Easterlin’s Paradox and the Macroeconomics of

Happiness

Andrew Oswald Warwick and IZA

I would like to acknowledge that much of this work is joint with coauthors Andrew Clark, Nick Powdthavee,

David G. Blanchflower, and Steve Wu.

Is modern society going in a sensible direction?

This is an empirical question

• "Does Economic Growth Improve the Human Lot?" Richard Easterlin

in Paul A. David and Melvin W. Reder, eds., Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, New York: Academic Press, Inc., 1974.

The Man Behind the Easterlin Paradox

The relationship between income and well-being in Japan over 25 years

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Life Satisfaction = -0.9 + 0.8 * Log GDP (t=8.3)World Values Survey

Life Satisfaction and GDP Per Capita

Countries are happier if they have low unemployment and inflation, and generous welfare benefits.

The macroeconomics of happiness

The macroeconomics of happiness

Countries are happier if they have low unemployment and inflation, and generous welfare benefits.

‘Fear’ depresses happiness.

R. Di Tella, R. Macculloch, A.J. Oswald American Economic Review, 2001.

In a recession

there is a widespread decline in mental well-being, we think because of the generalized insecurity.

• In the early 70s, 33% of Americans described their lives as very happy, 52% as pretty happy, and 15% as not too happy.

• In the early 70s, 33% of Americans described their lives as very happy, 52% as pretty happy, and 15% as not too happy.

• By the late 2000s, the numbers were 31%, 55%, 14%.

A few years ago

Economists started thinking harder about all this.

Stiglitz Report 2009 www.stiglitz-sen-fitoussi.fr

The Stiglitz Commission Report

• advocates a shift of emphasis from a “production-oriented” measurement system … toward broader measures of social progress.

“Emphasis on growth is misguided”

“Beyond GDP”

“Measuring what matters”

Happiness is the new GDP   

Smile, and the economy smiles with you. Factory workers in Macedonia.

Stiglitz et al:

Official statistics should blend objective and subjective well-being dataRecommendation 10: Measures of both objective and subjective well-being provide key information about people’s quality of life. Statistical offices should incorporate questions to capture people’s life evaluations, hedonic experiences and priorities in their own survey.

Are there any questions people would like to ask?

We are constrained by human nature:

Easterlin argued:

u = u(y, others’ y)

• But is it right to believe that humans are deeply concerned with relative position?

It has been found that

Relative-income variables show up consistently in well-being equations.

Blanchflower-Oswald, Journal of Public Economics 2004Luttmer, Quarterly Journal of Economics 2005GDA Brown et al, Industrial Relations 2008

Against whom do we compare ourselves?

Possibilities

Peer group/people like me Others in the same household Spouse/partner Myself in the past Friends Neighbours Work colleagues “Expectations”

Clark and Oswald (JPubEcon 1996). BHPS Data on 5000 Employees

Log income (y) -0.02 0.11 -0.001

(0.039) (0.050) (0.04)

Log comparison income (y*) --- -0.20 ---

(0.062)

Log NES comparison income (y**) --- --- -0.26

(0.073)

“Comparison Income” predicted from a Mincer Earnings equation (note: requires exclusion restrictions to avoid multicollinearity);

“NES comparison income” matched in from another data set by hours of work, and thus avoids identification problems (but assumes reference group defined by hours of work).

From Andrew Clark’s work: Wave 3 of the European Social Survey (22 countries).

Table1. “How important is it to you to compare your income with other people’s incomes?”

Not at all important 23.80 1 17.01 2 13.86 3 16.95 4 13.52 5 9.42 Very important 5.44

In the Netherlands and in Switzerland, people seem to do less comparing-against-others.

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Observations Weighted % Work colleagues 6 159 38.93 Family members 929 6.03 Friends 2 382 14.94 Others 1 192 7.39 Don't compare 5 185 32.72

Other evidence for relativity effects.

1) This is Denmark

Clark and colleagues use new geo-referenced data, based on a geographical grid of size 100*100 meters (i.e. 10 000 square meters, or a hectare) covering the entire country.

Economic Journal, 2009.

• Some of these grid cells are uninhabited, others are only very thinly inhabited: around two-thirds of inhabited hectare cells contain under five households.

• Data confidentiality: Statistics Denmark aggregates to produce clusters of neighbouring hectare cells with a minimum of 150 (600) households.

Contiguous Homogenous in terms of type and ownership of

housing (don’t mix flats and houses).

Figure 1Small neighbourhoods in the area of Taastrupgård, Høje Tåstrup

Source: Damm and Schultz-Nielsen (2008).

Economic Satisfaction, Income and Rank within Small Neighbourhoods: Panel Results

Baseline Baseline and Municipality

Baseline and Rank

Ln(HH income) 0.390** 0.390** 0.070* (0.021) (0.021) (0.028) Ln(median grid HH income) 0.228** 0.236** 0.634** (0.052) (0.055) (0.057) Ln(median municipality HH income) --- -0.062 --- --- (0.156) --- Relative rank in small grid --- --- 1.124** --- --- (0.068) See Neighbours Often -0.019 -0.019 -0.016 (0.016) (0.016) (0.016) Single -0.057* -0.057* 0.025 (0.027) (0.027) (0.028) Health problems dummy -0.023 -0.023 -0.023 (0.017) (0.017) (0.017) Age dummies (9) Yes Yes Yes Education dummies (6) Yes Yes Yes Socio-Economic Group dummies (3) Yes Yes Yes No. and Ages of children dummies (5) Yes Yes Yes No. Years in Grid dummies (5) Yes Yes Yes Regional dummies (13) Yes Yes Yes Year dummies (8) Yes Yes Yes Observations 33 870 33 870 33 870

People like having a rich neighbourhood…and being on top of the ‘rank’ pile.

