Do other peoples' incomes reduce the happiness which people in advanced countries experience fromany given income? And does this help to explain why in the U.S., Germany and some other advancedcountries, happiness has been constant for many decades? The answer to both questions is 'Yes'. Weprovide 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 ofown income. 2) In the West German Socio-Economic Panel since 1984 the same is true but with lifesatisfactionas the dependant variable. We also use the Panel to compare the effect of incomecomparisons and of adaptation as factors explaining the stable level of life-satisfaction: incomecomparisons 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 ofactual relative income - further supporting the view that comparisons matter. 4) Finally, for a panel ofEuropean 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 issmall and ill-defined. Our conclusions relate to time series and to advanced countries only. Theydiffer from those drawn in recent studies by Deaton and Stevenson/Wolfers, but those studies arelargely cross-sectional and mostly include non-advanced as well as advanced countries.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0918.
Find related papers by JEL classification: D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution D90 - Microeconomics - - Intertemporal Choice and Growth - - - General E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth H00 - Public Economics - - General - - - General I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Richard Layard & Guy Mayraz & Stephen J. Nickell, 2007.
"The Marginal Utility of Income,"
SOEPpapers
50, DIW Berlin, The German Socio-Economic Panel (SOEP).
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