Francesco Devicienti, Ambra Poggi
There is growing interest in the analysis and measurement of social exclusion, to complement the static and dynamic literature on income poverty. On theoretical grounds, social exclusion and income poverty are seen as different processes, but with closely interrelated dynamics. However, our empirical understanding of the way these two processes dynamically interact at the individual level is still very limited. To shed some light on the issue, we use a dynamic bivariate probit model, controlling for unobserved heterogeneity and Wooldridge (2005)-type initial conditions. Both first and second order Markov dynamics are examined. We estimate the model using the Italian sample of the ECHP, waves 1-8, and find a sizable extent of state dependence in both poverty and social exclusion. Moreover, there are dynamic cross-effects, implying that
poverty and social exclusion are mutually reinforcing. Social policies aimed at eradicating poverty and avoiding individuals’ social and economic marginalization should take these interaction effects explicitly into account.
Keywords: poverty dynamics, social exclusion, state dependence, dynamic bivariate probit model with random effects.