August 01, 2016

“Keeping up with the Joneses” may be costly

New research from an economist at the US Federal Reserve has revealed that having wealthy neighbours could have negative effects on people’s financial health.

A working paper by Jeffrey Thompson suggests that more Americans are borrowing in order to keep up with wealthier neighbous, specifically when it comes to investing in homes. Thompson believes that this pressure is one of the financial effects of growing inequality in the US.

Examining other contributing factors to “keeping up with the Joneses”, the research finds that it is not only increasing wealth that may cause those less wealthy to spend more, but also the effects of rising house prices due to wealthier people moving into average-priced neighborhoods. The research suggests that this can mean the cost of living can go up for those who may have always lived in those neighborhoods, as they try to maintain the same lifestyle as their wealthier counterparts who move in.

Thompson writes that: “One potential consequence of rising concentration of income at the top of the distribution is increased borrowing, as less affluent households attempt to maintain standards of living with less income.”

Xi Chen of Yale University has written for IZA World of Labor about the connection between relative deprivation and well-being. He writes that people who are unable to maintain the same standard of living as others around them are less healthy and happy, and more likely to spend money on status-seeking goods rather than basic needs. He argues that: “The negative impact of relative deprivation on well-being can be reduced by curbing such spending among the poor. Possible methods include consumption taxes on status-marking goods, community sanctions, and redistributive policies that may reduce such spending.”

The Federal Reserve working paper can be accessed here.

Related article:
Relative deprivation and individual well-being by Xi Chen