metadata: authors: 0: author: Cancho,Cesar A.
1: author: Davalos,Maria Eugenia
2: author: Sanchez,Carolina
count: Europe and Central Asia
docna: 0: docna: Why so gloomy ? perceptions of economic
            mobility in Europe and Central Asia
docty: Policy Research Working Paper
subtopic: Educational Sciences,Poverty Impact Evaluation,Poverty Monitoring & Analysis,Poverty Reduction Strategies,Employment and Unemployment,Inequality,Poverty Assessment,Poverty Diagnostics,Poverty Lines,Small Area Estimation Poverty Mapping
abstracts: cdata!: Despite significant improvements in per
            capita expenditures and a marked decline in poverty over the
            2000s, a large fraction of Eastern Europe and Central
            Asia's population reports their economic situation in
            the late 2000s to be worse than in 1989. This paper uses
            data from the Life in Transition Survey to document the gap
            between objective and subjective economic mobility and
            investigate what may drive this apparent disconnection. The
            paper aims at identifying some of the drivers behind
            subjective perceptions of economic mobility, focusing on the
            role of perceptions of fairness and trust in shaping
            people's perceptions of their upward or downward
            mobility. The results show that close to half of the
            households in the region perceive to have experienced
            downward economic mobility, that is, that their position in
            the income distribution has deteriorated. The results also
            show that perceptions of higher inequality, unfairness, and
            distrust in public institutions are associated with downward
            subjective economic mobility. The findings from this study
            confirm that factors beyond objective well-being are
            associated with the perceptions of mobility observed in
            Europe and Central Asia and may explain why the region has
            had such a pessimistic view of economic mobility during the
            past two decades. Understanding what drives people's
            perceptions of their living standards and quality of life is
            important, because regardless of objective measures,
            perceptions could influence people's behavior,
            including support for reforms and labor market decisions.
            For Eastern Europe and Central Asia, a region that has
            undergone substantive transformations and which is still
            going through a reform process, accounting for these aspects
            is critical.
repnme: repnme: Why so gloomy ? perceptions of economic
            mobility in Europe and Central Asia
display_title: Why so gloomy perceptions of
            economic mobility in Europe and Central Asia
listing_relative_url: /research/2015/12/25700487/so-gloomy-perceptions-economic-mobility-europe-central-asia
topicv3: Economic and Social Mobility m1326259 1152,Poverty m1326687 695,Education m1327048 470,Income Inequality m1503891 2668,Unemployment m1504051 2747
publishtoextweb_dt: 2015-12-18T00:00:00Z
no_of_pages: 46
author_keys: 0: author_key: 1192826
1: author_key: 1127099
2: author_key: 561243
model_extractions: WPS7519 Policy Research Working Paper 7519

# Why So Gloomy?

Perceptions of Economic Mobility in Europe and Central Asia _César Cancho María E. Dávalos Carolina Sánchez-Páramo_ Poverty and Equity Global Practice Group December 2015
Policy Research Working Paper 7519

# **Abstract**

Despite significant improvements in per capita expenditures and a marked decline in poverty over the 2000s, a large fraction of Eastern Europe and Central Asia’s population reports their economic situation in the late 2000s to be worse than in 1989. This paper uses data from the Life in Transition Survey to document the gap between objective and subjective economic mobility and investigate what may drive this apparent disconnection. The paper aims at identifying some of the drivers behind subjective perceptions of economic mobility, focusing on the role of perceptions of fairness and trust in shaping people’s perceptions of their upward or downward mobility. The results show that close to half of the households in the region perceive to have experienced downward economic mobility, that is, that their position in the income distribution has deteriorated. The results also show that perceptions of higher inequality, unfairness, and distrust in public institutions are associated with downward subjective economic mobility. The findings from this study confirm that factors beyond objective well-being are associated with the perceptions of mobility observed in Europe and Central Asia and may explain why the region has had such a pessimistic view of economic mobility during the past two decades. Understanding what drives people’s perceptions of their living standards and quality of life is important, because regardless of objective measures, perceptions could influence people’s behavior, including support for reforms and labor market decisions. For Eastern Europe and Central Asia, a region that has undergone substantive transformations and which is still going through a reform process, accounting for these aspects is critical.

This paper is a product of the Poverty and Equity Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at ccancho@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Why so gloomy? Perceptions of Economic Mobility in Europe and Central Asia**<sup>**1**</sup>

**César Cancho, María E. Dávalos and Carolina Sánchez-Páramo**

Keywords: subjective well-being, relative well-being, economic mobility, inequality, unfairness, trust, Europe and Central Asia. JEL classification: I3, J6, P2 1 This study was prepared as part of the program on economic mobility led by María E. Dávalos (Senior Economist, Poverty GP, Europe and Central Asia region) and Carolina Sánchez‐Páramo (Practice Manager, Poverty GP, Europe and Central Asia region), and financed by the TFESSD (P127607). The authors thank Maurizio Bussolo and participants of the ECA poverty team internal seminar for the comments received.
# **Contents**

|1. Growing but Unhappy: Making Sense of the Puzzle............................................................................... 3|
|---|
|2. Conceptual Framework for the Analysis of Perceptions of Mobility....................................................... 5|
|3. Individual and National Level Data........................................................................................................ 8|
|4. Perceptions of Economic Mobility and Their Correlates......................................................................... 9|
|a)<br>What are the perceptions of economic mobility observed in ECA?................................................ 9|
|b)<br>What is the socio-demographic profile of those with perceptions of downward mobility?............ 12|
|c)<br>What variables are correlated with perceptions? A multivariate analysis........................................ 14|
|d)<br>Are perceptions similar across sub-regions?.................................................................................. 20|
|5. Conclusions.......................................................................................................................................... 21|
|References................................................................................................................................................ 23|
|Appendices.............................................................................................................................................. 27|
|A1. Sample Characteristics................................................................................................................... 27|
|A2. Regression methodology................................................................................................................ 33|
|A3. Robustness checks......................................................................................................................... 38|
|A4. Perceived Movements by Individual Characteristics: Heads and Other Member............................ 42|

