How Conscious Are You of Others? Further Evidence on Relative Income and Happiness

Abstract

Empirical evidence indicates that an individual’s happiness is relative with respect to income, whereby it increases with one’s own income and declines as the income of a reference group increases. Several recent studies further suggest that the effect of relative income is mediated by the extent to which people compare themselves with others. In line with the empirical research examining the effects of comparison intensity, in the present study, we focus on the degree to which people are conscious of others’ living standards (hereinafter, awareness of others) and aim to ascertain whether the intensity of awareness of others interacts with the individual perception of relative income in affecting the degree of happiness. By analyzing survey data pertaining to samples representative of Japan and the U.S., we find that individuals who are highly conscious of others are unhappier in Japan but happier in the U.S. Second, the positive relationship between awareness of others and happiness found in the U.S. results from the perception of reference-group income, in that highly conscious individuals compare downward. Lastly, we further examine the extent to which the integrated effect of awareness of others and reference-group income is related to an individual’s choice that could affect the degree of happiness. Our work intends to contribute to a better understanding of how different measures of reference income and respondents’ awareness of others interact in determining individual happiness and choice behaviors.

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Notes

  1. 1.

    Lee and Ohtake (2018) compared the same dataset pertaining to Japan and the U.S. with its own government’s data and found a reasonably similar trend between the GCEO data and the officially published records.

  2. 2.

    New individuals were added in the 2004, 2006, and 2009 surveys in Japan, and in the 2007, 2008, and 2009 surveys in the U.S., using the same method as in the first survey year.

  3. 3.

    The 2006 survey dataset included 3763 individuals in Japan and 3120 individuals in the U.S. Nonresponses of absolute/relative income and labor-related variables reduced the sample size. For a comparison, we conducted the same estimations by including nonresponses as dummy variables or using different specifications (e.g., excluding some confounding variables). We found no significant differences in the results regarding the effects of relative variables.

  4. 4.

    The mean values of happiness in Japan and the U.S. reported in our work are very similar to those obtained from the Gallup World Poll in 2006 (see Fig. 1 in Deaton 2008).

  5. 5.

    We find that the overall results do not differ significantly when using different types of income data (e.g., individual annual income, monthly wage, or hourly wage).

  6. 6.

    The unit is 100 USD and 10,000 JPY.

  7. 7.

    See Sect. 3.5 for the discussion of our results.

  8. 8.

    In both countries, neighbors are the most frequent reference group (49.74% in Japan and 51.04% in the U.S.), followed by average people, family, colleagues, and friends/acquaintances (about 10 − 13% for each of these categories in both countries). The distributions of comparison groups are very similar in Japan and the U.S. In both countries, friends/acquaintances is the comparison group exhibiting the strongest intensity of relative utility. Yamada and Sato (2013) also used a Japanese sample in their analyses, but due to differences in the survey question wording and choice options of perceived reference group, their results might somewhat differ from ours.

  9. 9.

    Some researchers have provided explicit evidence for a significant relationship between individuals’ required income levels and own past income by using panel data, such as the German Socio-Economic Panel (SOEP) (Bartolini et al. 2013; Vendrik 2013) and the British Household Panel Survey (BHPS) (Clark 1999).

  10. 10.

    We carefully compared the results obtained by Ordered logit and OLS and found no significant differences. Furthermore, overall results that particularly involve our main control variables are reasonably similar for men and women included in the samples analyzed here. Hence, all results reported here for main estimations are based on the whole sample.

  11. 11.

    Living standard comparison was based on the responses to the “living standards” survey question, whereas social comparison income and aspirational comparison income are derived from “household income” to compare with others. Living standards and income are not exactly the same. Our dataset includes the measure of one’s own living standards. When we estimate the effect of relative income using living standard comparison, we control for one’s own living standards as the replacement for absolute household income and obtain similar results.

  12. 12.

    As noted in the text, for Eq. (3), we use the same model applied to Eq. (1) with the replacement of the dependent variable with individual choice. In Eq. (3), we use relative income and awareness of others that are coded as ordinal variables for the purpose of comparison with Eq. (1). Even when we estimate Eq. (3) with relative income and awareness of others that are recoded as binary variables, the results do not differ much.

  13. 13.

