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Easterlin Paradox

by 추홍희블로그 2008. 4. 26.

Maybe Money Does Buy Happiness After All

By DAVID LEONHARDT

Published: April 16, 2008

Correction Appended

In the aftermath of World War II, the Japanese economy went through one of the greatest booms the world has ever known. From 1950 to 1970, the economy’s output per person grew more than sevenfold. Japan, in just a few decades, remade itself from a war-torn country into one of the richest nations on earth.

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Yet, strangely, Japanese citizens didn’t seem to become any more satisfied with their lives. According to one poll, the percentage of people who gave the most positive possible answer about their life satisfaction actually fell from the late 1950s to the early ’70s. They were richer but apparently no happier.

This contrast became the most famous example of a theory known as the Easterlin paradox. In 1974, Richard Easterlin, then an economist at the University of Pennsylvania, published a study in which he argued that economic growth didn’t necessarily lead to more satisfaction.

People in poor countries, not surprisingly, did become happier once they could afford basic necessities. But beyond that, further gains simply seemed to reset the bar. To put it in today’s terms, owning an iPod doesn’t make you happier, because you then want an iPod Touch. Relative income — how much you make compared with others around you — mattered far more than absolute income, Mr. Easterlin wrote.

The paradox quickly became a social science classic, cited in academic journals and the popular media. It tapped into a near-spiritual human instinct to believe that money can’t buy happiness. As a 2006 headline in The Financial Times said, “The Hippies Were Right All Along About Happiness.”

But now the Easterlin paradox is under attack.

Last week, at the Brookings Institution in Washington, two young economists — from the University of Pennsylvania, as it happens — presented a rebuttal of the paradox. Their paper has quickly captured the attention of top economists around the world. It has also led to a spirited response from Mr. Easterlin.

In the paper, Betsey Stevenson and Justin Wolfers argue that money indeed tends to bring happiness, even if it doesn’t guarantee it. They point out that in the 34 years since Mr. Easterlin published his paper, an explosion of public opinion surveys has allowed for a better look at the question. “The central message,” Ms. Stevenson said, “is that income does matter.”

To see what they mean, take a look at the map that accompanies this column. It’s based on Gallup polls done around the world, and it clearly shows that life satisfaction is highest in the richest countries. The residents of these countries seem to understand that they have it pretty good, whether or not they own an iPod Touch.

If anything, Ms. Stevenson and Mr. Wolfers say, absolute income seems to matter more than relative income. In the United States, about 90 percent of people in households making at least $250,000 a year called themselves “very happy” in a recent Gallup Poll. In households with income below $30,000, only 42 percent of people gave that answer. But the international polling data suggests that the under-$30,000 crowd might not be happier if they lived in a poorer country.

Even the Japanese anomaly isn’t quite what it first seems to be. Ms. Stevenson and Mr. Wolfers dug into those old government surveys and discovered that the question had changed over the years.

In the late 1950s and early ’60s, the most positive answer the pollsters offered was, “Although I am not innumerably satisfied, I am generally satisfied with life now.” (Can you imagine an American poll offering that option?) But in 1964, the most positive answer became simply, “Completely satisfied.”

It is no wonder, then, that the percentage of people giving this answer fell. When you look only at the years in which the question remained the same, the share of people calling themselves “satisfied” or “completely satisfied” did rise.

To put the new research into context, I called Daniel Kahneman, a Princeton psychologist who shared the 2002 Nobel Prize in economics. He has spent his career skewering economists for their belief that money is everything and has himself written about the “aspiration treadmill” at the heart of the Easterlin paradox.

Yet Mr. Kahneman said he found the Stevenson-Wolfers paper to be “quite compelling.” He added, “There is just a vast amount of accumulating evidence that the Easterlin paradox may not exist.”

I then called Mr. Easterlin, who’s now at the University of Southern California and who had received a copy of the paper from Ms. Stevenson and Mr. Wolfers. He agreed that people in richer countries are more satisfied. But he’s skeptical that their wealth is causing their satisfaction. The results could instead reflect cultural differences in how people respond to poll questions, he said.

He would be more persuaded, he continued, if satisfaction had clearly risen in individual countries as they grew richer. In some, it has. But in others — notably the United States and China — it has not.

“Everybody wants to show the Easterlin paradox doesn’t hold up,” he told me. “And I’m perfectly willing to believe it doesn’t hold up. But I’d like to see an informed analysis that shows that.” He said he liked Ms. Stevenson and Mr. Wolfers personally, but he thought they had put out “a very rough draft without sufficient evidence.”

They, in turn, acknowledge that the data on individual countries over time is messy. But they note that satisfaction has risen in 8 of the 10 European countries for which there is polling back to 1970. It has also risen in Japan. And a big reason it may not have risen in the United States is that the hourly pay of most workers has not grown much recently.

“The time-series evidence is fragile,” Mr. Wolfers said. “But it’s more consistent with our story than his.”

