Household Financial Distress and Well-being: Evidence from the United Kingdom

In the context of a steady rise of household indebtedness in the United Kingdom since the early nineties, household financial distress and its impact on individual well-being has drawn the attention of policy makers. Analysing a combined panel of the British Household Panel Survey and Understanding Society over the period 1991-2012, this thesis contributes to the existing literature by examining three distinct yet, interconnected topics related to household financial distress and its association with various measures of well-being. Chapter 2 investigates the distributional heterogeneity in the impact of financial distress on life satisfaction and psychological well-being, measured through GHQ12 (General Health Questionnaire 12). The chapter deploys a fixed effect quantile regression which enables us to examine the association between financial distress and subjective well-being (SWB) across the well-being distribution while controlling for individuals’ unobserved heterogeneity. Results indicate that there is a decreasing trend in the size of the negative coefficient estimates from the lower to the upper end of the distribution. Therefore, there is a larger negative impact of financial distress on individuals with lower levels of SWB than those who have already attained higher SWB. Chapter 3 examines whether people adapt to a situation of long-standing financial distress. The chapter deploys a fixed effect regression to estimate the change in individuals’ SWB scores after successive rounds of financial distress. Results indicate that individuals do not adapt to financial distress even after passing through four consecutive years of such distress. This finding suggests that the negative effects of financial distress on SWB persist over time. Like long-term unemployment or poverty, it seems that financial distress has a ‘scarring effect’ on individuals’ SWB. Chapter 4 focuses on the impact of financial distress on cognitive ability. Using a cross section of Understanding Society survey, this chapter provides an empirical test as to whether financially distressed individuals are likely to experience cognitive impairment. The analysis deploys a two-stage residual inclusion method to address the association between financial distress and cognitive ability. The analysis indicates that individuals reporting financial distress significantly underperform in standard cognitive tests. Overall, the findings of the thesis indicate that household financial distress poses a real concern for mental health and well-being. They point towards the obvious need for future policy interventions to support those reporting low well-being. Although rising levels of household debt may be beneficial in maintaining aggregate demand, their negative effects on well-being suggest the need for policy action to alleviate financial distress.