    In Eq. (2), a binary indicator of lower-income reference group is used as a proxy for relative income, while here, it was replaced by a binary indicator of higher-income reference group. Although this may result in confusion, the models were constructed in this manner to test our hypotheses more explicitly, i.e., to establish the effect of lower-income reference group in association with awareness of others on an individual’s happiness, as well as the paradoxical effect of higher-income reference group in association with awareness of others on an individual’s choice.

  14. 14.

    For own income, we also use subjective measurement which indicates one’s own living standards measured on an 11-point scale (0 being the lowest and 10 the highest). The overall results are the same as those based on an objective measure of annual household income.

  15. 15.

    For a more detailed discussion of the U-shaped relationship between age and happiness, see Easterlin (2006).

  16. 16.

    The effect of awareness of others is comparable to that of relative income. This is to be expected as, if respondents believe that their reference group earns more than they do, their happiness declines, by 0.5 and 0.25 in Japan and the U.S., respectively, as shown in Column 4 and 10. On the other hand, in Japan/the U.S., absolute income and awareness of others, when relative income is controlled for, jointly reduce happiness by 0.28/0.24 points and 0.23/0.10 points, respectively, as shown in Column 4 and 10. These results are similar to those obtained when relative income is not controlled for.

  17. 17.

    Since the U.S. dataset used in the analyses comprises of two-year data, a fixed-effects model with balanced data is the same as the Column 6.

  18. 18.

    We report the results obtained from the random-effects model in Columns 3 and 7 for comparison, although the Hausman test shows that the fixed-effects model is preferred.

  19. 19.

    Unexpected sign and statistically insignificance of coefficients found in the results related to the U.S. respondents might stem from the fact that the values of these variables are very similar in 2005 and 2006.

  20. 20.

    We denote the coefficient resulting from the baseline regression as β˚ and the R-squared from that regression as R˚ and define the coefficient from the intermediate regression with controls included as \(\stackrel{\sim }{\upbeta }\) and the R-squared as \(\stackrel{\sim }{R}\). Oster (2019) suggests that a bias-adjusted effect,\({\upbeta }^{*}\), can be estimated as \({\upbeta }^{*} \left( {R^{{max}} ,{\updelta }} \right) = {\tilde{\upbeta }} - [{\updelta }\left( {\upbeta ^{ \circ } - {\tilde{\upbeta }}} \right)\frac{{R^{{max}} - \tilde{R}}}{{\tilde{R} - R^{ \circ } }}]\).

  21. 21.

    In addition to these explanatory variables, we included some labor-related variables in the estimation. We regressed happiness on the predicted income variable with and without the aforementioned explanatory variables.

  22. 22.

    For a comparison, residence dummies and/or labor-related variables were additionally included to calculate the predicted value of income. However, the estimated absolute and relative income effects were highly unstable and depend on specifications.

  23. 23.

    To account for this possibility, Card et al. (2012) informed their survey respondents of their peers' actual wages. Other authors opted for natural experiments to obtain meaningful estimates of income comparisons. In our work, we attempted to obtain robust results by using three measurements of relative income, which yield reasonably similar results.

  24. 24.

    The data adopted in these analyses unfortunately does not permit inclusion of additional factors. Note that the aim here is to ascertain if the choice of residence could differ depending on awareness of others interacted with one’s perceived income status relative to that of his/her reference group.

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Acknowledgments

Funding was provided by Grant-in-Aid for Scientific Research A (Grant No. 26245041), Grant-in-Aid for Scientific Research A (Grant No. 26245041), Grant-in-Aid for Scientific Research S (Grant No. 20H05632), Institute of Social and Economic Research at Osaka University (Grant No. Joint Usage/Research Center).

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Correspondence to Sun Youn Lee.

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Appendices

Appendix 1

Table 7.

Table 7 Definition and coding of variables

Appendix 2

Table 8.

Table 8 Determinants of the degree of happiness using panel data

Appendix 3

Table 9.

Table 9 Using ordinal variable of awareness of others

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Lee, S.Y., Ohtake, F. How Conscious Are You of Others? Further Evidence on Relative Income and Happiness. J Happiness Stud (2021). https://doi.org/10.1007/s10902-021-00364-7

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Keywords

  • Happiness
  • Relative income
  • Awareness of others
  • Hypothetical choice

JEL Classification

  • D6
  • I31
  • J0