Poverty and Psychological Resilience

I study the extent to which poverty and psychological well-being can be thought of as inputs in a feedback loop, by which poverty may have an influence on life satisfaction, while past low levels of satisfaction with life may lead to economic hardship. I use joint dynamic random-effects models that account for state dependence, feedback effects, unobserved heterogeneity and initial conditions, using data from the German Socio-Economic Panel for 1992–2018. Poverty hurts while it lasts: it raises the probability of being dissatisfied with life in the year it occurs and the following year, and people do not adapt to it. But the damage neither accumulates with the years spent in poverty nor outlasts the spell: people recover their previous life satisfaction within two years of leaving poverty, also after repeated spells. I interpret this as psychological resilience to poverty. Satisfaction with income and housing recovers more slowly than overall life satisfaction. In the other direction, low levels of satisfaction with life have a (short-lived) positive influence on the probability of being in poverty. Evidence suggests that psychological uneasiness can be added as an explanation to persistent poverty.