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Does relative income matter? Are the critics right?

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  • Richard Layard
  • Guy Mayraz
  • Stephen Nickell

Abstract

Do other peoples’ incomes reduce the happiness which people in advanced countries experience from any given income? And does this help to explain why in the U.S., Germany and some other advanced countries, happiness has been constant for many decades? The answer to both questions is ‘Yes’. We provide 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 of own income. 2) In the West German Socio-Economic Panel since 1984 the same is true but with lifesatisfaction as the dependant variable. We also use the Panel to compare the effect of income comparisons and of adaptation as factors explaining the stable level of life-satisfaction: income comparisons 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 of actual relative income – further supporting the view that comparisons matter. 4) Finally, for a panel of European 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 is small and ill-defined. Our conclusions relate to time series and to advanced countries only. They differ from those drawn in recent studies by Deaton and Stevenson/Wolfers, but those studies are largely cross-sectional and mostly include non-advanced as well as advanced countries.

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File URL: http://eprints.lse.ac.uk/28594/
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 28594.

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Length: 38 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:ehl:lserod:28594

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Related research

Keywords: Easterlin Paradox; happiness; relative income; growth;

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References

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  1. Robert J. MacCulloch & Rafael Di Tella & Andrew J. Oswald, 2001. "Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness," American Economic Review, American Economic Association, vol. 91(1), pages 335-341, March.
  2. Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
  3. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  4. Stevenson, Betsey & Wolfers, Justin, 2008. "Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox," CEPR Discussion Papers 6944, C.E.P.R. Discussion Papers.
  5. 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.
  6. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 963-1002, August.
  7. Helliwell, John F., 2003. "How's life? Combining individual and national variables to explain subjective well-being," Economic Modelling, Elsevier, vol. 20(2), pages 331-360, March.
  8. Bruno S. Frey, 2008. "Happiness: A Revolution in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062771, December.
  9. Vendrik, Maarten C.M. & Woltjer, Geert B., 2007. "Happiness and loss aversion: Is utility concave or convex in relative income?," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1423-1448, August.
  10. repec:pri:cheawb:deaton_income_health_and_wellbeing_around_the_world_evidence_%20from_gallup_world_poll_jep_spring2008 is not listed on IDEAS
  11. Bernard M.S. van Praag & Paul Frijters, 1999. "The measurement of welfare and well-being; the Leyden approach," School of Economics and Finance Discussion Papers and Working Papers Series 071a, School of Economics and Finance, Queensland University of Technology.
  12. John F. Helliwell, 2004. "Well-Being and Social Capital: Does Suicide Pose a Puzzle?," NBER Working Papers 10896, National Bureau of Economic Research, Inc.
  13. Stadt, H. van de & Geer, S.A. van de & Kapteyn, A.J., 1985. "The relativity of utility: Evidence from panel data," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364325, Tilburg University.
  14. Angus Deaton, 2008. "Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 53-72, Spring.
  15. Rafael Di Tella & John Haisken-De New & Robert MacCulloch, 2007. "Happiness Adaptation to Income and to Status in an Individual Panel," NBER Working Papers 13159, National Bureau of Economic Research, Inc.
  16. Richard Layard, 2006. "Happiness and Public Policy: a Challenge to the Profession," Economic Journal, Royal Economic Society, vol. 116(510), pages C24-C33, 03.
  17. John F. Heliwell & Haifang Huang, 2005. "How's the Job? Well-Being and Social Capital in the Workplace," NBER Working Papers 11759, National Bureau of Economic Research, Inc.
  18. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June.
  19. Richard Layard, 2006. "Happiness and public policy: a challenge to the profession," LSE Research Online Documents on Economics 47483, London School of Economics and Political Science, LSE Library.
  20. Stefano Bartolini & Ennio Bilancini & Maurizio Pugno, 2007. "Did the Decline in Social Capital Decrease American Happiness? A Relational Explanation of the Happiness Paradox," Department of Economics University of Siena 513, Department of Economics, University of Siena.
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