So where does all this leave us?

Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes.

But it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.

Economic growth can also pay for investments in scientific research that lead to longer, healthier lives. It can allow trips to see relatives not seen in years or places never visited. When you’re richer, you can decide to work less — and spend more time with your friends.

Affluence is a pretty good deal. Judging from that map, the people of the world seem to agree. At a time when the American economy seems to have fallen into recession and most families’ incomes have been stagnant for almost a decade, it’s good to be reminded of why we should care.

E-mail: leonhardt@nytimes.com

This article has been revised to reflect the following correction:

Correction: April 21, 2008
A chart on Wednesday with the Economic Scene column, about the relationship between income and personal satisfaction, misidentified the country shown with a gross domestic product of just under $8,000 per capita and a satisfaction score of just over 5. It was Iran, not Ireland. (As the chart correctly noted, Ireland has a gross domestic product of more than $32,000 per capita and a satisfaction score above 7.)

 

April 17, 2008,  11:47 am

The Economics of Happiness, Part 2: Are Rich Countries Happier than Poor Countries?

Following yesterday’s post, I promised to describe the new evidence that rich countries are happier than poor countries.

The simplest way to make this point is with a chart, using data from the Gallup World Poll. This amazing new dataset contains detailed data on subjective well-being for 132 countries in 2006. (Amazingly, Gallup plans to continue to field this poll every year.)

The key question asks:

“Please imagine a ladder/mountain with steps numbered from 0 at the bottom to 10 at the top. Suppose we say that the top of the ladder/mountain represents the best possible life for you and the bottom of the ladder/mountain represents the worst possible life for you. If the top step is 10 and the bottom step is 0, on which step of the ladder/mountain do you feel you personally stand at the present time?”

The following chart simply takes the average levels of satisfaction on this 0-10 scale, and plots it against G.D.P. per capita (note the log scale):

INSERT DESCRIPTION

There is an incredibly high correlation between average levels of happiness and average incomes — greater than 0.8. Angus Deaton actually beat us to this finding, and his analysis of these data is worth a close reading, (here).

There’s another striking finding in this graph: the relationship between happiness and log income appears nearly linear.

Thus, a 10 percent rise in income in the United States appears to increase happiness by about as much as a 10 perecent rise in income in Burundi.

Let me add two further comments here:

1. This is an interesting finding, because many had argued that there is a “satiation point” beyond which you just don’t benefit from greater income. Indeed, Richard Layard has argued that “there is no evidence that richer countries are happier than poorer ones — so long as we confine ourselves to countries with incomes over $15,000 per head.”

In fact, the slope appears to get steeper above $15,000!

2. Even so, it is worth noting that a 10 percent rise in income in Burundi requires one-sixtieth as much income as a 10 percent rise in income in the U.S. Thus, even if the slope is three times as steep for rich countries as poor countries (as we estimate), this still means than an extra $100 has about a twenty-times-greater effect on happiness in Burundi than it would in the United States.

Comparisons like this make you think that foreign aid may not be such a bad idea.

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27 comments so far...

  • 1.

    Interesting, but this assumes that people are truthful in reporting their happiness. Especially, if you are rich, you are expected to be happy.

    — Posted by D

  • 2.

    I wouldn’t mind the concept of foreign aid so much if the money actually benefitted the people. Instead it usually lines the pockets of the countries’ so called leaders.

    — Posted by Craig

  • 3.

    I understand happiness is notoriously difficult to measure, but the Gallup poll question seems a particularly bad rubric.

    It specifically asks what life you think best on a ranked scale. It is bad to assume this is the same thing as life satisfaction, though. Consider: a very contented person might say, even if he is a 5 on the scale, that he is quite satisfied with his life; while an uncontented person reporting 8 might be much less satisfied…he just has to keep feeding the beast (indeed, perhaps his natural lack of satisfaction got him ahigher place on the ladder).

    Moreover, I find it natural that people assume more money/resources is better, and the poll suggests people accurately guage how well-off, materially, they are in a relative sense. But the point of the Easterlin paradox is that our common assumptions about what’s “best” is crucially misguided.

    Many think they would be better off with more resources, worse off with fewer resources, and people appear to respond to the Gallup with that theory in mind. But, as the saying goes, money can’t buy happiness.

    Similar arguments could probably be applied to various “happiness surveys” which justify the Easterlin paradox itself, but at least those surveys ask people how *happy* they are, rather than where they are on the *best possible life* scale.

    — Posted by G. Owen Schaefer

  • 4.

    Of course you’ll see this trend because this chart has a log scale. But people don’t always see money that way. A 10 percent increase is a lot more money for someone who already has a lot. Yet the increase in happiness is linear.

    So it looks like more money (in absolute terms) doesn’t bring that much more happiness. Unless you always get increases in income as percentages in the form of raises and the like, you would think that there are better ways to be happy than making more money.