Also, suicide and comparisons:

“Dark contrasts: The paradox of high rates of suicide in happy places” Daly et al JEBO 2011

The pattern also holds in Europe

US states in modern data

Suicide dropped in NY after 9-11

Suicide dropped in NY after 9-11

“Effect of 11 September 2001 terrorist attacks in the USA on suicide in areas surrounding the crash sites” Cynthia Claassen et al BRITISH JOURNAL OF PSYCHIATRY, May 2010

Results: Around the World Trade Center, post-attack 180-day suicide rates dropped significantly (t=2.4, P=0.0046).

Overall, in humans

‘Relativity’ effects seem strong – and not just in incomes.

So what?

So what?

Why might it matter to social scientists if utility depends on relative things?

Some results from:

Easterlin, R. A. (2005). “Diminishing Marginal Utility of Income? Caveat Emptor”. Social Indicators Research. pp. 243-255.

This is of interest to us today –it deals with the case of Japan.

Japan was a poor country in the 1950s/early 1960s, but then experienced unprecedented growth.

Fact 1. Richer countries are happier countries.

Japan was in the middle of the income distribution in the early 1960s, and had a middling level of happiness

Japan

The blue lines show the estimated relationship between income and happiness

So what happened as Japan became richer?

Look at annual indices (1962=100) of life satisfaction and real GNP per capita for Japan, 1958-1987.

Between 1962 and 1987 Japan experienced unprecedented economic growth, with GNP per capita (in real terms)rising 3.5-fold: growing from 22 to 77 percent of the United States level in 1962

We might then imagine that Japan would follow the blue lines above: as Japan became richer, it would become happier.

In fact, happiness remained constant despite Japan’s remarkable growth

What “should” have happened

What did happen

The road to nowhere?

• Growth in income is now not correlated with growth in happiness

• This is the “Easterlin paradox”

Average Happiness and Real GDP per Capita for Repeated Cross-sections of Americans.

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FIGURE 1: Happiness and Real Income Per Capita in the US, 1973-2004

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• There is also evidence, perhaps not known to many economists, of worsening mental health through time in some countries.

Average GHQ Psychological Distress Levels Over Time in Britain: BHPS, 1991-2004

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Equivalent results have been found for adults in the Netherlands, UK and Belgium.

Worsening GHQ levels through time

• Verhaak, P.F.M., Hoeymans, N. and Westert, G.P. (2005). “Mental health in the Dutch population and in general practice: 1987-2001”, British Journal of General Practice.

• Wauterickx, N. and P. Bracke (2005), “Unipolar depression in the Belgian population - Trends and sex differences in an eight-wave sample”, Social Psychiatry and Psychiatric Epidemiology.

• Sacker, A. and Wiggins, R.D. (2002). “Age-period-cohort effects on inequalities in psychological distress”. Psychological Medicine.

Might this have something to do with work getting more stressful? [Yes]

Work by Francis Green, Keith Whitfield, et al.

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Source: Skills Survey series

What of well-being among the young?

Helen Sweeting et al

“GHQ increases among Scottish 15 year olds 1987–2006” Social Psychiatry & Psychiatric Epidemiology (2008).

Her team assesses whether life is getting more stressful for young people.

It is.

Mental strain in young Scots

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So there is much evidence that all this extra money we have today is not doing a lot for us.

Easterlin’s Paradox.

There has recently been a critique of Easterlin’s idea

There has recently been a critique of Easterlin’s idea

Betsey Stevenson and Justin Wolfers have argued that economic growth does buy happiness.

Brookings Papers, Spring 2008

Their work is extremely valuable

Their work is extremely valuable

But ultimately I think they probably have the wrong answer.

• Much of their paper is concerned with cross-section patterns.

• In the long time-differences, which is the appropriate test, little is statistically significant in 1973-2007 European data.

Another key difficulty is that we know movements in the rate of unemployment -- omitted from their regression equations -- affect mental well-being.

Di Tella, MacCulloch, Oswald AER 2001

Moreover, Stevenson and Wolfers agree that Americans have if anything become less happy over the last 40 years.

Overall

I would say that currently the balance of the evidence favours Easterlin rather than Stevenson-Wolfers.

[though it is bad science for us ever to close our minds, so we must watch for new evidence as it accumulates]

There is considerable evidence:

• (i) In the rich countries, happiness is running flat or declining

• (ii) Levels of GHQ mental-strain are rising.

These (uncomfortable) facts raise fundamental intellectual and policy questions for our generation and beyond.

Easterlin’s Paradox and the Macroeconomics of

Happiness

Andrew Oswald

Research site: www.andrewoswald.com

I would like to acknowledge that much of this work is joint with coauthors Andrew Clark, Nick Powdthavee,

David G. Blanchflower, and Steve Wu.