Economic Growth and Subjective WellBeing: Reassessing the Easterlin Paradox

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Economic Growth and Subjective Well-BeingReasses
sing the Easterlin Paradox

• Betsey Stevenson and Justin Wolfers
• Wharton School, University of Pennsylvania and
  NBER

The 2008 World Congress on NAEP Measures for
Nations, May 14 2008.
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Research Question What is the relationship
between income happiness?

• Why revisit the stylized facts?
• Theoretical implications Reference-dependent
  preferences
• Yielding important policy implications (and big
  policy claims)
• New data Longer time series (1946-2008) More
  countries (n132)
• Statistical inference Absence of evidence v.
  evidence of absence
• What are big versus small effects? ? Focus on
  the magnitudes

• What we wont do
• Assess causality Happiness ß log(Income)
• Revisit what subjective well-being data mean

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Measuring Subjective Well-Being

• Subjective well-being questions
• Happiness Taking all things together, would you
  say you are very happy quite happy not very
  happy not at all happy.
• Life satisfaction All things considered, how
  satisfied are you with your life as a whole these
  days? 1Dissatisfied 10Satisfied
• Satisfaction ladder Here is a ladder
  representing the ladder of life. Let's suppose
  the top of the ladder represents the best
  possible life for you, and the bottom, the worse
  possible life for you. On which step of the
  ladder do you feel you personally stand at the
  present time? 0-10 steps.
• Creating a cardinal measure
• Macro data Two steps
• Estimate Gross national happinessc,tOrdered
  probit Happinessi,c,t µc,t
  I(country)I(year) e eN(0,1)
• Regress GNH on GDP µc,t ß log(Incomec,t ) ?
• Micro data
• Ordered probit Happinessi,c,t ß
  log(Incomeindividual country or period ) e
  eN(0,1)

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Outline Assessing the Happiness-Income link

• Within-country comparisons
• USA
• All countries
• Between countries
• Through time
• Multiple datasets
• For both happiness and life satisfaction
• No evidence of satiation
• National Time Series
• Japan
• Europe
• USA

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Within-Country Comparisons
Taken all together, how would you say things are
these days?
Source U.S. General Social Survey, 2006
When we plot average happiness versus income for
clusters of people in a given country at a given
time, we see that rich people are in fact much
happier than poor people. Its actually an
astonishingly large difference. Theres no one
single change you can imagine that would make
your life improve on the happiness scale as much
as to move from the bottom 5 percent on the
income scale to the top 5 percent. - Robert
Frank (2005)
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Within-Country USA
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Histogram Within-Country Estimates
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Outline Assessing the Happiness-Income link

• Within-country comparisons
• USA
• All countries
• Between countries
• Through time
• Multiple datasets
• Both happiness and life satisfaction
• No evidence of satiation
• National Time Series
• Japan
• Europe
• USA

ßwithin 0.2 0.4
the happiness differences between rich and poor
countries that one might expect on the basis of
the within country differences by economic status
are not borne out by the international data.
Easterlin, (1974)
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Early Cross-National Studies
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World Values Survey 1981-2004
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Pew Global Attitudes Survey, 2002
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Between Gallup World Poll
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Comparing within- and between-country estimates
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Outline Assessing the Happiness-Income link

• Within-country comparisons
• USA
• All countries
• Between countries
• Through time
• Multiple datasets
• Both happiness and life satisfaction
• No evidence of satiation
• National Time Series
• Japan
• Europe
• USA

ßwithin 0.2 0.4
ßbetween 0.2 0.4
income growth in a society does not increase
happiness. - Easterlin (1995)
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Time Series No rise in happiness, despite growth
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Japan Well-Being versus GDP
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Japan Raw data
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Japan Economic Conditions and Well-Being
Satisfactiont 0.24log(GDPt) 0.06Unemp
-0.39Break 1 0.57Break 2 0.52Break 3
n51 (se) (0.06)
(0.02) (0.07)
(0.11) (0.14)
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European happiness trends
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International Panel Data
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Eurobarometer Nine countries
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USA Is it surprising that happiness hasnt grown?
Happinesst 0.048 Average log household income
in GSSt 95 ci -0.25 - 0.34Happinesst
0.058 Average log household income in CPSt
95 ci -0.21 0.33
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Conclusion Stylized facts about Wellbeing and
Income

