Perceptions Matter: Quasi-Experimental Evidence on the Effects of Spain's New Minimum Income on Households' Financial Wellbeing

Abstract

This paper examines how minimum income schemes (MISs) affect households’ financial wellbeing and whether this effect differs across objective material conditions and households’ perceptions. Two reasons motivate this study. First, while the Covid-19 pandemic, the ecological transition and the cost-of-living crisis have all prompted a renewed interest in MISs, no consensus exists on how effective these schemes are in improving households’ financial wellbeing. Second, when evaluating MISs, the literature focuses on objective measures of financial wellbeing, namely monetary poverty. Yet, peoples’ perceptions of their own situation can be instrumental in affecting their health, productivity and decision-making and can reveal important information about adaptation mechanisms or spillovers to non-recipients. This examines the case study of Spain, a country that introduced a new MIS in 2020. The paper uses Eurostat survey data for the 2010-2022 period in a Synthetic Control Method analysis. The results show that, while the policy had no significant effect on objective financial wellbeing measures (i.e. the poverty rate, the poverty gap and mean income) for its first year and a half of existence, it did considerably improve subjective financial wellbeing after two years and a half, as it helped households feel less pessimistic about the evolution of their finances during the Covid-19 and cost-of-living crises. The paper discusses several mechanisms explaining this differentiated impact of the policy, such as its lagged rollout, the improvements made to the benefit from 2022 as well as anticipation, placebo and positive spillover effects of the MIS. The findings highlight the importance for practitioners to consider subjective measures when assessing income support schemes.