Working Paper 296 - Relative Deprivation and Well-Being of the Rural Youth

Relative income deprivation is one mechanism through which income or wealth inequality is hypothesized to affect human behaviour, with consequences on well-being. The study checks these effects against multiple self-identified reference groups using a unique rich panel data set from Ethiopia, enabling us to examine a broader range of questions related to youth well-being than in previous studies in developing countries. In doing so, the study extends the standard analysis of relative deprivation (RD) from income per se, to consider social relative deprivation as well as assets (nonmonetary) relative deprivation. Since the effects of relative deprivation on well-being are also sensitive to the kind of measurements employed, the study employs two measurements of relative deprivation: objective and subjective, and compere the results from both. Our empirical results indicate that objective relative income deprivation has a ‘’signal effect’’ or a ‘’positive externality’’— higher income of others in the reference group indicate higher prospects for youth (that induce motivation), whereas the subjective income RD has a ‘’status effect’’—higher income of others in the reference group reduces life satisfaction. Both objective and subjective measures of social and nonmonetary RD have a ‘’status effect’’. Our findings are robust to different specifications. The policy implications of the results are discussed.JEL classification: D31, D63, I31, Z13. Keywords: Objective relative deprivation, subjective relative deprivation, income, non-income, social capital, subjective well-being, rural youth, Ethiopia