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Age, Life-Satisfaction, and Relative Income: Insights from the UK and Germany

Author

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  • FitzRoy, Felix

    (University of St. Andrews)

  • Nolan, Michael A.

    (University of Hull)

  • Steinhardt, Max F.

    (Free University of Berlin)

Abstract

We first confirm previous results with the German Socio-Economic Panel by Layard et al. (2010), and obtain strong negative effects of comparison income. However, when we split the sample by age, we find quite different results for reference income. The effects on life-satisfaction are positive and significant for those under 45, consistent with Hirschman's (1973) 'tunnel effect', and only negative (and larger than in the full sample) for those over 45, when relative deprivation dominates. Thus for young respondents, reference income's signalling role, indicating potential future prospects, can outweigh relative deprivation effects. Own-income effects are also larger for the older sample, and of greater magnitude than the comparison income effect. In East Germany the reference income effects are insignificant for all. With data from the British Household Panel Survey, we confirm standard results when encompassing all ages, but reference income loses significance in both age groups, and most surprisingly, even own income becomes insignificant for those over 45, while education has significant negative effects.

Suggested Citation

  • FitzRoy, Felix & Nolan, Michael A. & Steinhardt, Max F., 2011. "Age, Life-Satisfaction, and Relative Income: Insights from the UK and Germany," IZA Discussion Papers 6045, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp6045
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    References listed on IDEAS

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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.
    2. Blanchflower, David G. & Oswald, Andrew J., 2008. "Is well-being U-shaped over the life cycle?," Social Science & Medicine, Elsevier, vol. 66(8), pages 1733-1749, April.
    3. Claudia Senik, 2008. "Ambition and Jealousy: Income Interactions in the ‘Old’ Europe versus the ‘New’ Europe and the United States," Economica, London School of Economics and Political Science, vol. 75(299), pages 495-513, August.
    4. Albert O. Hirschman & Michael Rothschild, 1973. "The Changing Tolerance for Income Inequality in the Course of Economic DevelopmentWith A Mathematical Appendix," The Quarterly Journal of Economics, Oxford University Press, vol. 87(4), pages 544-566.
    5. Boyce, Christopher J. & Brown, Gordon D. A., 2008. "Income Rank and Upward Comparisons," Economic Research Papers 269895, University of Warwick - Department of Economics.
    6. Layard, Richard & Mayraz, Guy & Nickell, Stephen, 2009. "Does relative income matter? Are the critics right?," LSE Research Online Documents on Economics 28594, London School of Economics and Political Science, LSE Library.
    7. AndrewE. Clark & Nicolai Kristensen & Niels Westergård-Nielsen, 2009. "Job Satisfaction and Co-worker Wages: Status or Signal?," Economic Journal, Royal Economic Society, vol. 119(536), pages 430-447, March.
    8. Hirschman, Albert O., 1973. "The changing tolerance for income inequality in the course of economic development," World Development, Elsevier, vol. 1(12), pages 29-36, December.
    9. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September.
    10. Boyce, Christopher J. & Brown, Gordon D.A., 2008. "Income Rank and Upward Comparisons," The Warwick Economics Research Paper Series (TWERPS) 883, University of Warwick, Department of Economics.
    11. Ada Ferrer-i-Carbonell & Paul Frijters, 2004. "How Important is Methodology for the estimates of the determinants of Happiness?," Economic Journal, Royal Economic Society, vol. 114(497), pages 641-659, July.
    12. Senik, Claudia, 2004. "When information dominates comparison: Learning from Russian subjective panel data," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 2099-2123, August.
    13. Drichoutis, Andreas C. & Nayga Jr., Rodolfo M. & Lazaridis, Panagiotis, 2010. "Do reference values matter? Some notes and extensions on "income and happiness across Europe"," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 479-486, August.
    14. 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.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Inequality, happiness & age
      by chris dillow in Stumbling and Mumbling on 2011-11-28 21:11:40

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    Cited by:

    1. Akay, Alpaslan & Martinsson, Peter, 2012. "Positional Concerns through the Life Cycle: Evidence from Subjective Well-Being Data and Survey Experiments," IZA Discussion Papers 6342, Institute of Labor Economics (IZA).
    2. Godechot, Olivier & Senik, Claudia, 2015. "Wage comparisons in and out of the firm. Evidence from a matched employer–employee French database," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 395-410.
    3. Felix FitzRoy & Michael Nolan & Max Steinhardt & David Ulph, 2014. "Testing the tunnel effect: comparison, age and happiness in UK and German panels," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-30, December.
    4. Piper, Alan T., 2014. "Sliding down the U-shape? An investigation of the age-well-being relationship, with a focus on young adults," MPRA Paper 55819, University Library of Munich, Germany.
    5. 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 of Labor Economics (IZA).

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    More about this item

    Keywords

    reference groups; comparison income; subjective life-satisfaction; age; welfare;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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