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Subjective v objective changes in personal finances

Guest contributor

By Dr Chris Hanretty

Like most elections, this election will be fought on the basis of the economy. The Conservatives and the Liberal Democrats will argue that the economy is growing. Labour will argue that living standards are stagnant or declining.

As a result, many people will be asked during the course of this election campaign whether the economic position of their household has improved or worsened – or whether they expect it to improve or worsen over the coming twelve months. It matters how people answer these questions. Economic optimism is known to be associated with positive polling for incumbents (but doesn’t have an independent effect on election outcomes).

Unfortunately, the answers that people give to these questions do not always march in lock-step with more objective measures of households’ economic position. To show that, I’m going to compare two things:

  • first, respondents’ answers to the question “How does the financial situation of your household now compare with what it was 12 months ago” (possible answers: a lot worse / a little worse / stayed the same / a little better / a lot better), from Wave 3 of the BES (October 2014)
  • second, changes in respondents’ levels of household income, recorded by YouGov in (a) February 2014 and (b) February 2015 (possible answers: fifteen separate income bands, starting from under £5,000, and going up in £5,000 or £10,000 increments). I’ve taken the mean points of each bracket, and calculated the difference in household income. The median difference is zero, but 25% of respondents had a change larger than £5000, or one income band.

These two pieces of information are collected at separate points in time: when respondents are asked about the financial situation of their household, they’re not thinking about the answer they gave to the question on household income they gave five moments ago.

There are good reasons to think that people from households which have seen their income rise will say that their household’s financial position has improved. That’s true, but only in the smallest, most grudging way, as Figure 1 shows.

Household income Chris H

Respondent evaluations against actual changes

The percentage saying that their household’s financial position got worse (the red area) decreases as we move from households whose income did in fact decline, to households whose income did in fact increase. But the effect is very small, and the absolute figures still indicate that the link between objective and subjective evaluations isn’t that tight. 35% of people whose household income increased said that their household’s financial position got worse.

Now, you might object that

  • I take nominal income instead of real income, and that it’s possible for nominal increases in income to be wiped out by cost increases in certain bundles of good; or that
  • household financial position includes wealth as well as income, and it’s possible for income to change even as households draw down wealth; or that
  • the timing of the income measures (February 2014 -> February 2015) don’t match up with the timing of the responses (fieldwork: October 2014)

but still, this suggests strongly that subjective evaluations of economic conditions should be used as indicators of mood rather than as a proxy for what actually happened to respondents.