… and the Pursuit of Happiness - Institute of Economic Affairs

… and the pursuit of happiness
subjective wellbeing
These results, in column 2 of Table 1, confirm the graphical
analysis: all three of our data sets show a statistically significant
and positive relationship between satisfaction and the log of GDP.
These results suggest that absolute income plays an im portant
role in explaining the relationship between satisfaction and
income. The magnitude of the relationship is similar whether we
estimate it using individual-level data or are looking at the relationship
between national average wellbeing and income levels.
It is also similar whether or not we adjust for the differential age
and sex composition of respondents. The coefficients on the log of
average income vary somewhat but are centred on the range 0.3
to 0.4.
This range is striking for its resemblance to the within-country
satisfaction–income gradient. The relationship between wellbeing
and income across countries is very similar to the relationship
between wellbeing and income within given countries. Across
the 126 countries with valid income data, we find that there is
no country with a statistically significant negative relationship
between satisfaction and income, and the relationship between
satisfaction and income for each country is of the same direction
and has a similar slope to the relationship between satisfaction
and income across countries. In other words, our estimates of
the satisfaction–income gradient are similar whether estimated
within or between countries.
Recall that the Easterlin paradox rested on the belief that the
relationship between wellbeing and income was stronger within
countries than between countries. Earlier estimates of statistically
insignificant cross-country relationships between average
satisfaction and average income reflected the fact that previous
researchers were looking at small samples of fairly homogeneous
countries. It was the juxtaposition of this statistically insignificant
finding with evidence of a statistically significant wellbeing–income
relationship within countries which led Easterlin
to declare that the paradox existed. But the historical absence of
evidence for a proposition – that richer countries are happier – should
not have been confused as being evidence of its absence. Indeed, with
our larger data sets, we find statistically significant evidence that
high-income countries are happier than their low-income counterparts.
In fact, a claim about the importance of relative income
comparisons should rest upon the quantitative magnitudes of the
estimated relationships between wellbeing and income. Indeed,
further work by Stevenson and Wolfers (2010) concludes that
relative income plays at best a minor role in determining life
satisfaction.
An alternative story is based on the idea that people adapt to
their income level. By this view, what matters for satisfaction is
income relative to expectations. Higher income does not make
us happier because we adapt. Furthermore, variations in income
that have persisted for sufficiently long for expectations to adapt
should therefore be unrelated to satisfaction. The differences
in income between countries are lasting. Indeed, across the 131
countries in the Gallup World Poll, the correlation between the
log GDP per capita in 2006 and its value in 1980 is 0.93. If people
adapt to changes in income so that long-lasting changes in income
do not make them happier, persistent cross-country differences in
GDP per capita should have little explanatory power for satisfaction.
The data clearly falsify this hypothesis.
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