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**The reported low levels of perceived well-being are relevant in themselves, considering that subjective measures of well-being provide an important dimension to assessing individuals’ quality of life.** The Commission on the Measurement of Economic Performance and Social Progress (Stiglitz, Sen and Fitoussi, 2009), for instance, emphasized that objective and subjective measures of well-being are relevant to assessing quality of life. Increasing subjective well-being is an end in itself, but it could influence people’s behavior, including support for reforms and labor market decisions. Therefore, understanding what drives people’s perceptions is extremely relevant. The 2006 World Development Report highlighted, for example, that income inequality influenced people’s happiness – regardless of absolute income levels- linked to perceptions of “unfair processes and unequal distribution of opportunities” in society (World Bank 2005, p.82).

**This study aims at documenting the patterns of perception of economic mobility in the region and across groups of countries, and to identify factors that are correlated with the different types of perceptions of economic mobility observed in the region.** The analysis tests for the correlation of mobility with specific variables capturing fairness and trust in public institutions, inequality, personal and household characteristics, and macroeconomic performance indicators.

**Results confirm that factors beyond objective well-being are associated with the reported perceptions of mobility, as are the perception of trust and fairness in the country, the age and education of the respondent, and macro variables that capture the changes observed in the countries since the transition.** Households in countries where income/consumption distribution has become more unequal have a more negative perception of their situation. Further, findings show that trust in public institutions, perceptions of fairness in the economy and preference for a market economy are associated with perceptions of improvement. Younger cohorts and more educated people are more likely to perceive improvements in their economic situation, likely linked to these groups’ ability to access the opportunities introduced by the reforms and today’s markets. An interesting but intuitive result is that a more severe reduction of the size of the State is also associated with more negative perceptions. This is likely capturing the intensity of the reforms applied in these countries and its consequences in terms of uncertainty and employment outcomes. Finally, macro variables also play some role. Countries with weak growth have on average more negative perceptions, and a more severe economic contraction during transition is associated with more negative perceptions.

**The rest of the paper is organized as follows.** Section 2 presents the conceptual framework and key findings from the literature on which the analysis is based. Section 3 describes the data used in the analysis. Section 4 presents the main findings, looking at correlates of perceived economic mobility. It covers profiling, multivariate analysis of correlates with subjective mobility and disaggregation across sub-regions and low/middle income countries. Section 5 presents the conclusions of the study.

# **2. Conceptual Framework for the Analysis of Perceptions of Mobility**

**Subjective measures of well-being, like “satisfaction with life” or Catril’s Ladders, complement the information about quality of life that objective measures provide.** Economists have for long preferred to study revealed preferences, expressed by purchase decisions, rather than declarations of preferences. Under the typical microeconomic theory assumptions, revealed preferences are enough to infer individual’s well-being. However, a large amount of literature from behavioral economics and psychology find that people often make choices that do not necessarily increase their happiness. Their choices may hence not reflect their actual

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preferences and focusing exclusively on actual choices may leave an incomplete picture to understand wellbeing. (Kahneman and Krueger 2006)

**There is solid evidence in the economic literature that the most common measures of subjective wellbeing are consistent enough in time to be a reliable measure of well-being, and are not mainly driven by mood changes or personal distortions.** Krueger and Schkade (2008) analyzed the test–retest reliability of two types of measures of subjective well-being (a standard life satisfaction question and a measure based on recording of the satisfaction experienced at different times of the day)  and obtained a serial correlation of about .60 when assessed two weeks apart. This is lower than the reliability ratios typically found for education, income and many other common microeconomic variables. Nonetheless, the estimated degree of reliability of subjective well-being data is high enough to detect effects when they are present in most applications, especially if samples are large and the data are aggregated across people or activities. (Krueger and Schkade 2008)

**Even though the focus of this paper is on perceptions of economic mobility, we borrow from the literature on perceptions of economic well-being to identify factors behind the mismatch between objective and subjective measures.** For this, we followed the accounts of Selezneva (2011) and Dolan et al. (2008) about determinants of satisfaction with life (SWL). In her account, Selezneva (2011) reviews more than 70 studies that associate subjective well-being with income, work and family life, in the economic, psychological and political science literature, paying particular attention to transition countries. Dolan et al. (2008) reviews papers published in economics journals since 1990 as well as some key reviews in psychology that focus in finding individual-level, family-level and social-level determinants of subjective well-being. Both papers categorize the determinants roughly in income, personal characteristics, attitudes and beliefs, work conditions and macro environment.

