Abstract
The paper presents evidence of a positive but very small long-run relationship between income growth and happiness. Such finding is usually presented as a refutation of the Easterlin Paradox. The paper, however, argues that what the evidence actually reveals is that income growth has very little impact in terms of increasing happiness over the long term. The paper, in turn, argues that a rejection of the Easterlin Paradox requires the evidence to indicate economic significance. That is, the magnitude of the estimated long-run relationship between income growth and happiness is the more appropriate yardstick for an evaluation of the Easterlin Paradox.
Similar content being viewed by others
Notes
I agree with McCloskey (1985) and Ziliak and McCloskey (2008) on their objection regarding the strict application of statistical testing. Indeed, more powerful regression procedures and large-scale datasets can easily detect a statistically significant but minute relationship between two variables. An estimate of, say, 0.0001 that is statistically significant at p < 0.05 merely proves that the figure is not due to chance; but, in closer inspection, 0.0001 is practically equal to zero, and so it has no economic significance.
Suppose β 0 > 0 and set θ 0 = φ 0 = 0. The initial impact of y t on H t is β 0. All things the same, the initial impact β 0 translates as β 0 λ 0 on H t−1, β 0 λ 0 λ 1 on H t−2, β 0 λ 0 λ 1 λ 2 on H t−3, etc. Suppose, too, y t−1 has an impact of β 1 > 0. All things the same, the subsequent impacts of β 1 are β 1 λ 0 on H t−1, β 1 λ 0 λ 1 on H t−2, β 1 λ 0 λ 1 λ 2 on H t−3, etc. Graham (2011), for example, argues the case of an “unhappy growth” or β 0 < 0. If so, the impacts of −β 0 are −β 0 λ 0 on H t−1, −β 0 λ 0 λ 1 on H t−2, −β 0 λ 0 λ 1 λ 2 on H t−3, etc. In either β 0 or −β 0 notice a “steady” adjustment process as H t moves toward its new equilibrium.
The World Happiness Database has data for the sample countries in this paper as well as for Japan and the United States, but there is an issue concerning the comparability of the data because the survey procedure and measure for happiness are different in the cases of Japan and the United States. The Gallup World Poll is an alternative source but the data are very costly to acquire.
References
Bartolini S, Bilancini E, Sarracino F (2013) Predicting the trend of well-being in Germany: how much do comparisons, adaptation, and sociability matter? Soc Indic Res 114(2):169–191
Becchetti L, Castriota S, Corrado L, Ricca E (2013) Beyond the Joneses: inter-country income comparisons and happiness. J Socio Econ 45(3):187–195
Bottan N, Perez Turglia R (2011) Deconstructing the hedonic treadmill: is happiness autoregressive? J Socio Econ 40(3):224–236
Brenner R (2006) The economics of global turbulence: the advanced capitalist economics from long boom to long downturn, 1945–2005. Verso Books, London
Brickman P, Campbell D (1971) Hedonic relativism and planning the good society. In: Appley M (ed) Adaptation-level theory: a symposium. Academic Press, New York, pp 287–302
Clark A, Senik C (2010) Who compares to whom? The anatomy of income comparisons in Europe. Econ J 120(544):573–594
Clark A, Senik C (2011) Will GDP growth increase happiness in developing countries? Discussion Paper No. 5595. Institute for the Study of Labor, Bonn
Deaton A (2008) Income, health, and well-being around the world: evidence from the Gallup World Poll. J Econ Perspect 22(2):53–72
Di Tella R, MacCulloch R (2010) Happiness adaptation to income beyond “basic needs. In: Diener E, Helliwell J, Kahneman D (eds) International differences in well-being. Oxford University Press, New York, pp 217–246
Di Tella R, MacCulloch R, Oswald A (2001) Preferences of inflation and unemployment: evidence from surveys of happiness. Am Econ Rev 91(1):335–341
Di Tella R, MacCulloch R, Oswald A (2003) Macroeconomics of happiness. Rev Econ Stat 85(4):809–827
Di Tella R, De New J, MacCulloch R (2010) Happiness adaptation to income and to status in an individual panel. J Econ Behav Organ 76(3):834–852
