Adaptation and the Easterlin Paradox

Abstract

Two behavioural explanations of the Easterlin Paradox are commonly advanced. The first appeals to social comparisons, whereby individual i compares her income (Y it ) to a comparison income level earned by some other individual or group j (Y * jt ). The second explanation is that of adaptation to higher levels of income. This is of the same nature, but here the individual's current income is compared to her own income in the past (i.e. Y it is compared to Y it-τ , for some positive value or values of τ). The first of these explanations has attracted far more empirical attention than has the second. This is probably for dataavailability reasons, as the investigation of the latter requires panel information. There is also a suspicion that large changes in Y it might be accompanied by a movement in some other variable that is also correlated with subjective well-being. We here review the empirical evidence that individuals do indeed compare current to past income, and then whether individuals adapt in general to aspects of their economic and social life. Last, we ask whether adaptation is in fact a viable explanation of the Easterlin Paradox.

Adaptation to Poverty in Long-Run Panel Data

“…These adaptation to income results can be proposed as one possible explanation of the Easterlin (1974) paradox, that average life satisfaction remains constant within a country despite consistent economic growth (see Clark, 2016, for a survey).…”

Four Decades of the Economics of Happiness: Where Next?

“…Figure below illustrates the adaptation results for five life events (unemployment, marriage, divorce, birth of child, and widowhood) in BHPS data from Clark and Georgellis (). The results here are similar to those in the SOEP (Clark et al ., ) and in other panel datasets (as surveyed in Clark, ). Unemployment stands out here as being a status to which individuals do not adapt.…”

“…But for policy purposes, we need to know if these effects will fade away in the longer‐run. A recent survey of this area is Clark (). Note that adaptation is just a particular kind of comparison, as in equation , where the reference group is now not other people but rather the individual himself or herself in the past.…”

“…But it is not the only one. Some of the work cited in Clark () concludes as to partial or no adaptation to disability, cosmetic surgery and job insecurity (but full adaptation to moving house and becoming self‐employed). In addition, although there is evidence for adaptation to income in general, Clark et al .…”

Psychological Resilience to Major Socioeconomic Life Events

“…Attempting to document the distribution of resilience in the population and in the context of different adverse events, and identifying the characteristics of individuals with different levels of resilience, is a valuable research task. As Clark (2016) notes, "The analysis of the distribution of resilience is of policy importance, as it would help to show us who needs more help, and in what circumstances." Cunha and Heckman (2009) stress the importance of research that can identify the mechanisms that promote resilience and recovery from disadvantage, noting a lack of systematic knowledge in this area.…”