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Economic Growth and Subjective Well-Being: Reassessing 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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economic growth and subjective well being reassessing the easterlin paradox

Economic Growth and Subjective Well-Being:Reassessing 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.

research question what is the relationship between income happiness
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 (n=132)
  • Statistical inference: Absence of evidence v. evidence of absence
  • What are “big” versus small effects?  Focus on the magnitudes

What we won’t do:

  • Assess causality: Happiness = β log(Income)
  • Revisit what subjective well-being data “mean”

Stevenson & Wolfers, Economic Growth and Happiness

measuring subjective well being
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?” [1=Dissatisfied – 10=Satisfied]
    • 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,t”Ordered probit: Happinessi,c,t = μc,t * I(country)*I(year) + ε ε~N(0,1)
      • Regress GNH on GDP: μc,t = β log(Incomec,t ) + ν
    • Micro data:
      • Ordered probit: Happinessi,c,t = β log(Incomeindividual country or period )+ ε ε~N(0,1)

Stevenson & Wolfers, Economic Growth and Happiness

outline assessing the happiness income link
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

Stevenson & Wolfers, Economic Growth and Happiness

within country comparisons
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. It’s actually an astonishingly large difference. There’s 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)

Stevenson & Wolfers, Economic Growth and Happiness

within country usa
Within-Country: USA

Stevenson & Wolfers, Economic Growth and Happiness

histogram within country estimates
Histogram: Within-Country Estimates

Stevenson & Wolfers, Economic Growth and Happiness

outline assessing the happiness income link1
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

βwithin ≈ 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)

Stevenson & Wolfers, Economic Growth and Happiness

early cross national studies
Early Cross-National Studies

Stevenson & Wolfers, Economic Growth and Happiness

world values survey 1981 2004
World Values Survey: 1981-2004

Stevenson & Wolfers, Economic Growth and Happiness

pew global attitudes survey 2002
Pew Global Attitudes Survey, 2002

Stevenson & Wolfers, Economic Growth and Happiness

between gallup world poll
Between: Gallup World Poll

Stevenson & Wolfers, Economic Growth and Happiness

comparing within and between country estimates
Comparing within- and between-country estimates

Stevenson & Wolfers, Economic Growth and Happiness

outline assessing the happiness income link2
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

βwithin ≈ 0.2 – 0.4

βbetween ≈ 0.2 – 0.4

“income growth in a society does not increase happiness”. - Easterlin (1995)

Stevenson & Wolfers, Economic Growth and Happiness

time series no rise in happiness despite growth
Time Series: No rise in happiness, despite growth

Stevenson & Wolfers, Economic Growth and Happiness

japan well being versus gdp
Japan: Well-Being versus GDP

Stevenson & Wolfers, Economic Growth and Happiness

japan economic conditions and well being
Japan: Economic Conditions and Well-Being

Satisfactiont= 0.24*log(GDPt) – 0.06*Unemp -0.39*Break 1 – 0.57*Break 2 – 0.52*Break 3 n=51 (se) (0.06) (0.02) (0.07) (0.11) (0.14)

Stevenson & Wolfers, Economic Growth and Happiness

european happiness trends
European happiness trends

Stevenson & Wolfers, Economic Growth and Happiness

international panel data
International Panel Data

Stevenson & Wolfers, Economic Growth and Happiness

eurobarometer nine countries
Eurobarometer: Nine countries

Stevenson & Wolfers, Economic Growth and Happiness

usa is it surprising that happiness hasn t grown
USA: Is it surprising that happiness hasn’t grown?

