6 Does Relative Income Matter? Are the Critics Right?

Abstract

Do other peoples' incomes reduce the happiness which people in advanced countries experience from any given income? And does this help to explain why in the U.S., Germany and some other advanced countries, happiness has been constant for many decades? The answer to both questions is 'Yes'. We provide 4 main pieces of evidence. 1) In the U.S. General Survey (repeated samples since 1972) comparator income has a negative effect on happiness equal in magnitude to the positive effect of own income. 2) In the West German Socio-Economic Panel since 1984 the same is true but with lifesatisfaction as the dependant variable. We also use the Panel to compare the effect of income comparisons and of adaptation as factors explaining the stable level of life-satisfaction: income comparisons emerge as much the more important. 3) When in our U.S. analysis we introduce "perceived" relative income as a potential explanatory variable, its effect is as large as the effect of actual relative income -further supporting the view that comparisons matter. 4) Finally, for a panel of European countries since 1973 we estimate the effect of average income upon average lifesatisfaction, splitting income into two components: trend and cycle. The effect of trend income is small and ill-defined. Our conclusions relate to time series and to advanced countries only. They differ from those drawn in recent studies by Deaton and Stevenson/Wolfers, but those studies are largely cross-sectional and mostly include non-advanced as well as advanced countries.

Happy PIIGS?

“…Cross section analyses tend to show the existence of a positive, though weak, relationship between life satisfaction and GDP growth (Layard et al 2010;Deaton 2008;Inglehart et al 2008). In particular, Frey and Stutzer (2002), using data from the World Bank's World Value Survey, find for most countries analysed a positive relation, although the effect of GDP on well-being seems to be stronger for low levels of income, within and across countries.…”

Direct Evidence on Income Comparisons and Subjective Well-Being

“…Turning to the third problem, the US General Social Survey contains a question on perceived relative family income with respect to "American families in general" (also used, for example, by Layard et al 2010 andGuven/Sørensen 2012). Hence, there is no direct linkage between relevant reference groups and perceived relative income.…”

Gi oss politikken tilbake i helsepolitikken!

“…13 Layard et al (2010). In , 2009, respondents were asked whether they have ever been diagnosed with depression or anxiety.…”