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Absolute Income, Relative Income, and Happiness

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Abstract

This paper uses data from the World Values Survey to investigate how an individual’s self-reported happiness is related to (i) the level of her income in absolute terms, and (ii) the level of her income relative to other people in her country. The main findings are that (i) both absolute and relative income are positively and significantly correlated with happiness, (ii) quantitatively, changes in relative income have much larger effects on happiness than do changes in absolute income, and (iii) the effects on happiness of both absolute and relative income are small when compared to the effects several non-pecuniary factors.

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Notes

  1. Although there are cases in which spouses or jobs can in some sense be purchased, and to some extent good health can be “bought” through expenditures on health care.

  2. See http://www.worldvaluessurvey.org. This survey is the main source of data for this paper.

  3. Conducted by the Public Opinion Analysis sector of the European Commission. See http://europa.eu.int/comm/public_opinion/description_en.htm.

  4. Conducted by the National Opinion Research Center at the University of Chicago. See http://www.norc.uchicago.edu.

  5. Conducted by the Institute for Social and Economic Research at the University of Essex. See http://www.iser.essex.ac.uk/bhps/index.php.

  6. See http://www.gallup-international.com/surveys1.htm.

  7. See Diener (1984), Eckman et al. (1990), Pavot et al. (1991), Shedler et al. (1993), Sandvik et al. (1993), Balatsky and Diener (1993), Sutton and Davidson (1997), and Siedlitz et al. (1997).

  8. See Ouweneel and Veenhoven (1991), and Diener et al. (1995).

  9. See Veenhoven (1993, 1996), Diener et al. (1999), Diener and Suh (2000), and Frey and Stutzer (2002).

  10. See Horley and Lavery (1995), Diener and Suh (1997), Nolen-Hoeksema and Rustig (1999), and Lucas and Gohm (2000).

  11. See Lee et al. (1991) and Myers (1999).

  12. See Clark and Oswald (1994), and Di Tella et al. (2001).

  13. See Frey and Stutzer (2000) and Veenhoven (2000).

  14. See Alesina et al. (2001) and Graham and Felton (2004).

  16. In eliciting these ratings of subjective well-being, Cantril used a survey methodology that was somewhat more subtle than simply asking people to choose a number. Details on Cantril’s “self-anchoring” methodology can be found in Easterlin (1974) and in the original study (Cantril 1965).

  17. The estimated slope is 0.6486, with a p-value of 0.086. The r-squared for the regression is 0.2257.

  18. The influential cases are the US and India; the countries with “unusual political circumstances” are Cuba and the Dominican Republic. With these four cases deleted, an OLS line has a slope of 0.1014, with a p-value of 0.535. The r-squared is 0.0498.

  19. Even if absolute incomes were not distributed identically around their means across countries, this would be true as long as there was no systematic relationship between mean income and income distribution.

  20. Surveys that focus on the relationship between money and happiness can be found in Argyle (1999), Diener and Oishi (2000), Frey and Stutzer (2000), and Easterlin (2001).

  21. For individuals in the highest income category (for which no upper limit is specified), we use a figure equal to 120% of the lower bound of the category as an approximation of family income in local currency.

  22. Ideally, we might also adjust family income for the number of people in the respondent’s family, but the WVS contains no explicit question on household or family size, nor does it contain other questions from which family size could be inferred with any reasonable confidence.

  23. We are therefore implicitly assuming, as did Easterlin (1974), that the reference group to which a person compares herself is the population of the country in which she lives. An interesting area for further research would be to investigate the extent to which people’s happiness depends on their status relative to comparison groups defined by other criteria, such as ethnicity, religion or occupation. Praag and Ferrer-i-Carbonell (2004, Chap. 8) discuss recent research along these lines.

  24. The term “housewife” is one of the employment categories listed in the WVS codebook. There is no category for men who work full time on domestic tasks.

  25. Data on purchasing power parity GDP per capita are taken from World Bank (2004). Wave 3 of the WVS was conducted in different years in different countries; for each country, we use the value of PPP GDP per capita corresponding to the year in which wave 3 of the WVS was conducted there (see Tables 2 and 3).

  26. These 43 countries are the same as those listed in Table 2, except that (i) Montengro, Serbia and Taiwan are dropped because World Bank (2004) does not have GDP data for them, and (ii) Ghana, the Philippines, Slovenia and the UK, which were excluded from Table 2 because of missing data on family income in the WVS, are added.

  27. An OLS line through the non-eastern European data still has a positive slope, but the significance level falls to 94.9%, the estimated slope is just 0.2260, and the r-squared falls to 0.1440.