Diener E, Ng W, Harter J, Arora R (2010) Wealth and happiness across the world: material prosperity predicts life evaluation, whereas psychosocial prosperity predicts positive feelings. J Pers Soc Psychol 99(1):52–61
Diener E, Tay L, Oishi S (2013) Rising income and subjective well-being of nations. J Pers Soc Psychol 104(2):267–276
Duesenberry J (1952) Income, savings, and the theory of consumer behavior. Harvard University Press, Cambridge
Dumenil G, Glick M, Levy D (2001) Brenner on competition. Cap Class 25(2):61–77
Easterlin R (1974) Does economic growth improve the human lot? Some empirical evidence. In: David P, Reder M (eds) Nations and households in economic growth: essays in honor of Moses Abramovitz. Academic Press, New York, pp 89–125
Easterlin R (1995) Will raising the incomes of all increase the happiness of all? J Econ Behav Organ 27(1):35–47
Easterlin R (2001) Income and happiness: towards a unified theory. Econ J 111(473):465–484
Easterlin R (2005) Building a better theory of well-being. In: Bruni L, Porta P (eds) Economics and happiness: framing the analysis. Oxford University Press, New York, pp 29–64
Easterlin R (2013) Happiness and economic growth: The evidence. Discussion Paper No. 7187. Institute for the Study of Labor, Bonn
Easterlin R, Angelescu L (2009) Happiness and growth the world over: time series evidence on the happiness-income paradox. Discussion Paper No. 4060. Institute for the Study of Labor, Bonn
Easterlin R, Sawangfa O (2010) Happiness and economic growth: does the cross section predict time trends? Evidence from developing countries. In: Diener E, Helliwell J, Kahneman D (eds) International differences in well-being. Oxford University Press, Oxford, pp 166–216
Easterlin R, McVey L, Switek M, Sawangfa O, Zweig J (2010) The happiness paradox revisited. Proc Natl Acad Sci 107(52):22463–22468
Easterlin R, Morgan R, Switek M, Wang F (2012) China’s life satisfaction, 1990–2010. Proc Natl Acad Sci 109(2):9775–9780
Engsted T (2009) Statistical vs. economic significance in economics and econometrics: further comments on McCloskey and Ziliak. J Econ Methodol 16(4):393–408
Festinger L (1954) A theory of social comparison in process. Hum Relat 7(2):117–140
Frank R (1985) Choosing the right pond. Oxford University Press, New York
Frederick S, Loewenstein G (1999) Hedonic adaptation. In: Kahneman D, Diener E, Schwarz N (eds) Well-being: the foundations of hedonic psychology. Russell Sage Foundation, New York, pp 302–329
Frey B, Stutzer A (2000) Happiness, economy, and institutions. Econ J 110(466):198–938
Graham C (2011) Adaptation amidst prosperity and adversity: insights from happiness studies from around the world. World Bank Res Obs 26(1):105–137
Headey B, Ruud M, Wagner G (2010) Long-running German panel survey shows that personal and economic choices, not just genes, matter for happiness. Proc Natl Acad Sci 107(42):17922–17926
Helliwell J, Putnam R (2004) The social context of well-being. Philos Trans R Soc B 359(1449):1435–1446
Helson H (1964) Adaptation-level theory. Harper & Row Publishers, New York
Hirschman A (1973) The changing tolerance for income inequality in the course of economic development. Q J Econ 87(4):544–566
Inglehart R, Foa R, Peterson C, Welzel C (2008) Development, freedom, and rising happiness. Perspect Psychol Sci 3(4):264–285
Kasser T, Ryan R (1993) A dark side of the American dream: correlates of financial success as a central life aspiration. J Pers Soc Psychol 65(2):410–422
Knight J, Gunatilaka R (2011) Does economic growth raise happiness in China? Oxf Dev Stud 39(1):1–24
Knight J, Gunatilaka R (2012) Income, aspirations and the hedonic treadmill in a poor society. J Econ Behav Organ 82(1):67–81
Layard R (1980) Human satisfaction and public policy. Econ J 90(360):737–750
Luttmer E (2005) Neighbors as negatives: relative earnings and well-being. Q J Econ 120(3):963–1002
Lykken D, Tellegen A (1996) Happiness is a stochastic phenomenon. Psychol Sci 7(3):186-189
McCloskey D (1985) The rhetoric of economics. University of Wisconsin Press, Madison
