) security indeed frees up ‘mental space’ to invest in oneself, using cross-country evidence

Objective: Contribute to our understanding of what sets the middle class apart from the poor and investigate whether there are self-reinforcing dynamics at play

Focus on MICs / emerging economies

Method: structural equation model (and multilevel regression analysis)

Question: Are the data compatible with the ‘peace of mind’ narrative?

What type of investment?

Cultural capital; not instrumental in ‘making ends meet’

Human capital investment may pay off even in short or medium run

‘Peace of Mind’ pathway into middle class

EDUCATION

JOB SECURITY

PEACE OF MIND

INVESTMENT IN

CULTURAL CAPITAL

INCOME ASSETS/WEALTH

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Testing the ‘Peace of Mind’ narrative World Value Survey, 5th wave (2005-2008)

• 23 middle-income countries (lower cutoff: $1,250 GNI p.c.; upper cutoff: $12,500 GNI p.c.) → 37,150 households

Operationalisation of ‘PoM’ pathway into middle class

EDUCATION

JOB SECURITY

PEACE OF MIND

INVESTMENT IN

CULTURAL CAPITAL

INCOME ASSETS/WEALTH

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EDUCATION ON ISCED

SCALE

JOB SKILL ON ISCO

SCALE

ESTIMATED

INCOME

LAST YEAR’S SAVINGS

SENSE OF CONTROL

• NEWS CONSUMPTION

• INTEREST IN POLITICS

• IMPORTANCE TERTIARY EDUCATION (GIRL-TO-BOY)

• MEMBERSHIP IN ARTISTIC/ CULTURAL ORGANIZATION

PERSONAL RESOURCE THAT ABSORBS THE IMPACT OF

NEGATIVE SHOCKS ON MENTAL HEALTH (BUFFER AGAINST STRESS)

(THOITS, 1995; YOUNG 2001; LEVER, PIÑOL & URALDE, 2005)

Structural Equation Modeling

Structural Equation Modeling, also SEM, is like regression analysis: it estimates the linear effects of independent variables on Y.

However, it can do more!- Test whether models fit the data

SEM tests whether a restricted model has less explanatory power than a fullmodel, i.e., whether certain paths (relations) are redundant.

Full Restricted

Results – working respondents

Results – all respondents

Conclusion

Overall, ‘peace of mind’ narrative fits data reasonably well, but a number of additional relations improve fit:

‘Peace of mind’ also predicted by relative income, not only by education/job skills

Cultural capital investment also directly predicted by education/job skills, not only through ‘peace of mind’

Analysis suggests that ‘sense of control’ and cultural capital are class-dependent

However, analysis based on rather crude proxies → need for better data, especially on mental health

If narrative holds true, interesting implications for development interventions:

Benefits of interventions that would assist households in ‘navigating’ the future (e.g. trainings on business planning, financial management etc.)

‘Costs’ of complex interventions that further increase cognitive load on participants