Poverty, ambition & reference levels

I’ve written before about how inequality perpetuates itself through differences in confidence: people from rich backgrounds have the chutzpah to blag good jobs for which they are unqualified, whilst those from poorer backgrounds have confidence knocked out of them. However, a new paper by David Chivers suggests there’s another mechanism which can have the same effect – differences in aspirations.

He shows that people who are just above the poverty line are scared to take risks for fear of falling into poverty. This traps them into low-paying but safeish jobs. By contrast, risks are taken either by the rich, who can afford them, or the desperately poor who have nothing to lose.

Although Dr Chivers applies this to decisions on whether to become entrepreneurs in poorer countries, it resonates with me. Once I realized that I could pay the leccy bill and was in no danger of becoming homeless, all ambition left me. Rather than seek new, possibly better jobs and risk them not working out, I focused on keeping the safe job I had.

The analogy with Dr Chivers’ work lies in the importance of reference levels of income. For Dr Chivers, the reference level is absolute poverty. For me, it was the income we had as kids. As Malmendier and Nagel (among others) have shown (pdf), experiences in our formative years influence our economic choices years later.

This poses the question: how common am I? In one sense, of course, I’m not: there aren’t many that go from child poverty into Oxford. What I’m speculating is that those that do might be disproportionately likely to end up in middling careers. Having achieved a lowish reference level of income, we pootle along not chasing directorships or partnerships. We leave that to richer people who have higher reference levels: I suspect that a major spur to ambition is the desire to keep up with one’s father.

This isn’t to say we opt out of the rat race entirely: our fear of poverty stops us downshifting. It’s posh people who feel they can afford to take risks who give up work to become artisanal jam-makers.

As I say, this is speculation. It’s possible – and true for a few – that growing up poor can give a man a longlasting ambition to prove himself to the rich. But I suspect that for most of us anger can’t last a lifetime. Two factoids support my suspicion.

One Is the common claim that young professional footballers lack the drive to get to the top of their profession because they have too much to young. Having an income above the reference level set by one’s childhood saps ambition.

The other comes from research by Henrik Cronqvist and colleagues. They show that people who grew up poor but who invest in the stock market later in life buy stocks on lower price-earnings ratios. This is consistent with child poverty making people risk averse (though in this case the aversion to risk pays off!)

All this is consistent with a bigger fact – that more egalitarian societies have higher social mobility. There are many possible reasons for this, not least being that it’s easier to climb a ladder if the rungs are close together. One extra mechanism, though, might be that more equal societies give people from poor homes a higher reference level of income, which prolongs their ambition.

It’s also consistent with the fact that child poverty leaves lifelong scars – literally so.

If I’m right, the case for abolishing child poverty is even stronger than appreciated, because child poverty might hold back economic growth even years later by dampening ambition and entrepreneurship.

Now, I stress that I speculating here, And I know there are dangers in generalizing from one’s own case (at least in mine: doing so is fine for everybody else). But there is surely a question here. And because political discourse is dominated by people from posh backgrounds, it’s a question that doesn’t get the attention it should.

Comments

[Blissex]

«It’s posh people who feel they can afford to take risks who give up work to become artisanal jam-makers.»

Ah the usual sexist/patriarchal point of view: it is usually posh *women* who do that kind of stuff and take those risks. :-)

[rogerh]

Nail hit on head.

Aspiration does seem to depend on where you start from. We can see a dynastic effect in politics and journalism and show business where the same names crop up. Plainly a good racket to get into my boy. At one time the children of doctors and surgeons went into the same trade, maybe not so much now.

Then there is the parental contacts effect, getting a holiday job or internship at Blogs Bakers does not have the same CV effect as PoshBank plc. Then there is the pushy effect. I do see children where parents have in effect said 'I made it on my own so I'm not pushing them into anything'. In effect avoiding a push to fill in applications, take to interviews and so on. Hardly pushy, neglectful really. We dare not encourage pushiness, it would disturb too much.

Herein lies the problem. Would the middle classes support tax wise an education programme that raised the expectation of the poor and strongly advised and nudged lifestyle choices and actions. I doubt such a programme would be all that popular. On the one hand it would disturb idle complacency within both camps and on the other hand expose the serious lack of good quality jobs. Better to start a baby and get a flat.

[Bonnemort]

"more egalitarian societies have higher social mobility"

Then why do you support policies which result in less egalitarian societies?

"It’s posh people who feel they can afford to take risks who give up work to become artisanal jam-makers."

There was a program on BBC t'other day about West Wales, featuring artisanal hand-made chocolatiers from Carmarthenshire, all young, posh and English. In fact every business the

[Luis Enrique]

yes you could take this paper
http://klenow.com/HHJK.pdf
and something similar about talented people from poorer backgrounds

[maryjane]

nice post.

[Stephanie Ras]

Good piece.