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Life Satisfaction and Relative Income: Perceptions and Evidence

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Author Info

  • Guy Mayraz
  • Gert G. Wagner
  • Jürgen Schupp

Abstract

Using a unique dataset we study both the actual and self-perceived relationship between subjective well-being and income comparisons against a wide range of potential comparison groups, enabling us to investigate a broader range of questions than in previous studies. In questions inserted into a 2008 module of the German-Socio Economic Panel Study we ask subjects to report (a) how their income compares to various groups, such a co-workers, friends, and neighbours, and (b) how important these income comparisons are to them. We find substantial gender differences, with income comparisons being much better predictors of subjective well-being in men than in women. Generic (same-gender) comparisons are the most important, followed by within profession comparisons. Once generic and within-profession comparisons are controlled for, income relative to neighbours has a negative coefficient, implying that living in a high-income neighbourhood increases happiness. The perceived importance of income comparisons is found to be uncorrelated with its actual relationship to subjective well-being, suggesting that people are unconscious of its real impact. Subjects who judge comparisons to be important are, however, significantly less happy than subjects who see income comparisons as unimportant. Finally, the marginal effect of relative income on subjective well-being does not depend on whether a subject is below or above the reference group income.

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Bibliographic Info

Paper provided by DIW Berlin, The German Socio-Economic Panel (SOEP) in its series SOEPpapers on Multidisciplinary Panel Data Research with number 214.

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Length: 22 p.
Date of creation: 2009
Date of revision:
Handle: RePEc:diw:diwsop:diw_sp214

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Keywords: Income Comparisons; Relative Income; Life Satisfaction; German Socio Economic Panel Study; SOEP;

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References

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  1. Joerg Dittmann & Jan Goebel, 2010. "Your House, Your Car, Your Education: The Socioeconomic Situation of the Neighborhood and its Impact on Life Satisfaction in Germany," Social Indicators Research, Springer, vol. 96(3), pages 497-513, May.
  2. Conchita D’Ambrosio & Joachim Frick, 2007. "Income Satisfaction and Relative Deprivation: An Empirical Link," Social Indicators Research, Springer, vol. 81(3), pages 497-519, May.
  3. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
  4. Bruno S. Frey & Alois Stutzer, 2001. "What Can Economists Learn from Happiness Research?," CESifo Working Paper Series 503, CESifo Group Munich.
  5. Robert H. Frank, 2005. "Positional Externalities Cause Large and Preventable Welfare Losses," American Economic Review, American Economic Association, vol. 95(2), pages 137-141, May.
  6. Clark, Andrew E. & Senik, Claudia, 2009. "Who Compares to Whom? The Anatomy of Income Comparisons in Europe," CEPREMAP Working Papers (Docweb) 0907, CEPREMAP.
  7. Claudia Senik, 2008. "Direct evidence on income comparisons and their welfare effects," PSE Working Papers halshs-00588023, HAL.
  8. Layard, R. & Mayraz, G. & Nickell, S., 2008. "The marginal utility of income," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1846-1857, August.
  9. KNIGHT, John & SONG, Lina & GUNATILAKA, Ramani, 2009. "Subjective well-being and its determinants in rural China," China Economic Review, Elsevier, vol. 20(4), pages 635-649, December.
  10. McBride, Michael, 2001. "Relative-income effects on subjective well-being in the cross-section," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 251-278, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How does income inequality affect happiness?
    by Winton Bates in Freedom and Flourishing on 2012-02-09 06:07:00
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Cited by:
  1. Joachim Merz & Tim Rathjen, 2011. "Zeit- und Einkommensarmut von Freien Berufen und Unternehmern," FFB-Discussionpaper 89, Research Institute on Professions (Forschungsinstitut Freie Berufe (FFB)), LEUPHANA University Lüneburg.
  2. Grund, Christian & Martin, Johannes, 2012. "Monetary Reference Points of Managers: An Empirical Investigation of Status Quo Preferences and Social Comparisons," IZA Discussion Papers 7097, Institute for the Study of Labor (IZA).
  3. Schneck, Stefan, 2011. "The Effect of Relative Standing on Considerations About Self-Employment," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-486, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. Joachim Merz & Henning Stolze, 2010. "Kumulation von Querschnitten - Evaluierung alternativer Konzepte für die kumulierten laufenden Wirtschaftsrechnungen 1999 bis 2003 im Vergleich zur Einkommens- und Verbrauchsstichprobe 2003," FFB-Discussionpaper 85, Research Institute on Professions (Forschungsinstitut Freie Berufe (FFB)), LEUPHANA University Lüneburg.
  5. Pischke, Jörn-Steffen, 2011. "Money and Happiness: Evidence from the Industry Wage Structure," CEPR Discussion Papers 8409, C.E.P.R. Discussion Papers.
  6. Andrew Clark & Claudia Senik & Katsunori Yamada, 2013. "The Joneses in Japan: Income Comparisons and Financial Satisfaction," ISER Discussion Paper 0866, Institute of Social and Economic Research, Osaka University.
  7. Simone Schneider, 2010. "The Selection of Pay Referents: Potential Patterns and Impacts on Life Satisfaction," SOEPpapers on Multidisciplinary Panel Data Research 333, DIW Berlin, The German Socio-Economic Panel (SOEP).
  8. Schneck, Stefan, 2013. "My Wage is Unfair! Just a Feeling or Comparison with Peers?," EconStor Preprints 70096, ZBW - German National Library of Economics.
  9. Cristina Blanco-Perez, 2012. "Rethinking the Relative Income Hypothesis," SOEPpapers on Multidisciplinary Panel Data Research 501, DIW Berlin, The German Socio-Economic Panel (SOEP).

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