Happinesst = 0.048 * Average log household income in GSSt [95% ci: -0.25 - +0.34]Happinesst = 0.058 * Average log household income in CPSt [95% ci: -0.21 – 0.33]

Stevenson & Wolfers, Economic Growth and Happiness

conclusion stylized facts about wellbeing and income
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

βwithin ≈ 0.2 – 0.4

βbetween ≈ 0.2 – 0.4

βtime series ≈ 0.2 – 0.4

Stevenson & Wolfers, Economic Growth and Happiness

slide23

Blank slide: End of talk

Stevenson & Wolfers, Economic Growth and Happiness

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

Stevenson & Wolfers, Economic Growth and Happiness

yesterday s experiences
Yesterday’s Experiences

Stevenson & Wolfers, Economic Growth and Happiness

recalled feelings and gdp
Recalled feelings and GDP

Stevenson & Wolfers, Economic Growth and Happiness

bradburn recent feelings and gdp
Bradburn: Recent Feelings and GDP

Stevenson & Wolfers, Economic Growth and Happiness

within country rich are happier than poor
Within-Country: Rich are Happier than Poor
  • 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)

Question: “In general, how happy would you say that you are?”

%Very happy rising with income

%unhappy falling with income

Stevenson & Wolfers, Economic Growth and Happiness

between country estimates happiness gnp
Between-Country Estimates: Happiness & GNP

Stevenson & Wolfers, Economic Growth and Happiness

time series no rise in happiness despite growth1
Time Series: No rise in happiness, despite growth

Stevenson & Wolfers, Economic Growth and Happiness

implications of the easterlin paradox
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 people’s consumption matters]
      • Habit formation = hedonic treadmill [Other period’s 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

Stevenson & Wolfers, Economic Growth and Happiness

subjective well being
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?” [1=Dissatisfied – 10=Satisfied]
    • 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].”

Stevenson & Wolfers, Economic Growth and Happiness

alternative measures of average happiness
Alternative measures of average happiness

Stevenson & Wolfers, Economic Growth and Happiness

income happiness relationship in gss
Income-Happiness Relationship in GSS

Stevenson & Wolfers, Economic Growth and Happiness

within country rich are happier than poor1
Within-Country: Rich are happier than poor

Notes: ***, ** and * denote statistically significant at 1%, 5% and 10%, respectively.

(Robust 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.

Stevenson & Wolfers, Economic Growth and Happiness

within country variation gallup world poll
Within-Country Variation: Gallup World Poll

Stevenson & Wolfers, Economic Growth and Happiness

between country gdp wellbeing gradient
Between-Country GDP-Wellbeing Gradient

Stevenson & Wolfers, Economic Growth and Happiness

is there any evidence of satiation
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 (GDP>$15,000)
    • Happiness=1.08*log(GDP) [se=0.19]
  • Poor countries (GDP<$15,000)
    • Happiness=0.35*log(GDP) [se=0.04]
  • 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

Stevenson & Wolfers, Economic Growth and Happiness

satisfaction v happiness wvs
Satisfaction v. Happiness (WVS)

Stevenson & Wolfers, Economic Growth and Happiness

happiness v life satisfaction
Happiness v. Life Satisfaction

Stevenson & Wolfers, Economic Growth and Happiness

wvs comparing within and between
WVS: Comparing within- and between

Stevenson & Wolfers, Economic Growth and Happiness

income and happiness cross section v cross country
Income and Happiness: Cross-section v. Cross-country

Stevenson & Wolfers, Economic Growth and Happiness

china
China

“Overall how satisfied or dissatisfied are you with the way things are going in your life today?”

Stevenson & Wolfers, Economic Growth and Happiness

happiness and the output gap
Happiness and the Output Gap

Stevenson & Wolfers, Economic Growth and Happiness

u s trends by education
U.S. trends by education

Stevenson & Wolfers, Economic Growth and Happiness

u s happiness trends by race
U.S. Happiness Trends by Race

Stevenson & Wolfers, Economic Growth and Happiness

world values survey changes
World Values Survey Changes

Stevenson & Wolfers, Economic Growth and Happiness

wvs first diffs
WVS: First diffs

Stevenson & Wolfers, Economic Growth and Happiness

international panel data1
International Panel Data

Stevenson & Wolfers, Economic Growth and Happiness

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