**There is agreement in the literature that the correlation between income and subjective well-being is at most weak, leaving room for other factors to explain the perceptions of well-being.** For instance, Dolan et al. (2008) notice that results in the literature generally suggest positive but diminishing returns to income. Zaidi et al. (2009) using the 2006 LiTS obtain a positive correlation between income and satisfaction, though Cojocaru and Diagne (2013) find only a weak correlation between objective welfare and the household relative income position using the the 2010 LiTS. Clark and Oswald (1994) in the UK, and Frey and Stutzer (2000) in Switzerland find at most a low correlation between income and subjective-well-being.

**Income inequality can affect negatively the perceptions of well-being when is associated with an unfair process and unequal distribution of opportunities.** Using data for Europe and U.S. states, Alesina et al. (2004) obtains that even after controlling by income a higher national-level inequality is associated with more negative perceptions of well-being. However, it may also be the case that for countries with higher economic mobility inequality communicates opportunities, and hence higher inequality may signal a higher reward to effort, and have a positive effect on well-being (Dolan et al. 2008). The 2006 World Development Report highlights that income inequality influenced people’s happiness – regardless of absolute income levels- linked to perceptions of “unfair processes and unequal distribution of opportunities” in society (World Bank 2005, p.82). Finally, Abras (2012) obtain that circumstances determined by the lottery of birth (e.g. gender, parental status and politics), affect the perceptions of well-being when they play a role in determining income by means of facilitating positions or contracts.

**Perceptions of fairness are also correlated with higher levels of reported self-satisfaction.** For instance, using data on Italian workers, Tortia (2008) obtains that worker well-being is crucially influenced by fairness concerns. He obtains that self-satisfaction is positively affected by how fair workers perceive are the procedures

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within the organization (e.g. flow of information, promotions), even above how fair they perceive their compensation is with respect of their qualifications.. The author also obtains that public organizations are found to be at a disadvantage with respect to the private sector regarding both the degree of satisfaction and perceived fairness. In a related study, Krueger and Mas (2004) identify that workers perception of fairness can affect the quality of their work and the effort executed in performing their tasks. Finally, as World Bank (2005) notices, the experimental and subjective well-being literature in economics and social psychology points that there is something deep and fundamental about our taste for fairness and equity. Equity, the report indicates, matters intrinsically and fundamentally for human beings.

**Trust in other people and in national institutions plays an important role on the perceptions of individual well-being.** Using individual-level data from different countries, Helliwell (2003) finds that trust in other people is associated with higher levels of well-being. Though it is possible that optimism produces higher assessments of both trust and well-being, he explains, if the answers relate to people with whom people interviewed interact, then the positive effect captures the benefits of living in a high-trust community. On another study using similar data, Bjørnskov (2007) found that generalized trust increases life satisfaction, and a social capital factor score (comprised from responses to generalized trust, civic participation and perceptions of corruption) are positively associated with life satisfaction. Finally, trust in key public institutions such as the police, the legal system and government is also found to be associated with higher life satisfaction (Helliwell & Putnam, 2004; Hudson, 2006).

**Personal characteristics (like age, gender and ethnicity) and socially developed characteristics (like education, health or employment status) also have an impact and affect the perceptions of well-being.** For the first group, studies suggest a U-shaped curve with higher levels of well-being at the younger and older age points and the lowest life satisfaction occurring in middle age. There is also evidence that women and certain ethnic groups report higher levels of happiness (Dolan et al. 2008). For the second group, some studies find a positive relationship between each additional level of education and subjective well-being (SWB), while others find that middle-level education is related to the highest life satisfaction. Even so, it is difficult to isolate the effect of education due to unobservable variables (e.g. motivation, intelligence, family background) and the different channels through which education can affect happiness (e.g. health, income) (Dolan et al. 2008). Studies show a more consistent positive effect of physical and psychological health on happiness, and, inversely, a negative effect of unemployment on happiness (Dolan et al. 2008).

**Macroeconomic factors can also affect the perceptions of individual well-being when these factors have a direct impact on individuals’ life, as inflation or unemployment.** National unemployment rates reduce subjective well-being (Alesina et al. 2004, Di Tella et al., 2001, 2003; Wolfers, 2003), most likely through the induced fear of personal unemployment, which arises from a higher national unemployment rate. Inflation also has a negative effect on well-being, as studies in Europe, Latin America, and the United States have found (Alesina et al., 2004; Di Tella et al., 2001, 2003; Wolfers, 2003, Graham & Pettinato, 2001), although the results are not conclusive, as many other possible correlates, like income inequality or lack of trust, are not controlled for in the regressions (Dolan et al. 2011).

**There is evidence that reforms implemented in former socialist countries have affected negatively the perceptions of well-being.** Most authors agree in that populations of transition countries have paid for the socioeconomic transformation with their well-being. (Selezneva 2011) Reforms have introduced changes in all life dimensions, forcing the populations to face, among others, such new phenomena as unemployment and high fluctuation of incomes (Andren and Martinsson 2006). This affected the perceptions of well-being, which

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in the initial years plummeted and saw the proportion of people in the least happy categories soar (Blanchflower and Freeman 1997; Lelkes, 2006a and 2006b ; Angelescu, 2008). By 2011, there is still a considerable gap in subjective well-being between transitional and no transitional countries, even though smaller than after the initial reforms (Lelkes, 2006b).

