Inequality, social comparisons and minimum income aspirations: Evidence from South Africa

ISER Working Paper No. 2017/3 1 A range of empirical studies have shown that people’s minimum income aspirations increase with their own income (Danziger et al., 1984, de Vos and Garner, 1991, Appadurai, 2004, Stutzer, 2004) and with the income of others in their community (Burchardt, 2005, Barr and Clark, 2010, Knight and Gunatilaka, 2012, Bogliacino and Ortoleva, 2015). These changes have been explained by processes of adaptation through habituation and social comparison (Sen, 1990, Teschl and Comim, 2005, Knight and Gunatilaka, 2012). However, the relationship between aspirations and inequality has received far less empirical attention. There are two competing hypotheses on how inequality shapes individual aspirations. Some studies suggest that high levels of inequality are likely to dampen the aspirations of the relatively poor (Corneo and Jeanne, 2001, Halleröd, 2006, Ray, 2006) because the living standards of the better off may ‘appear as more or less unattainable for people in more straitened economic circumstances’ (Halleröd, 2006: 388). This is described as a failure of the capacity to aspire (Appadurai, 2004). Other studies, however, argue that high and rising levels of inequality may stimulate the aspirations of the relatively poor, if the upward mobility of some is taken as a sign that others may benefit in the future (Stark, 2006, Ray, 2010, Macours and Vakis, 2014). In this paper, we investigate the formation of income aspirations in South Africa, a country with one of the world’s highest levels of inequality. During the decades of apartheid, sharp racial cleavages in access to resources and opportunities meant that high levels of aggregate inequality reflected large racial divisions in income. Over the post-apartheid period, inequality has increased further. However, this increase has been driven by a rise in within-race inequality, and particularly by a widening of inequality among Africans1 who comprise the majority population of South Africa (Leibbrandt et al., 2010). Poverty rates, which have fallen only modestly since the democratic transition, remain high and Africans remain considerably overrepresented among the poor (Leibbrandt et al., 2010, Posel et al., 2016). However, there has also been significant racial transformation at the upper end of the income distribution over the post-apartheid period (Visagie, 2015a, Southall, 2016). We explore the formation of income aspirations in the context of these high levels of both poverty and inequality by analysing responses to the classic minimum income question (MIQ) (see Goedhard et al., 1977) collected in a nationally representative household survey conducted in 2008/2009. Respondents were asked to identify the minimum monthly income needed for their household to make ends meet, a measure viewed as the lower threshold of their income aspirations (Stutzer, 2004, Herrera et al., 2006, Barr and Clark, 2010, Knight and Gunatilaka, 2012). We investigate whether and how the aspirations gap, or the difference between actual income and reported minimum income needs, differs between households that are below and above the national poverty line. We then estimate the correlates of income aspirations in both poor and non-poor households and consider in particular, how aspirations differ according to the average income and inequality levels in the household’s residential district. The remainder of the paper is structured as follows. In the next section we provide a brief review of the literature on aspirations, adaptation and inequality, and of the South African context. In Section 3 we discuss the data that we analyse and outline our empirical strategy. 1 Statistics South Africa uses the categories Black African, Indian/Asian, Coloured and White to represent the four main population groups in all household surveys and in the Census. We follow this approach and, in our analysis, ‘Africans’ refers to the group ‘Black Africans’.