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Who benefits from big government? A life satisfaction approach

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Abstract

Which impact does government size have on life satisfaction, and how do effects of bigger government differ between income groups in society? Previous studies typically employed country averages and thus neglected possibly heterogeneous happiness effects between income groups. This paper addresses empirically the effects of government spending on subjective well-being of individuals belonging to different income groups. Our analysis is based on individual data from 25 European countries participating in the European Social Survey. In contrast to most previous studies we take account of the endogeneity between relative income position and reported life satisfaction by an instrumental variable approach. Our results suggest, first, that most government spending categories, including social protection, are on average negatively related to individual well-being. Secondly, estimated marginal effects of health, education and social protection spending at different income levels show that spending increases always have a stronger negative effect on high income groups’ well-being than on low income groups’ life satisfaction. For all government spending categories, marginal happiness effects of higher public spending are clearly negative for income groups at the top.

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Notes

  1. Notwithstanding the existing differences, the terms "happiness", "life satisfaction" and "subjective well-being" are used interchangeably in the present paper.

  2. Knoll et al. (2013) report evidence for positive effects of low economic regulation on subjective well-being. Paradoxically, people who are ideologically opposed to market-oriented policies sometimes benefit most from deregulation in terms of increased life satisfaction.

  3. Gandelman and Porzecanski (2013) report that income inequality also transforms into happiness inequality, but due to decreasing marginal utility of income happiness inequality is only about half the size of income inequality, as measured by Gini coefficients.

  4. Further income categories are: 2nd category: 1800–3600€; 3rd category: 3600–6000€; 4th category: 6000–12,000€; 5th category: 12,000–18,000€; 6th category: 18,000–24,000€; 7th category: 24,000–30,000€; 8th category: 30,000–36,000€; 9th category: 36,000–60,000€; 10th category: 60,000–90,000€; 11th category: 90,000–120,000€.

  5. We also employed income inequality measures as macro control variables but these never turned out to be statistically significant.

  6. In order to obtain comparable occupation information over all waves, we have recoded the ISCO 88-information into the ISCO 08-scheme according to the correspondence table of the ILO (http://www.ilo.org/public/english/bureau/stat/isco/isco08/index.htm).

  7. For an overview see D'Addio (2007) pp. 39 ff., and Bowles and Gintis (2002) pp. 17 f.

  8. We do not report the whole set of control variables, as estimates are highly stable. Of course, results are available on request.

  9. We owe this idea to Justina A. V. Fischer.

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Author information

Authors and Affiliations

  1. Institute of Economics, University of Bochum, 44799, Bochum, Germany

    Bodo Knoll

  2. Austrian Institute of Economic Research (WIFO), Arsenal Objekt 20, 1030, Vienna, Austria

    Hans Pitlik

Authors
  1. Bodo Knoll
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  2. Hans Pitlik
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Correspondence to Hans Pitlik.

Appendix

Appendix

See Tables 7, 8, 9, 10 and 11.

Table 7 Number of observations for each country and each ESS wave
Full size table
Table 8 Mean of government size indicators (spending as percent of GDP) by country
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Table 9 Summary statistics of individual characteristics
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Table 10 Summary statistics of country variables
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Table 11 Jackknife analysis of IV-regression: range of coefficients
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Knoll, B., Pitlik, H. Who benefits from big government? A life satisfaction approach. Empirica 43, 533–557 (2016). https://doi.org/10.1007/s10663-015-9304-4

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