Adaptation to Changes in Financial Status: the Analysis of Russian Panel Data

Satisfaction with income is an important indicator for determining specific measures of social policy and evaluating their effectiveness. However, government and other policy makers can only affect the material welfare of population, therefore it is important to study the mechanisms of the latter's transmission to subjective well-being. This paper studies one of these mechanisms - adaptation to changes in financial situation. In order to test existence of this phenomena in Russia two models are used. They allow to test this hypothesis for the short and long-term periods. In addition, adaptation to poverty is also investigated in this paper. The RLMS-HSE dataset is used for estimations. Hence, it has been shown that, on average, individuals adapt to declining incomes in the short and long term, while the effect of growing incomes does not fade with time. However, these findings are not confirmed for individuals in poverty. Moreover, the hypothesis of adaptation to this state is rejected. Thus, one can conclude that there is an automatic mechanism for reducing subjective inequality in Russian society along with a long-term positive effect of real income growth. However, since the social comparison channel has also found its confirmation, reduction of income inequality and poverty must remain a priority of the social policy.