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.