    Sometimes I think I must be the only one who always wants to see data on a linear scale. In this case, you’d see a much flatter increase in happiness as income goes up. That seems more intuitive to me.

    — Posted by Dave Younskevicius

  • 5.

    Great topic. I agree that there can be many many explanations for the correlation (better quality of life in nations with high GDP irrespective of income, flaws in polling, etc.), but it is interesting nonetheless.

    — Posted by dchero

  • 6.

    I feel like that question doesn’t really get at happiness in such a fundamental way. The way it is phrased, “best possible life for you”, and the analogy of having to climb up a mountain or a ladder (the economic ladder?) almost seems to be getting at where we stand in relation to the dreams we set up for ourselves. As I read it I interpreted it more as “how close are you to attaining your dreams?” than as “how happy are you?”, an important difference I think. Our dreams or goals tend to have a more economic base, “In perfect life I wouldn’t have to worry about money at all” or, “In a perfect life I would have more free time” as opposed to, “In a perfect life I would feel loved”. Both are important to happiness, but typically we don’t set such distinct goals for love, and certainly don’t perceive ourselves as climbing up some sort of love ladder. I would imagine that people living in wealthier countries would on average perceive themselves to be closer to thoeir economic goals than people in poorer countries, but I don’t think that necessarily means that they’re happier.

    — Posted by Laura B

  • 7.

    The question is actually more complicated than such analyses suggest. When comparing levels of a psychological construct (here: life satisfaction) across groups (here: nations), one needs to be concerned about what is called “measurement (in)equivalence” (also known as “differential item/test functioning”). At the risk of dramatically oversimplifying, the point is that, prior to comparing mean levels of life satisfaction across nations, it is important to ensure that people in different nations interpret the questions (and the response options) similarly. Otherwise, one is left comparing apples and oranges. Another issue is that, prior to comparing levels of life satisfaction across nations, it is necessary to demonstrate that a statistically significant proportion of the variance in life satisfaction exists between, as opposed to within, nations (to be fair, Wolfers may have tested for this).

    At any rate, the overall point is that, from a psychometric standpoint, such comparisons–although of obvious sensational value–are fraught with interpretational difficulties.

    — Posted by Psycho(metrician)

  • 8.

    Psycho(metrician)
    It seems to me, as a non-academic, that Gallup has done a creditable job of creating a culturally neutral happiness measure. Since this study shows a reasonable correlation between wealth and happiness, I see that as much a validation of the polling technique as a refutation of the Easterlin paradox. Certainly, if people are even partly rational, then they will use their *excess* funds in a way that would make them happier. If there were a way to calculate how much discretionary money exists in an economy, that graph might shown an even higher correlation to happiness.

    I would also point Freakonomics readers who would be interested in another point of view to Dan Ariely http://www.predictablyirrational.com/ who has a poignant post on what this means to him personally.

    — Posted by misterb

  • 9.

    How do you know people don’t compare themselves to those in other countries? Immigrants do. Seeking, as in the question, the “best possible life”.

    — Posted by Mark Bryan

  • 10.

    So individuals in higher-income nations consider themselves more satisfied with their lives. Does that mean that individuals in lower-income nations might be ….. “bitter”?

    Perhaps Prof. Goolsbee has some thoughts on this issue.

    — Posted by Uncle Jeffy

  • 11.

    All very interesting, but it’s a shame about the “best possible life for you” Gallup poll question. It doesn’t get at “happiness” in any real sense, the problem is that we don’t know if people are making relativistic comparisons across borders in their answers or not. Surely the chap in Burundi would answer more than 4 if he didn’t know that a better life was possible in say Denmark or the US. Really we need a veil of ignorance for this question to work, or we would need data over a large number of years to see if this graph shifts up as countries get richer on average or if it merely shifts to the right meaning that happiness as we previously thought is relative? I’m sure Justin will answer this question in part 3 though.

    — Posted by Tom

  • 12.

    Maybe the Easterlin paradox was true before the days of globalised communication, when people only compared their own lives to the lives of people in their own country.

    So it might still be about relative wealth, but the reference group has changed dramatically.

    — Posted by kaliriffic

  • 13.

    Before jumping to the conclusion that foreign aid would increase happiness, I think it’s worth arguing that happiness that comes from money, comes from one’s ability to earn money, not just have it handed to them. People need opportunities to progress, not just opportunities to spend money.

    — Posted by Naim

  • 14.

    Agreed - it is always better to teach someone how to fish than to just give them fish.

    — Posted by RD

  • 15.

    I find the results of this study quite revealing and it is interesting that people are taking issue with its conclusions and the measure of “happiness” used. I think we in the west are somehow uncomfortable with (or feel guilty about) the idea that having a great deal of wealth and resources really does make our lives better and more satisfying than the lives of those that don’t. The old maxim that “money can’t buy happiness” was probably coined by someone who had both.

    — Posted by Mark

  • 16.

