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Life Satisfaction and Relative Income: Perceptions and Evidence

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Author Info
Mayraz, Guy () (CEP, London School of Economics)
Wagner, Gert G. () (DIW Berlin)
Schupp, Jürgen () (DIW Berlin)

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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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4390.

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Length: 24 pages
Date of creation: Sep 2009
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Handle: RePEc:iza:izadps:dp4390

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Related research
Keywords: income comparisons; relative income; life satisfaction; German Socio Economic Panel Study; SOEP;

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D62 - Microeconomics - - Welfare Economics - - - Externalities
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
I3 - Health, Education, and Welfare - - Welfare and Poverty
I31 - Health, Education, and Welfare - - Welfare and Poverty - - - General Welfare
Z13 - Other Special Topics - - Cultural Economics - - - Social Norms and Social Capital; Social Networks Economic Anthropology

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  1. 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.
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  2. Bruno S. Frey & Alois Stutzer, 2002. "What Can Economists Learn from Happiness Research?," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 402-435, June.
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  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!]
  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. [Downloadable!] (restricted)
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  6. Claudia Senik, 2007. "Direct evidence on income comparisons and their welfare effects," PSE Working Papers 2007-19, PSE (Ecole normale supérieure), revised Sep 2008. [Downloadable!]
    Other versions:
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This page was last updated on 2009-11-23.

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