  28. With an estimated coefficient of 1.2549, significant at above the 99.9% confidence level, and an r-squared of 0.7944.

  29. An OLS line through just the eastern European data has an estimated slope of 0.7977, significant at the 99.2% confidence level, with an r-squared of 0.4009.

  30. The limitation in the WVS documentation is that for many countries no information is available on what local currency values were used to define the boundaries of the family income brackets used in item 227. Without that information, it is not possible to approximate respondents’ family incomes, which, as described in Sect. 3, is necessary for the construction of abs, rel_pct, and rel_med.

  31. For a detailed exposition of the ordered probit regression model, see Long (1997) and Long and Freese (2001).

  32. To see the collinearity problem formally, let med(j) represent the median absolute income of country j; the median absolute income of the country whose dummy variable is excluded from the regression is then denoted \( med{\left( {\ifmmode\expandafter\bar\else\expandafter\=\fi{j}} \right)} \). The following J + 2 vectors then add up to a vector of all zeros: a vector of constants, each equal to \(\hbox{ln}{\left({med{\left({\ifmmode\expandafter\bar\else\expandafter\=\fi{j}} \right)}} \right)} \); one vector for each of the J − 1 countries whose dummies are included, each vector of the form ln(med (j))d j ; the vector of observed values of ln(abs); and negative one times the vector of observed values of ln(rel_med). Intuitively, the source of the collinearity is that, because rel_med is defined as the ratio of abs to med(j), the difference between ln(abs) and ln(rel_med) is constant within countries. (For all individuals in any country j, that difference is equal to ln(med (j))).

  33. Data for both of these variables is from World Bank (2004).

  34. As described in Inglehart (1997).

  35. See Easterlin (1995, 2001, 2003).

  36. As Easterlin (2004) has pointed out, however, this U-shaped relationship between age and happiness appears in analyses that hold constant factors such as health and whether one is widowed. Since people’s health and probability of being widowed in fact do not remain constant over their life-spans, this U-shaped relationship is not inconsistent with the possibility that people’s experienced happiness levels tend to fall in the later periods of their lives.

  37. Because the regressions estimate the effect of employment status on happiness with absolute and relative income held constant, the increases in happiness attributed to finding a full-time job are the consequence of factors other than changes in the individual’s income associated with finding a job. Our analysis does not tell us exactly what those other factors are, but it seems reasonable to speculate that they have to do with increased self-esteem and respect from others, and perhaps an increased feeling of purpose or productivity (that may come from simply having a job, even if the purpose or product of the job are not inspiring to the person holding it).

  38. There are also less restrictive conditions under which a change in an individual’s absolute income would not be accompanied by a change in her relative income. If we measure relative income by rel_pct (as in regression 1), this would be the case as long as the change in the individual’s absolute income did not change her rank in the national income distribution (perhaps because of simultaneous changes in the absolute incomes of some or all of the other people in her country). If we measure relative income by rel_med (as in regression 2), it would be the case as long as median income in the individual’s country increased proportionately with her absolute income.

  39. We assume that, other than absolute and relative income, all of the variables upon which \( \widehat{H} \) depends are held constant, and so write \( \widehat{H} \) as a function of just abs and rel.

  40. Blanchflower and Oswald (2000) present similar results showing that people value important non-pecuniary qualities of life as much as very large amounts of money.

  41. Frank (1999) presents extensive evidence of this phenomenon.

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Acknowledgements

For helpful discussion and comments, we would like to thank Gabriela Catterberg, Ellsworth Dägg, Picard Janné, Christopher Kilby, Vladimir Kontorovich, and Anne Preston; participants in the Behavioral Research Council’s symposium on Behavioral Economics and Neoclassical Economics, July 2002, Great Barrington, MA; and participants in the 6th International Conference of the International Society for Quality of Life Studies, November 2004, Philadelphia, PA.

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Authors and Affiliations

  1. Department of Economics, Haverford College, 370 Lancaster Avenue, Haverford, PA, 19041, USA

    Richard Ball

  2. Exelon Corporation, 300 Exelon Way, Kennett Square, PA, 19348, USA

    Kateryna Chernova

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Correspondence to Richard Ball.

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Kateryna Chernova completed work on this paper while an undergraduate student at Bryn Mawr College.

Data Appendix

Data Appendix

1.1 Self-reported Happiness, Absolute Income, and Relative Income

Variable name: happy

Source: WVS item V65

WVS item V65 asked respondents to choose a category on an integer scale from 1 (least satisfied) to 10 (most satisfied) in answer to the question “All things considered, how satisfied are you with your life as a whole these days?” Each individual’s value of happy simply equals the category chosen by the individual in response to this question.

