A need for safety keeps the poor near poverty

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

I think we already knew this;

I’ve written before about how inequality perpetuates itself through differences in confidence: people from rich backgrounds have the chutzpah to blag good jobs for which they are unqualified, whilst those from poorer backgrounds have confidence knocked out of them. However, a new paper by David Chivers suggests there’s another mechanism which can have the same effect – differences in aspirations.

He shows that people who are just above the poverty line are scared to take risks for fear of falling into poverty. This traps them into low-paying but safeish jobs. By contrast, risks are taken either by the rich, who can afford them, or the desperately poor who have nothing to lose.

Although Dr Chivers applies this to decisions on whether to become entrepreneurs in poorer countries, it resonates with me. Once I realized that I could pay the leccy bill and was in no danger of becoming homeless, all ambition left me. Rather than seek new, possibly better jobs and risk them not working out, I focused on keeping the safe job I had.

The analogy with Dr Chivers’ work lies in the importance of reference levels of income. For Dr Chivers, the reference level is absolute poverty. For me, it was the income we had as kids. As Malmendier and Nagel (among others) have shown (pdf), experiences in our formative years influence our economic choices years later.

This poses the question: how common am I? In one sense, of course, I’m not: there aren’t many that go from child poverty into Oxford. What I’m speculating is that those that do might be disproportionately likely to end up in middling careers. Having achieved a lowish reference level of income, we pootle along not chasing directorships or partnerships. We leave that to richer people who have higher reference levels: I suspect that a major spur to ambition is the desire to keep up with one’s father.