# **3. Individual and National Level Data**

**The individual-level data used for this study comes from the Life in Transition Survey collected in 2006.** This survey was collected by the European Bank of Reconstruction and Development (EBRD) and the World Bank (WB). Although the LiTs was conducted in 2010 as well, the study focuses on the 2006 round to capture perceptions in a period of economic boom – to avoid results being driven by the impact of the global economic crisis – and given the more comprehensive information on labor histories collected in the 2006 round. Perceptions on economic mobility in 2010 are, however, presented in annexes as well to complement the analysis. It collected information about socio-demographics characteristics and attitudes and values of the population in Eastern Europe, Central Asia and Turkey. It covered 29 countries, with a sample of 1,000 households per country.<sup>4</sup>

**The respondent of the survey is a random member of the household interviewed older than 18 years old.** The survey is divided in two sections. The first one was answered by the household head and contains the household roster and the variables on perceptions of economic mobility. The second part is answered by a randomly selected household member older than 18 years old, and contains information on employment, employment history since 1989 and an extensive set of questions on attitudes and values. We merged the information coming from the two respondents in the household. This implies we assume the answer given by the household head is representative of the household opinion.

**Personal and household characteristics used for the estimations are constructed based on the data available in the employment and household characteristics sections.** We used this information to obtain the age, education, ethnicity, religion, and employment status of the respondent. Also, we used this section for the education of the father. We used the household characteristics to construct the location (urban/rural), household size, consumption and assets owned, and the shares of children and seniors. We also extracted information about the education of the father, as an indicator of condition that cannot be affected by the individual, to test whether they play a role in the perceptions of mobility.

**Attitudes and beliefs are obtained from the module of opinions included in the survey, which covered perceptions about the dynamics of the society and valuation of institutions.** For the variable on trust in public institutions, we constructed an index based on trust in five public institutions (Presidency, Cabinet of Ministers, Parliament, Judges and Police). For each institution, the original variables were coded in 5 categories, ranging from distrust to full trust. We collapse this information in three categories and construct an index that can take three values (-1, 0, or 1) corresponding to distrust, neutral or trust in each institution. The aggregate index is the arithmetic average. For fairness, we used a question on what the respondent beliefs is rewarded in society, either effort and intelligence, or contacts and corruption/criminal ties. For market economy support, we took a question asking to express a preference between a market economy or a centrally planned one. Finally,

> 4 It included Mongolia, EBRD country of operation since 2006, and part of the World Bank East Asia and Pacific Region. Turkey is not an EBRD country of operation. Turkmenistan was not included.

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for a perception of performance related to a local comparison group, we took a variable asking for the perceived performance compared to colleagues in 1989.

**Employment histories were constructed by taking advantage of the information collected on job market performance for each year between 1989 and 2006.** The second section contains an extensive set of questions about life events and labor market history since 1989 to 2006, year by year. Unemployment may have been underreported, since working at least one part of the year is enough to consider the year as employed. If more than one position was held during one year, they are all reported in different cells. This information is used to construct the labor history of the interviewed person, including time worked in the public or private sector and number of different jobs held in this time.  We restricted the information to the years when the interviewed person was between 18 and 65 years old.<sup>5</sup>

**We also took advantage of the information on labor histories to construct a measure of public employment for every year between 1989 and 2006.** Using the information on enterprise ownership, we were able to obtain the share of employment, excluding public administration, corresponding to the public sector. As can be expected, this share was considerably high in 1989 (with the exception of Turkey), and has fallen dramatically for most countries by 2006.

**The data at the national level was obtained from the World Development Indicators database (World Bank 2013)** . We used GDP per capita in real terms, Gini coefficients, and the ratio of the share of income the top 20% and the bottom 20%. In many cases the data for the years 1989 and 2006 was not available, so we replaced for the closest year available, with up to three years of difference.

# **4. Perceptions of Economic Mobility and Their Correlates**

**a) What are the perceptions of economic mobility observed in ECA?**

**A substantial share of households in the region perceives that their standards of living have fallen compared to 1989.** In 2006, around 50% of households in the region declared that they saw their countries in worse economic standing than in 1989. Moreover, when asked about the specific situation of the household in the same period of time, again, around 50% of the households declared a worsening in their economic situation (Figure 3).

**The perceived fall in living standards is consistent across all sub-regions.** Only households in Central Asian countries perceive in majority that their countries are doing better than in 1989 (Figure 3). This is indeed a region in which GDP per capita was almost 15 percent higher over the period. For all the other sub-regions – even the best performers in terms of GDP growth - the prevalent view is of a worsening of the national economic conditions, peaking at almost 70% in the Western Balkans. About the conditions of the household interviewed, the results are similar, and even more dramatic. On average, people across all regions consider that their household is doing worse than in 1989, ranging from 41% in New EU Member States (again, one of the best performing regions) to almost 60% in the Western Balkans.

> 5 We considered Out of Labor Force the cases with no employment information between 1989 and 2006, or decided not to work, or declared are officially retired & not worked & were at least 55 for women and 60 for men, or declared left job because of retirement and never worked again or declared studying and not working. We considered employed if worked for wages or self‐employed. Finally, we considered unemployed if received unemployment benefits and did not working, or if it was part of the Labor Force, and did not have a job.

