Income Expectations and Happiness: Evidence from British Panel Data

Abstract

We analyze the impact of households’ subjective current and future financial measures on their well-being by using three waves of a longitudinal data set—Understanding Society -from the UK. We use a fixed-effects regression method to get rid of individual heterogeneity, and find that even after controlling for some demographic characteristics, including equivalent household income, subjective measures of current and future financial well-being are still significant correlates of life satisfaction in UK households. The same results hold for income satisfaction and mental health. Our main contribution however is showing that positive surprises in financial expectations decrease the subjective well-being of the household’s, and vice versa for negative surprises. This result shows that even though a household’s expectations of its future financial situation may not be accurate, any unexpected shock regarding household income could be significantly correlated with subjective well-being.

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Notes

  1. 1.

    The questions are presented in Appendix

  2. 2.

    We originally used total household income but an anonymous reviewer suggested that we use equivalent household income. The results are qualitatively the same. We thank the reviewer for suggesting the use of this variable.

  3. 3.

    Senik (2006) refers to this as a “surprise” in her working paper thus we continue to use this term in our paper.

  4. 4.

    McFall (2011) provides more technical information on income imputation.

  5. 5.

    The annual inflation rate in 2009 was 2.2 %. We define those whose incomes have changed by less than 5 % as being in the “same” state of financial position. By using 5 % as the benchmark, we take into account real income as well as the errors that could arise during imputations.

  6. 6.

    We thank an anonymous referee for pointing this out.

  7. 7.

    The results are available upon request

  8. 8.

    Available at https://www.understandingsociety.ac.uk/documentation

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Correspondence to Tufan Ekici.

Appendix

Appendix

The survey provider’s documentation on the construction of Mental Health variable is given as belowFootnote 8: “Mental Component Summary (MCS) measure converts valid answers to the following questions into a single mental functioning score, resulting in a continuous scale with a range of 0 (low functioning) to 100 (high functioning). For complete details on scoring methods see Ware et al. (2001), How to Score Version 2 of the SF-12 Health Survey (With a Supplement Documenting Version 1), Lincoln, RI, QualityMetric Incorporated.”

  1. 1.

    In general would you say hour health is (excellent, very good, good, fair, poor)?

  2. 2.

    Now I am going to read you a list of activities that you might do during a typical day. As I read each item, please tell me if your health now limits you a lot, limits you a little, or does not limit you at all in these activities. First moderate activities, such as moving a table, pushing a vacuum cleaner, bowling etc.

  3. 3.

    Climbing several flights of stairs?

  4. 4.

    During the past 4 weeks, how much of the time have you accomplished less than you would like as a result of your physical health? (All of the time, most of the time, some of the time, a little of the time, none of the time)

  5. 5.

    During the past 4 weeks, how much of the time were you limited in the kind of work or other regular daily activities you do as a result of your physical health? (All the time, most of the time, some of the time, a little of the time, none of the time)

  6. 6.

    During the past 4 weeks, how much of the time have you accomplished less than you would like as a result of any emotional problems (such as feeling depressed or anxious)? (All of the time, most of the time, some of the time, a little of the time, none of the time)

  7. 7.

    During the past 4 weeks, how much of the time did you work or other regular daily activities less carefully than usual as a result of any emotional problems, such as feeling depressed or anxious? (All of the time, most of the time, some of the time, a little of the time, none of the time)

  8. 8.

    During the past 4 weeks, how much did pain interfere with your normal work including both work outside the home and housework? Did it interfere… (not at all, a little bit, moderately, quite a bit, extremely)

  9. 9.

    How much of the time during the past 4 weeks have you felt calm and peaceful? (All of the time, most of the time, some of the time, a little of the time, none of the time)

  10. 10.

    How much of the time during the past 4 weeks did you have a lot of energy? (All of the time, most of the time, some of the time, a little of the time, none of the time)

  11. 11.

    How much of the time during the past 4 weeks have you felt downhearted and depressed? (All of the time, most of the time, some of the time, a little of the time, none of the time)

  12. 12.

    During the past 4 weeks, how much of the time has your physical health or emotional problems interfered with your social activities like visiting friends or relatives? (All of the time, most of the time, some of the time, a little of the time, none of the time)

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Ekici, T., Koydemir, S. Income Expectations and Happiness: Evidence from British Panel Data. Applied Research Quality Life 11, 539–552 (2016). https://doi.org/10.1007/s11482-014-9380-9

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Keywords

  • Financial expectations
  • Life satisfaction
  • Subjective well-being
  • Happiness
  • Expectation surprise