Living in the Shadow of the Past: Financial Profiles and Well‐Being*

Abstract

We here consider the link between individual financial profiles over time and well-being, as measured by life satisfaction. We in particular look at annual self-reported financial worsening and improvement information for over 25,000 individuals in Australian panel data from 2002 to 2017. We first find that satisfaction falls (rises) with a contemporaneous major financial worsening (improvement), with worsening having the larger influence. Second, the experience of these financial events in the past continues to be linked to current well-being. Last, only the order of financial-improvement spells relates to well-being: a given number of past years where finances deteriorated has the same association with current well-being whether the deterioration occurred in one continuous spell or was interrupted. We last show that these associations are heterogeneous over the distribution of well-being.

Whose mental health declines during economic downturns?

“…We have Westfall-Young stepdown adjusted p-values for the estimates presented in Figure2using the Stata wyoung program(Jones et al, 2019). The adjusted p-values indicate that the association between unemployment and poor mental health remains statistically significant at the 5% level for women aged 20-29.6 The estimated impacts are more likely driven by increases in unemployment (economic downturns) than by decreases in unemployment.Negative economic shocks have been shown to have larger impact on mental wellbeing than positive shocks(Boyce et al, 2013;Clark et al, 2021) 7 Although employment type is time-varying, it is unaffected by the area unemployment rate in our sample. The estimated unemployment effect for young women equals 0.0004 (p = 0.815).8 The percentage of observations in our sample occurring in areas in which the unemployment rate is <3%, 3-6%, 6-9% and >9% equal 9.2%, 54.7%, 30.8% and 5.3%, respectively.9 Respondents are asked to recall their parent's occupation when they were aged 14.…”

“…6 6 The estimated impacts are more likely driven by increases in unemployment (economic downturns) than by decreases in unemployment. Negative economic shocks have been shown to have larger impact on mental wellbeing than positive shocks (Boyce et al., 2013; Clark et al., 2021) …”

Subjective Wellbeing Dynamics

“…In contrast, positive financial and economic events tend to have small effects on subjective wellbeing, indicative of loss aversion: the idea that 'losses loom larger than gains' (Tversky and Kahneman 1979, p. 279). 10 Frijters, Johnston and Shields (2011), Kettlewell et al (2020), Clark, D'ambrosio and Zhu (2021) and others have identified significant effects of the 'major improvement in finances' event, but effect sizes are relatively small. Similarly, positive labour market events have been shown to have small or near-zero effects.…”

“…The subjective 'major worsening in finances' event in HILDA has been repeatedly found to have a large effect on subjective wellbeing outcomes. 9 Recently, Clark, D'ambrosio and Zhu (2021) conclude that the first-period effect of this adverse event on overall life satisfaction (-10 scale) is almost −0.4, and roughly four-times larger than the 'major improvement in finances' event. Adaptation to the negative financial shock seems to take around 2-3 years, and is particularly harmful for people at the lower end of the wellbeing distribution.…”

Debt, Credit Payment Holidays, and Their Relationship with Mental Health during the COVID-19 Pandemic in the United Kingdom

“…However, this effect is more pronounced when the type of debt is high-cost and unsecured (Hojman, Miranda, and Ruiz-Tagle 2016; Loibl et al 2022; Meltzer et al 2013), where there are multiple sources of debt (Meltzer et al 2013), and where debts are persistently high over time (Clayton et al 2015; Gunasinghe et al 2018; Hojman et al 2016; Sun and Houle 2020). Similarly, studies based on subjective measures such as capacity or difficulty to pay (ten Have et al 2021) or financial worry and rumination (de Bruijn and Antonides 2020) find an increased likelihood of mental disorder and lower levels of life satisfaction irrespective of the type (Loibl et al 2022), which is heightened when persistent over time (Clark, D’Ambrosio, and Zhu 2021; ten Have et al 2021).…”