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**Figure 5. Perception of Economic Mobility 1989 – 2006**

<!-- Start of picture text --> (a) ECA (b) New EU Member States (c) Western Balkans<br> and Turkey<br><!-- End of picture text --> <!-- Start of picture text --> ECA: Type of Inter-step Mobility 1989 to 2006 EU10+1 & Turkey: Type of Inter-step Mobility 1989 to 2006 Western Balkans: Type of Inter-step Mobility 1989 to 2006<br>59.9<br>46.5 47.5<br>40.6 38.7<br>29.2<br>12.8 13.8 10.9<br>Down Same Up Down Same Up Down Same Up<br>(d) Russia, Moldova, Ukraine (e) South Caucasus (f) Central Asia<br> and Belarus<br>CIS: Type of Inter-step Mobility 1989 to 2006 South Caucasus: Type of Inter-step Mobility 1989 to 2006 Central Asia: Type of Inter-step Mobility 1989 to 2006<br>65.0<br>50.5<br>47.3<br>41.5<br>36.7<br>26.4<br>12.8 11.2<br>8.6<br>Down Same Up Down Same Up Down Same Up<br>70 70 70<br>60 60 60<br>50 50 50<br>40 40 40<br>Percentage 30 Percentage 30 Percentage 30<br>20 20 20<br>10 10 10<br>70 70 70<br>60 60 60<br>50 50 50<br>40 40 40<br>Percentage 30 Percentage 30 Percentage 30<br>20 20 20<br>10 10 10<br><!-- End of picture text -->

- (d) Russia, Moldova, Ukraine       (e) South Caucasus (f) Central Asia and Belarus

Source: 2006 LiTS (individual weights)

- **b) What is the socio-demographic profile of those with perceptions of downward mobility?**

**Perceptions of mobility vary by socio-demographic characteristics of the households, though with very few exceptions the prevalent perception is to have moved down in the income distribution after the transition.** We performed a descriptive analysis of the perceptions by income, age, location, education, and employment status. This analysis is aimed at shedding light into the postures of different socio-demographic groups, rather than to find causality or to isolate the effect of particular characteristics. The results show differences in the intensity of the perception, although in almost all cases the predominant view is to have moved down. Also, we would ideally use the characteristics before and after transition for this profiling, but the only information available about characteristics is from 2006. We prefer to report a profile based in 2006 information since this is still informative.

**Not surprisingly, poorer households in 2006 have more negative perceptions of mobility.** Using two different measures of welfare at the household level, we consistently obtain that poorest households in 2006 are more likely to report having moved down in the income distribution (Figure 6). The measures used are monthly household consumption and an index based on asset ownership. Results are roughly similar for both measures. The share of households that perceive movements down are around 55% for the lowest quintile and

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**Regression results are presented in the Appendix and are centered on identifying correlates of downward mobility between 1989 and 2006.** The dependent variable takes a value of one if the individual reported moving up or staying in the same position, and zero if it reported downward mobility. We estimated probit regressions to facilitate the interpretation of the results; however, results were qualitatively equivalent under a multivariate regression on three types of movements. A movement is defined (as in section 3) as a movement in any direction of at least two steps, regardless of the initial point. Movements of only one step are considered as staying in the same step. We excluded households in the two lowest and uppermost steps in 2006 from the sample to avoid biases introduced by the mechanical effect of being unable to move in all possible directions (move down for the upper steps in 2006, and move up for lowest steps in 2006). All regressions and a thorough discussion of the methodology used are presented in the Appendices.

# **Perceptions of inequality, fairness and trust matter**

**Increases in country income inequality are associated with more negative perceptions of economic mobility.** Table A2.2 shows that household in countries in which inequality increased between 1989 and 2006 – measured by the ratio of the 80<sup>th</sup> /20<sup>th</sup> percentiles– had a higher probability of reporting downward movements in the income distribution (Column (3)). Using an alternative measure of Gini, obtained from the World Income Inequality Database shows also a negative effect of the increases in inequality with respect to the perception of movements up<sup>9</sup> (Column (4)). This alternative measure, though, is less consistent than the obtained from the World Development Indicators and is incomplete for most former Yugoslavia countries, so we preferred to use the original from the WDI for the rest of the report. As reported earlier when citing the 2006 WDR, “One reason that inequality might make people less happy, even when controlling for absolute income levels, is that it violates their sense of fairness” (p. 82). The Gini, a less sensitive measure to changes in the tails of the distribution, can potentially not capture this correlation.

**Perceptions of fairness in moving ahead in life are associated with more positive perceptions about economic mobility.** The perception that effort, hard work and intelligence are the most important factors to succeeding in life, rather than criminal or corrupt ties, or political connections, reduces the probability of reporting movements down. Specifically, those who believe in fairness have 9 percentage points less probabilities of perceiving a worsening in their relative position. This is particularly the case in higher income countries in ECA (Table A2.3).

**Trust in public institutions is associated with more positive perceptions about economic mobility.** For any individual, moving from a neutral approach to trust to becoming trusting in public institutions reduces the likelihood of perceiving movements down by 7 percentage points. This effect is stronger (10 percentage points) in low and lower-middle income ECA countries.<sup>10</sup>

**The perception of having done better than colleagues in 1989 is associated with less probabilities of perceiving downward economic mobility** . Individuals who reported a relative improvement compared to their peers pre-transition have a 4 percentage point lower probability of reporting downward mobility. This

> 9 <u>http://www.wider.unu.edu/research/Database/en_GB/database/</u>

> 10 We also performed a robustness check, by replacing this indicator for trust in religious institutions. The rationale behind is that if people who are more likely to be trustful are most likely to perceive improvements in their situation, then trust in religious institutions should be significant too. The results show that this variable is not significant. This suggests that the connection between trust in public institutions and perceptions is not driven by individual biases, but by actual beliefs about these institutions.

