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Testing the Easterlin Hypothesis with Panel Data: The Dynamic Relationship between Life Satisfaction and Economic Growth in Germany and the UK

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  • Tobias Pfaff
  • Johannes Hirata

Abstract

Recent studies focused on testing the Easterlin hypothesis (happiness and national income correlate in the cross-section but not over time) on a global level. We make a case for testing the Easterlin hypothesis at the country level where individual panel data allow exploiting important methodological advantages. Novelties of our test of the Easterlin hypothesis are a) long-term panel data and estimation with individual fixed effects, b) regional GDP per capita with a higher variation than national figures, c) accounting for potentially biased clustered standard errors when the number of clusters is small. Using long-term panel data for Germany and the United Kingdom, we do not find robust evidence for a relationship between GDP per capita and life satisfaction in either country (controlling for a variety of variables). Together with the evidence from previous research, we now count three countries for which Easterlin's happiness-income hypothesis cannot be rejected: the United States, Germany, and the United Kingdom.

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  • Tobias Pfaff & Johannes Hirata, 2013. "Testing the Easterlin Hypothesis with Panel Data: The Dynamic Relationship between Life Satisfaction and Economic Growth in Germany and the UK," SOEPpapers on Multidisciplinary Panel Data Research 554, DIW Berlin, The German Socio-Economic Panel (SOEP).
    • Handle: RePEc:diw:diwsop:diw_sp554
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    3. Felix R. FitzRoy & Michael A. Nolan, 2020. "Education, income and happiness: panel evidence for the UK," Empirical Economics, Springer, vol. 58(5), pages 2573-2592, May.
    4. Peter Krause, 2015. "Quality of Life and Inequality," SOEPpapers on Multidisciplinary Panel Data Research 765, DIW Berlin, The German Socio-Economic Panel (SOEP).

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    More about this item

    Keywords

    Subjective well-being; economic growth; income; Easterlin hypothesis;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D0 - Microeconomics - - General
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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