    The question is asking for people to imagine “the best possible life” and NOT “how happy are you?”
    1) Aren’t these questions entirely different?
    2) If people are imagining the “best possible life”, then may they be comparing themselves to people around the world? If so, then wouldn’t you still say that people’s own sense of well being is relative to the rest of people out there? Isn’t this question inherently about people’s relative positions in life?

    — Posted by Jonathan

  • 17.

    Does anyone else wish they had used average income per capita instead of GDP per capita? And nominal dollars rather than PPP? If you’re comparing international financial figures, doesn’t it make more sense to use 1 system of exchange?

    And can someone please explain the significance of using a log scale????

    As regards the question asked participants, I think it’s as good as you’re going to get. ‘How happy are you - 1 to 10?’ will set a short term context. Having people consider their general satisfaction with life is far better.

    — Posted by Mr ?

  • 18.

    Can anyone explain to me why Venezuela is an outlier in being much more happy than expected for their income?

    Don’t these people realize that they have the 4th highest murder rate in the world?
    http://www.nationmaster.com/graph/cri_mur_percap-crime- murders-per-capita

    Does Hugo Chavez have magic happiness dust that he blows on all the Venezuelans?

    — Posted by FK

  • 19.

    I just don’t know that the question itself necessarily gets to “happiness”. The terms “best possible life” and “worst possible life” don’t necessarily correlate to “happiest” and “least happiest”, especially if we are looking at people in other countries/cultures, where other desires influence life choices. The perception of one’s place in the world does not necessarily dictate their happiness; it certainly can for many people, but why not just ask the question more bluntly, asking, on a scale of 1 to 10, how happy are you with your life? Greg Easterbrook has an interesting book dealing with this particular issue. An excerpt from the book’s synopsis: “His latest, The Progress Paradox: How Life Gets Better While People Feel Worse, was published in December 2003. The book focuses on statistical data indicating that Americans are better off in terms of material goods and amount of free time available but surveys show that they are not happier than before. Easterbrook argues that this has occurred due to choice anxiety and abundance denial.”

    I’m not well-versed in statistics and approach this from a non-academic perspective, but this would be the conclusion I walk away with from reading this study; namely, that the question was not necessarily about happiness.

    — Posted by Brian

  • 20.

    Perhaps the conclusion should be that higher income is a result of higher life satisfaction.

    Correlation and causation should not be confused.

    — Posted by Dave

  • 21.

    A couple of people asked about the significance of the log scale - it’s misleading if you aren’t used to looking at them.

    Click through to the Deaton paper and scroll down to the charts at the end - he has the same data on a linear scale. It’s more obvious on his chart how much more difference money makes on the low end of the scale.

    And above $15K, the differences get lost in the variability - that is, there are coutries like Finland and Denmark that are happier, with far less money, than the USA. To me that means that above 15K, factors other than money have a greater effect on happiness. Maybe those factors are good health care, or social equality? In any case, it doesn’t appear that “trickle down” is working in the USA, which is on the bottom edge of the happiness curve despite having the highest GDP. We don’t appear to be doing the right things with our money.

    — Posted by jgr4

  • 22.

    I am with Tom is comment #11. It really seems that for this to have any meaning that people answering the questions would need to be isolated from knowing about other countries. I suspect that someone in former Zaire who is at the top of the income chain might rate themselves high on the scale if they only had knowledge in their own country. But when you start to flash scenes of huge mansions fancy cars and abundant resources/food in the Europe and the US for example his rating would most likely drop significantly.

    Even if the question was perfect and it isn’t, would the correlation really mean that income is the cause. Not sure we can make that jump.

    — Posted by The Happy Rock

  • 23.

    I am also concerned (as others have said) that the ladder analogy may get at life satisfaction but not “happiness”.

    The other glaring question would be, “Within a given country, does income correlate with life satisfaction FOR INDIVIDUALS?” In other words, is it having a higher income that makes one more satisfied with their lot in life or is it simply living in a wealthier nation which is more likely to have clean water, reliable electricity, adequate sanitation, good schools, etc.? My suspicion is that the wealth of the nation would have more of an effect than the wealth of the individual.

    — Posted by Dr. Mike

  • 24.

    For FK, about Venezuela, we are just drunk and partying all the time.

    — Posted by Jose Hernandez

  • 25.

    It seems that the farther a country is from the line, the better/worse they are at making the most out of their money. For example, Hong Kong and Bulgaria seem to suck at it, while Venezuela and Denmark should serve as models to the rest of the world.

    -Shan
    www.globallyrational.com

    — Posted by Shan

  • 26.

    Money may not buy happiness, but it can rent some.

    — Posted by monicker

  • 27.

    I was very happy when I graduated from college, yet if asked the survey question (what rung I was on), I would have answered 4 or 5. I had not had time yet to reach my goals (my best possible life), but I was still happy.

    The question as asked can not possibly be used to support your analysis.