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effect is stronger and significant for low and lower-middle income ECA countries (10 percentage points), but not significant for countries with higher incomes in the region. Robustness checks, however, raise concerns about this finding.<sup>11</sup>

**Support to market economy is also positively correlated with more positive perceptions of economic mobility.** Declaring support to a market economy, as opposed to a centrally-planned one, is associated with 7 percentage points fewer chances of perceiving a worsening in the position in the income ladder. This effect may be partially driven by being precisely the ones who have benefited from the new conditions introduced in a market economy (for instance, rewards to entrepreneurship, risk-taking behavior, or high tolerance to uncertainty), the ones who perceive improvements in their relative well-being. Robustness checks suggest that actual belief in the market system, rather than a general attitude or bias towards changes introduced after transition, is what is driving the association.<sup>12</sup>

**The young and more educated fare better**

**Young populations are more likely to declare improvements in their economic position.** Consistently with the results in the profiling section, age is strongly associated with the probabilities of perceiving improvements in well-being. Belonging to the 18-35 years old category, as opposed to any of the other age groups decreases the probabilities of perceiving a worsening in the economic situation of 7 percentage points. These results contradict the common finding in the literature of a more optimistic perception of life for older people (Dolan et al. 2008). Given that the youngest cohort (18-35 in 2006) was under 18 years old in 1989, the result for this group may be capturing also intergenerational perceived mobility. We performed some robustness checks by restricting the sample to cases with the same respondent in the employment and perception sections, and to the cases with only workers older than 35 years old (18 in 1989). Results are presented in the Appendix (Table A3.2) and show results largely consistent with the original full sample, although the age now has a positive effect on perceptions of economic mobility.<sup>13</sup>

**More educated people are more likely to declare improvements.** College-educated respondents are less likely to perceive their position falling in the income distribution, as opposed to the other levels of education.

11 We restricted the sample only to the respondents who think their household is doing worse than in 1989, in absolute terms. Among these respondents, perceiving that they are doing better than the 1989 colleagues would be most likely driven by actual perceptions, rather than by overall optimistic views about life. The same happens when the sample is restricted the cases that think they are doing better or at least the same than in 1989, in absolute terms. In neither of both cases the perception of doing better than the comparison group is significant, raising concerns about the driver behind the initially reported correlation. Most likely, the original result is driven by common idiosyncrasies contained in the perceptions of mobility and relative performance, rather than actual perceptions of improvements.

12 We also checked the robustness of this result using the opinion about democratic against an authoritarian regime. If the support to a market economy is driven by support in general to the changes introduced with the reforms, most likely the support to a democratic regime would be also correlated with the perceptions of mobility. However, support to democracy is not significantly correlated 13 The only noticeable difference is in the significance of belonging to the 55‐64 age group. The reported negative effect over the probabilities of perceiving downward mobility turns statistically significant, though only weakly. Also, the share of time spent working in the public sector becomes significant, showing now that more time in the public sector between 1989 and 2006 is associated with more probabilities of perceiving a movement down. All the other parameters sign and significance remain unaltered.

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Moving to college-level education from any other category lowers the probabilities of perceiving falls by 6 percentage points.

**In today’s market economy and process of ongoing reforms, the young and more educated have a better perceived outlook** . The perceived improvement in economic situation of these groups is likely linked to their relatively higher readiness – in terms of skills, for example – to benefit from the opportunities introduced by the reforms. This finding is consistent with the discussion in Arias et al. (2014) in which is pointed that across the region, an increasing share of employers cited skills as a major constraint to firms’ growth. In a context where most education and training systems have failed to keep up with the fast-changing labor market, being flexible and ready to acquire and develop non-routine higher-order skills, including socioemotional (“soft”) skills, translates into more job opportunities and higher earnings.

# **Family background plays a role in perceptions**

**The education of the father plays a role in determining the perception of mobility, hinting that opportunities in the country are associated with factors beyond the individual’s control.** Including the education of the father in the regression shows that secondary and professional education lead to better perceptions of economic mobility than basic or no education. Surprisingly, a father with higher education does not lead to better perceptions than a father with primary education. These results signal that factors beyond the control of the worker may be driving the access to opportunities or the satisfaction in life. In case perceptions were to depend only factors that the interviewee can decide, father characteristics should not have any effect. Other variables, like father belonging to the communist party, did not show statistically significant results.

# **Individual labor market experiences have a role, but less than expected**

**Working for a public company and being self-employed are associated with lower perceived downward mobility.** Public workers are more likely to report improvements in the economic situation, though this effect is statistically weak. This result certainly contradicts previous findings in the literature (e.g. Tortia (2008)), although previous results have focused in developed countries and did not analyzed periods with dramatic changes comparable to the transition lived in the ECA region. Considering the generalized reduction in the size of the state across countries in the region and the strong preference for public jobs<sup>14</sup> (EBRD 2010), being currently employed for the public sector may indicate that these workers were able to retain these positions and associated benefits. Hence, it is intuitive for them to perceive an improvement in their situation since, for many of their peers, reforms involved considerable undesired changes. In the case of self-employment, this can be signaling entrepreneurial ability and willingness to take risks, values highly regarded in a market economy.

