Feeling Poor, Feeling Rich, or Feeling Middle-Class : An Empirical Investigation

Based on their objective economic situation and comparing with their peers, individuals formperceptions of their economic position in a society. Data from the three waves of the Life in Transition surveys ofEuropean countries show that these perceptions systematically deviate from the rankings obtained usingconsumption levels. People position themselves in the middle ranks in larger numbers than those who are in the middleranks according to their consumption levels. Correspondingly, many people who objectively are classifiedin the top, richest, or bottom, poorest, ranks subjectively feel that they are in the middle class. This puzzling"bunching in the middle" is the focus of this paper. Explanations are tested and discarded that considersubjective perceptions as misperceptions or the result of other mistakes due to data limitations (such as tail bias).The paper concludes that rather than reflecting a subjective assessment of the distribution of welfare, subjectiverankings reveal subjective economic well-being. The paper show that monetary consumption is a strong predictor ofsubjective economic well-being, but that the latter is influenced by many other factors, including economicsecurity, proxied by employment status or other measures of human capital, such as health and education. These findingshave policy relevance, since redistribution measures aiming at simply protecting consumption levels may not besufficient to restore the economic well-being provided by having full-time secure types of employment.