• Within-country comparisons
• USA
• All countries
• Between countries
• Through time
• Multiple datasets
• Both happiness and life satisfaction
• No evidence of satiation
• National Time Series
• USA
• Japan
• Europe

ßwithin 0.2 0.4
ßbetween 0.2 0.4
ßtime series 0.2 0.4
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• Blank slide End of talk

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Spare Slides

• Background
• Within-country
• Between-country
• National time series
• International panel data
• Broader measures of subjective well-being

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Yesterdays Experiences
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Recalled feelings and GDP
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Bradburn Recent Feelings and GDP
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Within-Country Rich are Happier than Poor
Question In general, how happy would you say
that you are?
Very happy rising with income
unhappy falling with income

• Similar relationship holds in other countries and
  eras
• As far as I am aware, in every representative
  national survey ever done a significant bivariate
  relationship between happiness and income has
  been found. Easterlin (2001)

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Between-Country Estimates Happiness GNP
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Time Series No rise in happiness, despite growth
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Implications of the Easterlin Paradox

• Why do national comparisons among countries and
  over time show an association between income and
  happiness which is so much weaker than, if not
  inconsistent with, that shown by within-country
  comparisons? Easterlin (1974)
• Reference-dependent preferences
• Relative income matters Other peoples
  consumption matters
• Habit formation hedonic treadmill Other
  periods consumption
• Policy implications
• Growth My results, along with mounting evidence
  from other time series studies of subjective
  well-being, do on balance undermine the view that
  a focus on economic growth is in the best
  interests of society. Easterlin (2005)
• Public finance If preferences are interdependent
• ? Pigouvian rationale for taxing labor supply /
  conspicuous consumption

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Subjective Well-being

• Subjective well-being refers to all of the
  various types of evaluations, both positive and
  negative, that people make of their lives. It
  includes reflective cognitive evaluations, such
  as life satisfaction and work satisfaction,
  interest and engagement, and affective reactions
  to life events, such as joy and sadness.
  (Diener, 2005)
• Typical questions
• Happiness
• Taking all things together, would you say you
  are very happy quite happy not very happy not
  at all happy.
• Life satisfaction
• All things considered, how satisfied are you
  with your life as a whole these days?
  1Dissatisfied 10Satisfied
• Satisfaction ladder
• Here is a ladder representing the ladder of
  life. Let's suppose the top of the ladder
  represents the best possible life for you, and
  the bottom, the worse possible life for you. On
  which step of the ladder do you feel you
  personally stand at the present time? 0-10
  steps.

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Alternative measures of average happiness
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Income-Happiness Relationship in GSS
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Within-Country Rich are happier than poor
Notes , and denote statistically
significant at 1, 5 and 10, respectively. (Robu
st standard errors in parentheses, clustered by
country.) Column 1 An ordered probit regression
of well-being on log household income, and
country fixed-effects Column 2 Adds gender, a
quartic in age, and their interaction as
controls Column 3 Instruments for log household
income using indicator variables for levels of
education. Second stage is an ordered probit
regression of well-being on the predicted values,
the residuals, and country fixed-effects. Column
4 The instrument set now includes indicator
variables for levels of education, interacted
with country dummies.
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Within-Country Variation Gallup World Poll
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Between-Country GDP-Wellbeing Gradient
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Is there any evidence of satiation?

• if we compare countries, there is no evidence
  that richer countries are happier than poorer
  ones so long as we confine ourselves to
  countries with incomes over 15,000 per head. -
  Layard (2005)

• Rich countries (GDPgt15,000)
• Happiness1.08log(GDP) se0.19
• Poor countries (GDPlt15,000)
• Happiness0.35log(GDP) se0.04
• A 1 rise in GDP
• Has three times larger effects in rich countries
  than poor countries
• A 100 rise in GDP
• 3x larger effect in Jamaica than US
• 20x larger effect in Burundi than US

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Satisfaction v. Happiness (WVS)
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Happiness v. Life Satisfaction
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WVS Comparing within- and between
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Income and Happiness Cross-section v.
Cross-country
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China
Overall how satisfied or dissatisfied are you
with the way things are going in your life today?
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Happiness and the Output Gap
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U.S. trends by education
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U.S. Happiness Trends by Race
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Gender Happiness Trends in the United States
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World Values Survey Changes
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WVS First diffs
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International Panel Data