# **Surprisingly, labor history does not play any significant role on the perceptions of economic mobility.**

The share of time in the labor force spent working for the public sector is negatively correlated with upward mobility, although the degree of statistical significance is weak. The share of time working for the private sector does not have a significant effect over the perceptions. When the sample is restricted to household heads and older than 35 years old workers the share of time employed in the public sector shows a positive effect over the probabilities of perceiving downward mobility (Table A3.2). The variable is defined as shares of time spent 14 According to data collected in the LiTS 2010 (EBRD 2010), 45% of workers 18+ in the region would prefer to work for a state‐owned enterprise (30%) or the public administration (15%). Being self‐employed comes behind with 25% of the sample, 20% would prefer in a private firm, and 10% does not know. While these results hide some regional disparities, it is clear also that it highlights a preference for the types of positions offered in the public sector.

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either on public sector, private sector or unemployed/out of labor force (base category), hence the effect is with respect to being unemployed/inactive. This is a somehow puzzling result, since there is weak evidence that being employed by the public sector at the time of the survey has the opposite effect (less chances of perceiving downwards movements). A possible explanation is that this variable is picking up the effect of belonging to the 55-65 years old (in 2006) group. (See Figure A1.2) It is in this group where the shares of time in public sector reaches its highest, as opposed to the younger workers (private) and older workers (unemployed/inactive). For the number of jobs held between 1989 and 2006, which can work as a metric of the turmoil introduced by the reforms in economies where the labor market used to guarantee a position for all workers for life, the effects are also non statistically significant. This result hints that the current personal employment situation is more important than the memory for the perceptions of mobility.

# **The role of income and macroeconomic indicators**

**Current income explains only a minor fraction of the observed variation in perceptions.** Estimating OLS regressions on the raw changes in step between 1989 and 2006 against two welfare measures (consumption and asset index), we obtain that welfare explains only a minor fraction of the variation in perceptions, though the parameters are statistically significant. Consumption can only explain 5% of the variations in perceptions, while the asset index explains only 8%, as measured by using the R-squared of the regressions (Table A2.1). Moreover, when consumption deciles are included in the regression containing all the other variables, they do not show any significant effect over perceived economic mobility.

**Countries with weak growth have on average more negative perceptions, particularly for those countries faring better pre-transition.** A 10-percent increase in GDP per capita between 1990 and 2006 translates into 3 percentage points higher probabilities of perceiving a movement up. However, the starting point matters for perceptions of mobility: for countries with similar growth, a higher GDP per capita in 1990 (by US$1,000) translates into a 3 percentage point lower probability of reporting improvements.

**A stronger economic contraction during the transition period is associated with more positive perceptions.** After controlling for the effect of initial GDP per capita level and the change between 1990 and 2006, a more severe contraction of the GDP per capita during the nineties is associated with more probabilities of self-reported upward economic mobility. This result suggests that those in countries that experienced tough economic times in the nineties place more value in the country’s or own relatively improved economic situation by 2006. The lowest point during the transition period is likely to be a reference point for countries that had severe economic contractions.

**Bigger public sectors in 1989 are associated with more negative perceptions.** With the exception of Turkey, in all the countries of the region the State controlled considerable productive resources in the economy. This translated in massive public employment which ranged from 57% for Czech Republic to 91% in Belarus (own estimation based on EBRD 2006). The regression analysis shows that an increment of 10 percentage points in the share of public employment in 1989 translates in 9 percentage points less probabilities of perceiving upward mobility. This result hints that populations in countries that use to have more certainty about future employment may have been hit worse by the changes introduced with the liberalization of the economy.

**Accordingly, countries that reduced more intensely their share of public employment have more negative perceptions.** Between 1989 and 2006 all countries in the region reduced the participation of the State in the economy. This ranged between 13 percentage points in Belarus to 50 percentage points in Bulgaria (own estimation based on EBRD 2006). A reduction of 10 percentage points in this share lowers the

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# **d) Are perceptions similar across sub-regions?**

**The magnitude and significance of the results vary across sub-regions** . This section explores the regression analysis in five country groupings in ECA: New EU Member States and Turkey; Western Balkans; Belarus, Moldova and Ukraine; South Caucasus Countries, Central Asia and Russia. Table A2.4 presents the results.  Overall, the sub-regional results are consistent with those of ECA, though some of the most striking exceptions arise in the Western Balkans.

**Across most sub-regions, households who believe in fairness and that trust in public institutions have a less grim perception of their economic mobility.** The exception is Central Asia, where the results are not significant. The effect of believing in effort, hard work and intelligence for succeeding in life is particularly strong in Russia, leading to a decrease in the likelihood of reporting downward mobility by around 16 percent. Trust in the presidency, cabinet of ministers, parliament, judges and the police decreases perceptions of downward movement across sub-regions.  The result is not significant for Russia but it is strong and significant for all others, particularly for New EU Member States and Turkey.

**For the majority of advanced reforms and late reformers in the region, in contrast to intermediate reforms, support to market economy is positively correlated with higher subjective economic mobility.** These are countries in which the reform effort started earlier and had already started to pay off (advanced), or in which the reform efforts are lagging behind and significant and necessary policy changes remain to be done (this reflection borrows from the typology in Arias et al, 2013). In intermediate reformers, the majority of which are from the Western Balkans and South Caucasus, support to market economy has no impact on mobility perceptions.

**In Central Asia and the South Caucasus, the perceived position relative to pre-transition colleagues matters** . In these two sub-regions, the perceptions of being better off than colleagues in 1989 has a very strong association (around 13 percentage points) with moving up or at least staying in the same position.