Variable name: MEAN_HAPPY

Source: Constructed from happy

This is the mean value of happy for all individuals from the same country as the respondent.

Variable name: abs

Source: WVS item V227

WVS item V227 asked respondents to indicate which of 10 income categories their family incomes fell in. The boundaries of the categories were given in the currency of the respondent’s country. For respondents reporting incomes in all but the highest category, abs is equal to the midpoint of the category, converted from local currency to purchasing power parity dollars ($PPP), using “purchasing power parity conversion factors” obtained from World Bank (2004). For respondents reporting incomes in the highest category, abs is equal to 120% of the lower bound of the highest category, converted from local currency to $PPP as in all cases.

Variable name: rel_pct

Source: Constructed from abs

An individual’s value of rel_pct is equal to the percentage of respondents from her country with values of abs less than or equal to hers.

Variable name: rel_med

Source: Constructed from abs

An individual’s value of rel_med is equal to the individual’s value of abs divided by the median of abs for all respondents from her country.

1.2 Respondent’s Marital Status

Variable name: partner

Source: WVS item V89

This equals 1 if the respondent is married or “living as married,” and 0 otherwise.

Variable name: split

Source: WVS item V89

This equals 1 if the respondent is divorced or separated, and 0 otherwise.

Variable name: widow

Source: WVS item V89

This equals 1 if the respondent is widowed, and 0 otherwise.

1.3 Respondent’s Sex

Variable name: female

Source: WVS item V214

This equals 1 if the respondent is female, and 0 if the respondent is male.

1.4 Respondent’s Employment Status

Variable name: part_time

Source: WVS item V220

This equals 1 if the respondent is employed for pay and works less than 30 h per week, and 0 otherwise.

Variable name: self_employed

Source: WVS item V220

This equals 1 if the respondent is self-employed, and 0 otherwise.

Variable name: retired

Source: WVS item V220

This equals 1 if the respondent is retired, and 0 otherwise.

Variable name: housewife

Source: WVS item V220

This equals 1 if the respondent’s self-report of employment is “housewife not otherwise employed,” and 0 otherwise.

Variable name: student

Source: WVS item V220

This equals 1 if the respondent is a student, and 0 otherwise.

Variable name: unemployed

Source: WVS item V220

This equals 1 if the respondent is unemployed, and 0 otherwise.

1.5 Respondent’s Number of Children

Variable name: kid1

Source: WVS item V90

This equals 1 if the respondent has exactly 1 child, and 0 otherwise.

Variable name: kid2plus

Source: WVS item V90

This equals 1 if the respondent is the respondent has 2 or more children, and 0 otherwise.

1.6 Respondent’s Age

Variable name: age

Source: WVS item V216

Respondent’s age in years.

Variable name: age2

Source: Constructed from age

The square of the respondent’s age in years.

1.7 Respondent’s Health

Variable name: health

Source: WVS item V11

WVS item V11 asks “All in all, how would you describe your state of health these days? Would you say it is... “ Respondents are asked to choose among five categories: Very good, Good, Fair, Poor and Very poor. We have coded these categories, respectively, as 5, 4, 3, 2 and 1. (This reverses the order of the coding in the WVS codebook, but is consistent with the coding of other ordinal variables we use, for which larger numerical values correspond to “better” states.)

1.8 Importance of Religion in Respondent’s Life

Variable name: religion

Source: WVS item V190

WVS item V190 asks “How important is God in your life?” Respondents are asked to answer on an integer scale from 1 (“not at all important”) to 10 (“very important”). Each individual’s value of religion simply equals the category chosen by the individual in response to this question.

1.9 Level and Growth Rate of GDP per Capita in Respondent’s Country

Variable name: GDP_PC

Source: World Bank (2004)

GDP per capita, PPP (constant 1995 international $), for the year in which wave 3 of the WVS was conducted in the respondent’s country.

Variable name: GROWTH

Source: Constructed from GDP_PC

Percentage growth in GDP_PC in the respondent’s country over the 5 years preceding wave 3 of the WVS.

For year t, \( GROWTH{\left( t \right)} = \frac{{GDP\_PC{\left( t \right)} - GDP\_PC{\left( {t - 5} \right)}}} {{GDP\_PC{\left( {t - 5} \right)}}} \)

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Ball, R., Chernova, K. Absolute Income, Relative Income, and Happiness. Soc Indic Res 88, 497–529 (2008). https://doi.org/10.1007/s11205-007-9217-0

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