Different Versions of the Easterlin Paradox: New Evidence for European Countries

Abstract

Richer people are happier than poorer people, but when a country becomes richer over time, its people do not become happier. This seemingly contradictory pair of findings of Richard Easterlin has become famous as the Easterlin Paradox. However, it was met with counterevidence. To shed more light on this controversy, we distinguish between five different versions of the paradox. These versions apply to either groups of countries or individual countries, and to either the long or the medium term. We argue that the long term is most appropriate for testing the paradox, and that tests of the paradox should always control for an autonomous time trend.Unfortunately, this requirement renders the long-term version of the paradox for individual countries untestable.We test all other versions of the paradox with Eurobarometer data from 27 European countries. We do so by estimating country-panel equations for mean life satisfaction that include trend and cyclical components of per capita GDP as regressors. When testing variants of the paradox that apply to groups of countries, we find a clear and robust confirmation of the long-and medium-term versions of the paradox for a group of nine Western and Northern European countries. Moreover, we obtain a non-robust rejection of the medium-term variant of the paradox for a set of eleven Eastern European countries. On the level of individual countries, the medium-term variant of the paradox clearly holds for the nine Western and Northern European countries, but is consistently rejected for Greece, Ireland, Italy, and Spain. In the case of the Eastern European countries, the medium-term version of the paradox is rejected for Bulgaria, Lithuania, and Poland. As the Western and Northern European countries have a high per capita GDP as compared to that of Southern and Eastern European countries, our results are in line with the finding of Proto and Rustichini (2013), who find a non-monotonic relation between per capita GDP and life satisfaction over time which is positive for poorer countries, but flat (or negative) for richer countries.JEL codes: I31, I32, O11

How much can we learn from happiness data?

“…reported happiness. In the context of the Easterlin Paradox, a particularly salient control is a linear time trend that picks up secular trends in other determinants of mean happiness than ln (see Kaiser & Vendrik, 2019). In Table A2 of Appendix E, we thus extend Table 1 by adding a linear time trend to the estimation equations.…”

Did the Easterlin Paradox apply in South Korea between 1980 and 2015? A case study

“…A limitation of this macro-approach focusing on only one individual country is that the positive trend in happiness and life satisfaction may be driven by other factors and the positive association between income and subjective well-being is spurious. Although the original paradox only referred to the lack of a positive correlation and was not concerned with endogeneity problems, omitted variable bias poses a serious problem here (see Kaiser and Vendrik 2018). Adding additional control variables would be an option here, but given the small number of observations this can only be done to a limited extent.…”

“…In addition, some control variables may mediate the effect of GDP per capita on happiness and should therefore not be included in the model. A country-panel approach (Layard et al 2010;Sacks et al 2010;Kaiser and Vendrik 2018) may help to alleviate these problems, but a further elaboration of this is beyond the scope of this paper.…”

Does the Credit Cycle Have an Impact on Happiness?

“…Stevenson and Wolfers [34] find that economic growth associated with rising happiness by examining the relationship between changes in happiness and income over time within countries. Some researchers believe that the degree of wealth of the country should be considered when examining the relationship between personal income and happiness [4,[35][36][37][38]. Beyond income, however, many social scientists have documented that happiness is associated with the person's state of health and ageing [39,40], income inequality [41,42], natural environments [43,44], level of education [45], financial crisis [46], and quality of governance [47,48].…”