**The Western Balkans show unique results in demographics and education.** First, even if the older populations across sub-regions more often perceive downward movements, the Western Balkans have the strongest association between old age and negative perceptions of economic mobility: the probabilities of perceiving movements down are 10 percentage points higher for those ages 54-65 years and 14 percentage points higher for those over age 66 years. Second, in this same sub-region, advanced education, in contrast with the aggregate results, is associated with more negative perceptions on economic mobility. In other words, the more educated have a more pessimistic outlook on quality of life than those with little or no formal education. This education effect is also observed in the South Caucasus countries. This is not surprising if we consider the high unemployment rates for these regions for workers with higher education. For instance, in Macedonia, FYR, the unemployment rate for higher education graduates in 2006 was close to 20%, a similar rate than the one observed in Armenia and Georgia around those years<sup>15</sup> (ILO 2013).

**Labor market status’ association with perceived mobility shows mixed results across sub-regions** . The Western Balkans again stands out: the unemployed in this sub-region – one with particularly high unemployment rates- have more negative perceptions of economic mobility (at 8 percentage points); this effect

> 15 Unemployment rate for Armenia in 2007 for persons with tertiary education was 20.4, while in Georgia it was 19.3 for the same year. (ILO 2013)

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is, surprisingly and uniquely, also observed among those employed in the public sector in these countries<sup>16</sup> . Conversely, in New EU Member States and Turkey, in particular, public workers have a less negative perception of their economic mobility. Central Asia is the only sub-region in which private employment is associated with a more positive perception on mobility, and in which the opposite happens for working in the agricultural sector<sup>17</sup> .

# **5. Conclusions**

**A substantial share of households in the region perceives that their standards of living in 2006 have fallen compared to 1989.** Using as a definition of movement a change in at least two steps in any direction, 47% of the households in the region declared to have moved down in the income distribution, regardless of their starting step. Around 40% of households perceive they have stayed in the same step, or moved at most one step in any direction. Less than 13% of households in the region perceive an improvement in their relative position.

**This pattern is consistent across sub-regions.** With the exception of New EU Member States and Turkey – the ones with higher economic growth during the period - in all sub-regions the most prevalent perception is of downward mobility. And even in these countries, almost 40% of the households declared to have moved down, behind around 50% of the households that consider doing only as well as in 1989. Western Balkans and South Caucasus are the regions with the most negative perceptions, where households that feel they have moved down reach 60% and 65% respectively. In Russia, Moldova, Ukraine and Belarus, and Central Asia countries, this share of households is close to 50% as well.

**Less affluent, older, rural and unemployed people show a more negative perception of economic mobility.** Taking advantage of the information available in the survey for 2006, we obtained that these characteristics were associated with perceptions of downward economic mobility.

**Current income can only explain only a small fraction of the observed variation in perceptions.** Welfare explains only a minor fraction of the variation in perceptions. Consumption can only explain 5% of the variations in perceptions, while the asset index explains only 8%, as measured by using the R-squared of the regressions

**Factors beyond objective well-being, including those related to trust and fairness are associated with perceptions of mobility.** Households in countries where income distribution has become more unequal have a more negative perception of their situation. Further, findings show that trust in public institutions, perceptions of fairness in the economy and preference for a market economy are associated with perceptions of improvement.

> 16 In the Western Balkans, the public sector employs 48% of the workforce, close to the 47% regional average. 17 In Central Asia, private employment accounts for 46% of the employment, below the regional average of 53%. The agricultural sector employs a share considerably higher than the regional average: 31% of employed workers vs. a regional average of 10%.

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**Younger cohorts and more educated people are more likely to perceive improvements in their economic situation** . This result is likely linked to these groups’ ability to access the opportunities introduced by the reforms and today’s markets.

**A more severe reduction of the size of the State is also associated with more negative perceptions.** This is likely capturing the intensity of the reforms applied in these countries and its consequences in terms of uncertainty and employment outcomes.

**National level variables are significantly associated with the perceptions of economic mobility.** The combined effect of macroeconomic variables on perceptions of downward economic mobility is below the regional average for the New EU Member States and Turkey, while for South Caucasus, Western Balkans and Central Asia it is above the average.

**The magnitude and significance of the results vary across sub-regions.** Across most sub-regions, households who believe in fairness and that trust in public institutions have a less grim perception of their economic mobility. For the majority of advanced reforms and late reformers in the region, in contrast to intermediate reforms, support to market economy is positively correlated with higher subjective economic mobility. In Central Asia and the South Caucasus, the perceived position relative to pre-transition colleagues matters. The Western Balkans show unique results in demographics and education. First, even if the older populations across sub-regions more often perceive downward movements, the Western Balkans has the strongest association between old age and negative perceptions of economic mobility. Second, in this same subregion, advanced education, in contrast with the aggregate results, is associated with more negative perceptions on economic mobility. Labor market status’ association with perceived mobility shows mixed results across sub-regions. The Western Balkans again stands out: the unemployed in this sub-region – one with particularly high unemployment rates- have more negative perceptions of economic mobility. Conversely, in New EU Member States and Turkey, in particular, public workers have a less negative perception of their economic mobility. Central Asia is the only sub-region in which private employment is associated with a more positive perception on mobility, and in which the opposite happens for working in the agricultural sector.

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