    Here is an interesting test: The older one is, the more likely one has achieved life goals (got married, had kids, retired). Does the data also show that older respondents were on a higher rung (which is different than happier) than the young? And since age is correlated to income you may have been fooled.

    — Posted by tom e

April 18, 2008,  1:06 pm

The Economics of Happiness, Part 3: Historical Evidence

Yesterday I noted that there is powerful evidence from the recent Gallup World Poll that rich countries are happier than poor countries. Today, I want to show you how this fact remained hidden in the data for several decades. (And I don’t mean to suggest that we are the first to discover this, but rather that those who noted this were somewhat outside the mainstream.)

In our recent paper, Betsey Stevenson and I went back and re-analyzed all of the early international surveys of happiness, and we now have data from 1946 to 2006.

The figure below shows the results from five early international comparisons of happiness and G.D.P.

The G.D.P. data on the x-axis are self-explanatory. The happiness data on the y-axis are also easy to understand — although the units we use for analyzing them may be less so.

The difficulty we face is that some surveys ask about well-being on a 0 to 10 scale, some ask if you are “very happy, fairly happy, or not very happy”, and others ask about happiness on a 4, 5, and sometimes even 7-point scale.

These differences make it difficult to make comparisons across surveys. We estimate average happiness scores by country by running an ordered probit regression of happiness on country fixed effects, and this is what you see plotted above.

Yes, there is too much jargon in that sentence, so let me try to give an intuitive explanation:

Essentially, this technique assigns each person a happiness “z-score,” by taking their response, dividing it by the standard deviation, and subtracting the mean. We also need to sort out the extent to which “very happy” differs from “fairly happy” or “not very happy,” and the ordered probit does this by analyzing the proportion of the population giving each response.

If, say, only a tiny fraction of people ever respond that they are “not very happy”, then we could infer that this is a pretty bad state to be in. All told, the coefficients can be interpreted as average levels of happiness, measured in units that correspond to the pooled within-country standard deviation of happiness.

If this seems overly complex, the main point is that we try to make these estimates comparable.

To the eye, this figure seems not to show much of a relationship between income and happiness, and early observers simply noted that most of the data was inside the shaded band. But looking more closely, in three of the five cases we get statistically significant effects, and in no case can we reject the hypothesis that the happiness-G.D.P. gradient is 0.3. This is pretty important, as we shall see below.

Next we show the data from succeeding waves of the World Values Survey, which began in the early 1980’s.

INSERT DESCRIPTION

While there is still some doubt about the link between well-being and G.D.P., in the early 1980’s (as more data accumulated) it became increasingly clear that there is a close link between the two. Indeed, by the latest wave of the survey, we see a wellbeing-income gradient of 0.35, and a correlation of 0.7.

Here are some more supportive data from the 2002 Pew Global Attitudes Survey, covering 44 countries:

INSERT DESCRIPTION

Finally, we get to the 2006 Gallup World Poll:

INSERT DESCRIPTION

Yes, this is the same graph I showed yesterday, but this time I’ve put the y-axis in comparable units to the other surveys. And the wellbeing-income gradient is about 0.4.

The key point is that across all of these surveys, the estimated wellbeing-income gradient is around 0.2 to 0.4. Moreover, this holds across each of the many datasets that have accumulated over the past sixty years. In the early years, this relationship was not always statistically significant, but this did not mean that there was no such relationship.

Three more observations about what we can learn from this history:

1) The income-well-being relationship has appeared just about as strongly in surveys probing happiness as in surveys asking about life satisfaction. (There are exceptions.)

2) one interpretation of the 2006 Gallup data is that it is still all about relative income comparisons: In today’s global village, folks in Jamaica may be comparing their lot in life to the greater prosperity they observe when watching U.S. television shows. Countering this, it looks, to my eye, as though the income-happiness link appears about as strong in countries that are truly plugged in to the global village, as those that are less engaged.

3) Moreover, the relationship between income and happiness is about as strong today as it was in the very first surveys, which were taken sixty years ago, when the world was less integrated.

Tomorrow I’ll show how comparisons of rich and poor people also yield a very similar wellbeing-income gradient.

Related

10 comments so far...

  • 1.

    What I think would add to this analysis is to determine what differentiates the happiness level at the high end, among those with similar GDP per capita. Why is Denmark happier than Italy or the US? Small size? Homogeneity? Culture? The most common critique of the argument you are making is to highlight these differences and to claim that government programs make the difference. Sorting them out and their significance would really bolster your argument, an argument I believe is squarely on the mark.

    — Posted by JT

  • 2.

    This is good work! This is what I love to see from the Freakonomics team.

    — Posted by Craig

  • 3.

    Instead of saying that you calculated the happiness z-score “by taking their response, dividing it by the standard deviation, and subtracting the mean,” it would probably be clearer to say “”by taking their response, subtracting the mean, and dividing the result by the standard deviation.”

    — Posted by Daniel

  • 4.

