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Happiness and the Persistence of Income Shocks

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  • Christian Bayer
  • Falko Juessen

Abstract

We reassess the empirical effects of income and employment on self-reported well-being. Our analysis makes use of a two-step estimation procedure that allows us to apply instrumental variable regressions with ordinal observable data. As suggested by the theory of incomplete markets, we differentiate between the effects of persistent and transitory income shocks. In line with this theory, we find that persistent shocks have a significant impact on happiness while transitory shocks do not. This also has consequences for inference about the happiness effect of employment. We find that employment per se is associated with a nonsignificant decline in happiness. (JEL D12, D52, I31, J22)

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  • Christian Bayer & Falko Juessen, 2015. "Happiness and the Persistence of Income Shocks," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(4), pages 160-187, October.
    • Handle: RePEc:aea:aejmac:v:7:y:2015:i:4:p:160-87
    Note: DOI: 10.1257/mac.20120163
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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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