Merton R, Kitt A (1950) Contributions to the theory of reference group behavior. In: Merton R, Lazarsfeld P (eds) Studies in the scope and method of ‘the American soldier’. Free Press, Glencoe, pp 40–106
Newman C, Delaney L, Nolan B (2008) A dynamic model of the relationship between income and financial satisfaction: evidence from Ireland. Econ Soc Rev 39(2):105–130
Oswald A (1997) Happiness and economic performance. Econ J 107(445):1815–1831
Paul S, Guilbert D (2013) Income–happiness paradox in Australia: testing the theories of adaptation and social comparison. Econ Model 30(1):900–910
Pollak R (1970) Habit formation and dynamic demand functions. J Polit Econ 78(4):745–763
Pollak R (1976) Interdependent preferences. Am Econ Rev 66(3):309–320
Sacks D, Stevenson B, Wolfers J (2012) The new stylized facts about income and subjective well-being. Emotion 12(6):1181–1187
Scitovsky T (1976) The joyless economy: an inquiry into human satisfaction and consumer dissatisfaction. Oxford University Press, Oxford
Scitovsky T (1986) Human desire and economic satisfaction: essays on the frontiers of economics. Wheatsheaf Books, Brighton
Sheldon K, Kasser T (1998) Pursuing personal goals: skills enable progress, but not all progress is beneficial. Pers Soc Psychol Bull 24(12):1319–1331
Stevenson B, Wolfers J (2008) Economic growth and happiness: reassessing the Easterlin Paradox. Brook Pap Econ Act 39(1):1–87
Stevenson B, Wolfers J (2013) Subjective well-being and income: is there any evidence of satiation? Am Econ Rev 103(3):598–604
Stutzer A (2004) The role of income aspirations in individual happiness. J Econ Behav Organ 54(1):89–109
Thornbecke E (2004) Economic and statistical significance: comments on “size matters”. J Socio Econ 33(5):571–575
Veenhoven R, Haggerty M (2006) Rising happiness in nations 1946–2004: a reply to Easterlin. Soc Indic Res 79(3):421–436
Veenhoven R, Vergunst F (2014) The Easterlin illusion: economic growth does go with greater happiness. Int J Happiness Dev. http://www.inderscience.com/info/ingeneral/forthcoming.php?jcode=ijhd
Vendrik M (2013) Adaptation, anticipation and social interaction in happiness: an integrated error-correction approach. J Pub Econ 105(1):131–149
Vohs K, Mead N, Goode M (2008) Merely activating the concept of money changes personal and interpersonal behavior. Curr Dir Psychol Sci 17(3):208–212
Wunder C (2012) Does subjective well-being dynamically adjust to circumstances? Econ Lett 117(3):750–752
Ziliak S, McCloskey D (2008) The cult of statistical significance. University of Michigan Press, Ann Arbor
Author information
Authors and Affiliations
Corresponding author
Appendices
Appendix
Recall Eq. (5) in the main text:
where \( F\left[ {\Delta Y^{*} } \right] = F\left[ {\Delta Y_{t} ,\Delta Y_{t}^{e} ,\Delta Y_{t}^{r} } \right] \) represents the income stimuli. Below, Eqs. (9) and (10) as well as Eqs. (11) and (12) make up the “basic models” from which dynamic specifications are possible for regression analyses.
Zero rate of adaptation
In the case of zero happiness adaptation to income, set α to zero. No social comparison in income implies ΔY e t = ΔY r t = 0. If so, Eq. (8) becomes
where h t = ΔH t . The above expression is the recent workhorse of the Easterlin group, especially Easterlin and Angelescu (2009), Easterlin and Sawangfa (2010), Easterlin et al. (2010), and Easterlin (2013).
Setting ΔY e t ≠ 0 and ΔY r t ≠ 0 and keeping α = 0 obtains the expanded formulation of
Instantaneous rate of adaptation
In the case of instantaneous happiness adaptation to income, set α to one. Once again, no social comparison in income implies ΔY e t = ΔY r t = 0. If so, Eq. (8) reduces into
In fact, the above expression is the original workhorse of the Easterlin group; that is, Easterlin (1974, 1995, 2001).
Setting ΔY e t ≠ 0 and ΔY r t ≠ 0 and keeping α = 1 obtains expanded formulation of
Rights and permissions
About this article
Cite this article
Beja, E.L. Income growth and happiness: reassessment of the Easterlin Paradox. Int Rev Econ 61, 329–346 (2014). https://doi.org/10.1007/s12232-014-0211-y
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s12232-014-0211-y