    Is it possible that the gradient you are trying to estimate is not a constant but an increasing function of the cummulative impact of mass marketing past and future with its basic message that the good life depends on increased consumption of goods and services - all of which increases a person’s need for more income. If this is the case, then it would be reasonable to expect an increasing gradient as we go forward.

    — Posted by oto

  • 5.

    This is incredibly fascinating. I am looking forward to the next one tomorrow! Thanks for spending so much time preparing this analysis for the blog and making it so understandable… it’s exactly what I come here for.

    — Posted by Andy

  • 6.

    A simple quintile analysis supports your analysis. It shows that for countries in the highest income quintile(average income of 76 percent of the U.S. level in 2000) the percentages who are satisfied with life as a whole are considerably higher than for the 4th quintile(average income of 46 percent of the U.S. level). Interestingly, the same pattern emerges for people with high, medium and low incomes (relative to country averages). If anyone is interested the details are at: http://wintonbates.blogspot.com/2008/04/how-does-probab ility-of-happiness-vary.html .

    — Posted by Winton Bates

  • 7.

    As a kid I grew up in a low-income one-parent household and went to high school during the stagflation of the late 1970’s. As I grew older and my income increased and I certainly became happier. Today I save a lot of money because of my poor upbringing, and I live modestly compared to my means because I am satisfied with less. Having money in the bank makes me feel secure, which is a big thing with me, and that makes me really happy. All of this correlated with America’s increasing GDP. Let’s keep it going so I can die with a huge smile on my face.

    — Posted by Dave Thomas

  • 8.

    enough with this diabolical ‘facts’ stuff!

    how does this new look/new data square with some other new look/new data?

    http://www.ted.com/index.php/talks/view/id/97

    it doesn’t.

    somebody’s gotta be wrong.

    the rich lottery winner is exactly as happy as the much-poorer disabled person. what about synthetic happiness?

    somebody’s twisting something, or just doing poor analysis, or fudging results, or comparing apples and oranges.

    whether it’s harvard dude or freaks or the statistics gods - something is going on, here.

    bueller?

    — Posted by Peter

  • 9.

    Saying that the gradient is 0.3 is not very informative if we don’t know the denominator. Is it a 0.3 change in the happiness z-score for every $1,000 in GDP/capita? That would appear to be a substantially important effect. on the other hand, a 0.3 change for a $10,000 change in GDP/capita would be much less significant.

    In addition, I have to comment that the gradient shown in the graphs is very deceptive because the scale of the X-axis is not linear. For example, look at Mexico and the US in the next-to-last graph: they have about the same level of ’satisfaction’, which seems OK because they appear very close in the x-scale. However, Mexico’s GDP per capita is 4 TIMES lower than that of the US. If the x-axis scale were linear, I am sure all these lines would appear a lot flatter than they currently look, and I am pretty sure that the next-to-last graph would look just like random noise.

    — Posted by Bodracir

  • 10.

    Peter’s link points us to a talk by Dan Gilbert which causes him to wonder whether people are comparing apples and oranges.

    In Gilbert’s book, ‘Stumbling on happiness’, he suggests that if you want to know how you might feel in alternative futures, you are likely to make big mistakes if you try to imagine how you might feel. He suggests that it is better to ask other people who are currenty in similar situations how they feel. So that seems to me to suggest that the best way to find out whether it would be better to be rich or poor is to ask rich and poor people how happy they are or how satisfied they are with their lives. That is exactly what the surveys do.

    Some of us might like to imagine that we could adapt to anything, but from what people on low and high incomes tell us in these surveys it seems like a good idea to accept that higher incomes are generally more conducive to happiness. (Alternatively, we could just take Sophie Tucker’s word for it. She famously said that she had been both poor and rich and found that rich was better.)

    — Posted by Winton Bates

April 23, 2008,  11:36 am

The Economics of Happiness, Part 5: Will Raising the Incomes of All Raise the Happiness of All?

In a famous 1995 paper, Richard Easterlin asked: “Will raising the incomes of all increase the happiness of all?” His analysis involved studying the evolution of happiness through time in Japan, the U.S. and Europe. His answer? “No.”

Betsey Stevenson
and I recently returned to examining the evolution of happiness in these three important regions, and we conclude that the evidence is not so clear cut.

First, Europe. The Eurobarometer Survey allows us to track average levels of life satisfaction since 1973, in the same nine nations that Easterlin analyzed. The relationship between happiness and G.D.P. in these countries is shown below:

Growth in life satisfaction and GDP

A few observations:

1) In eight of these nine nations, satisfaction grew as G.D.P. grew, and in six of these cases, the relationship is statistically significant.

2) But there are some pretty interesting exceptions. For instance, why has happiness fallen in Belgium, even as G.D.P. has grown? And why did happiness take so long to grow in Ireland, even as the “Irish miracle” led to tremendous economic growth?

3) While the pattern varies across countries, in most cases, the time series data suggest a satisfaction-G.D.P. gradient of about 0.2, with some larger, and some smaller.

