Do people adapt to poverty? Evidence from the German SOEP

We analyze the multi-faceted effects of poverty on the subjective well-being of individuals. Using panel data on more than 42,500 individuals living in Germany from 1993 to 2010 we show that self-reported satisfaction with life decreases as a result of both contemporaneous and past episodes of poverty. The intensity of contemporaneous poverty also plays an additional negative role. In addition, poor individuals prefer income stability so that persistent poverty is less harmful than the same number of years of low income experienced with movements in and out of poverty. The negative effects of being in poverty are permanent and do not vanish over time: individuals do not adapt to poverty, and, even when subsequently out of poverty, they report lower satisfaction with life. These effects differ by population subgroups.