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Untangling the Relationship Between Income and Subjective Well-Being: The Role of Perceived Income Adequacy and Borrowing Constraints

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Abstract

This paper aims to untangle the relationship between income and subjective well-being. To accomplish this, we investigate how subjective well-being is affected by two financially-related determinants that have not been investigated before or scarcely so. Specifically, we research the impact on subjective well-being of how people are coping with their present income as well as of their borrowing constraints. The results indicate that both variables determine subjective well-being and that they mediate the effects of other variables, namely income, which is not directly related to well-being. Additionally, they signal that income matters to the extent to which it contributes to meeting the desired consumption needs and eases borrowing constraints. Such mediating effects thus contribute to explain how income affects subjective well-being. We also inspect differences in life satisfaction responsiveness to perceived income adequacy and borrowing constraints in certain groups of individuals, and find that the subjective well-being of individuals in a more fragile financial position is particularly responsive to the alleviation of borrowing constraints.

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Notes

  1. The European Social Survey (ESS) aims at measuring and explaining trends in attitudes, beliefs and values across countries in Europe and its close neighbours. The questionnaire includes two main sections, each consisting of approximately 120 items; a ‘core’ module which will remain relatively constant from round to round, plus two or more ‘rotating’ modules, repeated at intervals. For more details and data access please consult the ESS home site at www.europeansocialsurvey.org.

  2. The cumulative file contains data from countries that have fielded two or three rounds: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and Ukraine.

  3. Estonia and Ukraine were eliminated from this study on the basis of missing data on income in the rounds they fielded (2nd and 3rd). Other countries were excluded from some rounds due to missing data on income and/or education level.

  4. Gender is a dummy with zero for male and one for female.

  5. Marital status considers individuals living with a partner in the married category, with the single people constituting the omitted category.

  6. Employment status considers a number of categories, with the omitted variable being “in paid work (or away temporarily, employee, self-employed, working for your family business)”. The other categories are unemployed, retired, home care (doing housework, looking after children or other), in school, permanently sick or disabled, and other activity, which incorporates “in community or military service”.

  7. The education level omitted combines “not completed primary education” and “primary or first stage of basic”. The other levels are: “lower secondary or second stage of basic”, “upper secondary”, “post-secondary, non-tertiary”, “first stage of tertiary” and “second stage of tertiary”.

  8. We also tested the OECD-modified equivalence scale to construct equivalent income. This method involves assigning a value of 1 to the first adult household member, of 0.5 to each additional member and of 0.3 to each child under 14. However, the results did not show sensitivity to the equivalence scale used. Hence, we will only report results for the former method.

  9. We omitted the results regarding the disaggregation by past unemployment experiences, since these are similar to those obtained for the disaggregation employed versus unemployed.

  10. For parsimony reasons, these results have not been reported, but are available upon request from the authors.

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  1. Faculdade de Economia da Universidade de Coimbra/GEMF, Av. Dias da Silva 165, 3004-512, Coimbra, Portugal

    Maria C. Pereira & Filipe Coelho

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  1. Maria C. Pereira
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  2. Filipe Coelho
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Correspondence to Maria C. Pereira.

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Pereira, M.C., Coelho, F. Untangling the Relationship Between Income and Subjective Well-Being: The Role of Perceived Income Adequacy and Borrowing Constraints. J Happiness Stud 14, 985–1005 (2013). https://doi.org/10.1007/s10902-012-9365-z

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