4) This pattern of satisfaction growing with G.D.P. is less clearly evident if one analyzes only the early data (solid dots). This partly explains how we are able to make stronger inferences than earlier researchers.

5) In subsequent years, this survey (and indeed, Europe) has expanded to include more countries. We have analyzed this broader sample of countries, finding roughly similar conclusions.

Now, let’s turn to Japan, which is arguably the most interesting case study, because it went from a quite poor country after the war, to become one of the world’s economic powerhouses by the late 1980’s. Moreover, Japan is unusual because the government has collected life satisfaction data since 1958. Previous researchers had interpreted those data as suggesting that this incredible economic growth had yielded no gains in happiness.

Puzzled by this finding, we had the Japanese survey questions re-translated. It turns out that there was not one continuous question yielding a flat trend in well-being, but instead four separate questions asked in four separate periods. And during each of the first three periods — when economic growth was rapid — it was matched by commensurate growth in life satisfaction. The fourth question began in 1992 and satisfaction declined as per capita economic growth was anemic (0.9 percent) and unemployment became a problem.

Evolution of subjective well-being

Looked at this way, the dramatic growth in Japanese G.D.P. from 1958 to 1991 was matched by rapid growth in life satisfaction. The decline in satisfaction since 1992 is both worrying, and worth much more study.

Finally, we turn to the United States. Happiness data from the General Social Survey show virtually no trend since 1972, despite G.D.P. having doubled over this period. We find this puzzling, and we really don’t have an airtight understanding of what is happening in the U.S. Equally the “happiness shortfall” isn’t that large — by 2006 perhaps another 8 percent of the population should be “very happy”, and the proportions “not too happy” or “fairly happy” should each be about 4 percent lower.

One possibility is that inequality may play a role.

Yesterday I showed that happiness seems to be related to the log of a person’s income level. If this is right, then average levels of happiness would rise with average log income, whereas our usual income numbers (shown in the second panel, below) focus on the log of average income.

Instead, the bottom panel shows rather anemic growth in average log income. Thus, given that the income gains over the past few decades went mostly to those who are well off, and given that these folks get somewhat less happiness per extra dollar, then perhaps it seems reasonable not to expect much of a rise in happiness. And indeed, average happiness for those at the top of the income distribution has grown through this period.

Income and happiness trends

Our research paper contains a lot more about comparisons of happiness and income through time. The broader datasets follow the contours of the discussion above: the experience of some countries points strongly to a happiness-income link, there are definitely cases that point against it, and others leave you scratching your head.

All told, there are probably more time series suggesting that growing G.D.P. is related to growing happiness than there are suggesting the opposite. Thus we conclude that the time series evidence is both weakly supportive of a happiness-income link, and also fragile.

And even if these data don’t convince you that there is a strong connection between G.D.P. and happiness, they also shouldn’t convince you that they are unrelated.

Tomorrow, we’ll turn to asking in a bit more detail just what these happiness data are measuring.

Related

15 comments so far...

  • 1.

    You say an increase in income inequality explains the anomaly of the U.S., I say it’s because past a certain point, money doesn’t bring happiness. There’s a famous study that says beyond $40,000, more money does not make you much happier.

    As I replied in the first post on the topic, this trend is being obscured by the constant use of logarithmic scales. Constant scales would show the trend between income and happiness levelling off much faster, to the point where in a rich nation like the U.S., the relationship between the two might be flat. Money is great when you’re broke and can’t afford to eat. But when you already have two cars, a house, and a decent job, more money is not necessarily going to make you a lot happier.

    — Posted by Dave Younskevicius

  • 2.

    Does having more candy make kids happier? Probably. For most kids there is no such thing as having too much candy.

    But just like people’s environmental awareness changes over time, so can people’s materialistic awareness. Less really is more sometimes, and many people are re-discovering this simple truth. This leads to an apples and oranges comparison between people with vastly different priorities in life.

    — Posted by Stephen de las Heras

  • 3.

    I think this is all very interesting. With respect to the peculiar case of the U.S., I think it is a strong possibility that we would have to analyze variance with various social factors given differentiation in social space. What are the factors that enable or constraint the degree to which income expands the decision space? What is the political situation in Belgium?

    I will be especially interested in looking at how these questions are asked and how satisfaction is measured, as this becomes particularly difficult when we are dealing with cross-cultural comparisons (even cross-class comparisons are to some degree incommensurate without sufficient controls).

    — Posted by Kevin

  • 4.

    If the question is: is the income effect on happyness from relative or f(absolute) changes in income - has anyone looked at other measures of income (e.g. median) and/or constrasted these changes over changes in income inequality (Gini). If relative changes are key, increasing inequity with no change to average income would be an interesing test.

    — Posted by Anthony

  • 5.

    Thank you for this series of posts. Greatly appreciated. Am looking forward to more. This kind of material, presented for a general audience in plain English but with links to more technical material, is the best of the internet and is, I hope, a model for the way knowledge should be presented.

    To explain, as you know, most academic writing is hideous. Some is just bad writing. Some is overuse of jargon that narrows the intent and meaning to a specific academic or technical point. And some is jargonized obfuscation designed to make work seem more important.

    Increasing specialization and its attendant sub-languages make communication across fields more difficult. The internet, with its multi-media and links, can allow material to be understood across boundaries while preserving its depth. The difference is between an accessible but rich text and the sad reality that general or survey materials tend toward the superficial while the technical becomes incomprehensible.

    — Posted by jonathan

  • 6.

    Dave,

    I think the log scales make sense, considering marginal return.

    $10 matters a lot to someone with $10,000 annual income, but doesn’t matter much to someone with $5,000 annual income. But $50 would matter to the person with $50,000 annual income.

    — Posted by Will

  • 7.

    In Ireland 1973-89 the economy was indeed growing but not as fast as the educated population with higher expectations than their parents. Access to the European Community and cheap air fares increased the global mobility of Irish graduates during this period. Emigration peaked in 1989 when employment bottomed out. Return migration of Irish citizens had begun increasing in 1987. I would say that in the 80s there was a wide range of satisfaction levels as the people adjusted to the new economy and investments were made in infrastructure. GDP per capita increased steadily but the population was leaking. Irish employment began increasing from 1989 and really took off in the early 90s.

    — Posted by Greg Flynn

  • 8.

    Post #1 complained that Easterlin “data just didn’t lend themselves to strong conclusions.” Now, to imply any kind of direct correlation between income and happiness without issuing the same qualification is disingenuous.

    There seems to be no controlling for availability of health care, or food, for instance. There seems to be no control of other variables that influence one’s perceived place on a perceived scale other than being caused by GDP.

    Also, might the Japanese 1992-2006 data and the 1972-2006 U.S. data (GDP going up, happiness staying flat) indicate there is a “satiation point”? It seems inadequate to point to growing U.S. disparity of income during the time or the growing trend of working mothers in U.S., unless that is being controlled in data from other countries where “happiness” rises with “GDP.”

    Also, how sure are you that lower income people are fairly represented in the happiness survey across the globe? Interesting how when you take out two poorer countries, Tanzania and Nigeria, the results are more to your liking.

    I’ve heard ignorance is bliss, maybe wealth makes people stupid- that is not considered. Or what about the results proving the world is becoming a mono-culture of mass consuming capitalism, and income is becoming a proxy for happiness?

    To repeat, to complain that Easterlin’s “data just didn’t lend themselves to strong conclusions” and to continue to imply any kind of direct correlation between income and happiness without issuing the same qualification is disingenuous, although maybe on par with the rest of economic theory that ignores something like environmental degradation and considers war and wasteful military spending a plus in GDP.

    — Posted by ids

  • 9.

    I think men and women have differing views on happiness. I would like to see gender broken out of the data, especially since the presence of large numbers of women in the workforce.

    — Posted by doug

  • 10.

    I know if my home had a higher income we could do things we can’t do now. With bills and everything else I don’t have the money to stretch into vacations or anything like that.

    I stay at home and my husband works. I watch our son and run a blog, it is fairly new but I am hoping some day it might bring in some cash. i choose to be a stay at home mom which does put a financial strain on our family, but benefits my son, and that pretty much out weighs the money issues.

    We are happy, but calls from bill collectors, or trying to manage where everything is going to go and will we have enough money for gas and food each month is stressful.

    So yes more money = less stress = a happier me

    Rachel
    The Baked Blogger
    http://bakedblog.com

    — Posted by Rachel

  • 11.

    I saw the last graphs and was quite surprised. The second last graph, Log of (average income) is quite OK and is done regularly. But after that, the graph that you have drawn the average log of income, is problematic.

    After taking the log, any addition is basically a multiplication of the original data, a division by 2 would be a square root, a division by 3 would be a cube root and so on.

    So averaging after the log, has no meaning and would result in nonsensical data.

    — Posted by rishi

  • 12.

    As for the Irish question: what do your date show if you use GNP in stead of GDP. In general GDP and GNP are highly correlated but in the case of Ireland GDP has outstripped GNP enormously since 1990 or so.

    — Posted by Maurits

  • 13.

    What does “satisfation” mean? How do I know how happy I am? IF somebody asks me how happy I am, couldn’t that affect how happy I am? Perhaps money can’t buy happiness, but if you are happy just to get money, it doesn’t have to. IS it possible that happiness brings money?

    — Posted by Russell Beckley

  • 14.

    Gregg Easterbrook of The New Republic, The Brookings Institute and ESPN (how’s that for a fan plug?) wrote a great book about this exact subject call the The Progress Paradox. Just finished it on a flight last week.

    — Posted by Will

  • 15.

    Mo money mo problems.

    — Posted by Belgium