The Effect of Absolute Income on the Overall Happiness of a Person

Proposal

The purpose of this study will be to estimate how a person’s self-described happiness changes as their absolute income changes. For the sake of the paper, absolute income will refer to the dollar amount that an individual is paid. The study will look at the nominal GDP of a given country in 1998, then compare that with their life satisfaction score provided by the third wave World Values Survey (WVS) (Inglehart et al. 2003). The survey was administered to a sample population of 82 different countries from 1996-1998 and asked respondents to rate their life satisfaction on a scale of 1-10 (Inglehart et al. 2003). Other factors such as sex, marital status, employment, age, and health will also be factored into the paper.

Economists have formed a tangential relationship with the concept of happiness over the years. Foundational microeconomics holds that the goal of a reasonable actor is to maximize their utility or happiness. In the real world, the level of happiness in a society is one of the most important metrics in gauging that society’s functionality. Scholars such as R.B. Edgerton have defined good cultures as “those in which health and happiness flourish” (Edgerton 1992). Subjective well-being has also been “strongly linked to health and longevity in healthy populations” (Diener and Chan 2011). This shows that the general happiness of a population should be of utmost importance to their government. However, if absolute income can be shown to not be a large factor in determining the happiness of a population, this would prove to have far-reaching governmental implications. First it would require that less emphasis be put on GDP when attempting to gauge the well-being of the people.  It would also mean governments should err on the side of regulation when presented with a situation in which one must forgo maximum output (maximum income) in order to preserve things like the environment and worker safety standards.

Modern research on the relationship between income and happiness was kicked off by the seminal work of Easterlin (1974). The paper (discussed in greater detail below), attempted to find whether there was “evidence that economic growth was positively associated with social welfare,” (Easterlin 1974). One of the hypotheses put forth by the paper was that absolute income mattered very little to a person’s happiness when compared with relative income (Easterlin 1974). However, a large amount of future works would go on to challenge the extreme form of this hypothesis (Ball et al. 2007). This study will contribute to this ongoing debate by estimating the effect of increasing absolute income on a person’s happiness. 

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Literature Review

As stated above, Easterlin (1974) attempted to answer whether there is a relationship between income and happiness in a country’s population and whether there was a relationship between average income and average happiness. Using data from the United States, he concluded that, while happiness was positively correlated with income, average happiness responses seemed to not be affected by average income. This would mean that, despite a country routinely increasing its income per capita, the happiness of a population would not change. The paper also hypothesized that it was only relative income that was important for a person’s happiness, while absolute income had little effect.

Blanchflower and Oswald (2000) found that, in the decades after Easterlin’s paper was published, the pattern remained similar for the United States and Great Britain. Their findings supported Easterlin’s assertion that economic growth did not increase the happiness of a society.  Happiness rates in the United States were found to be declining, while happiness rates in Great Britain had remained stagnant since the 1970s, even though both countries saw an increase in GDP per capita since then.

Tella et al. (2003) showed that macroeconomic changes influence the happiness of a society. Happiness equations were shown to increase as income increased and have a similar structure amongst different countries. The study also found that reported happiness was correlated with changes in economic variables such as GDP per capita. Both the level and change in economic variables were shown to be statistically significant in changing a population’s happiness. The researchers admit that it is highly likely that increases in happiness relative to increases in national income decrease over time. They argue this is due to human beings getting used to an increase in income. 

Ball and Chernova. (2007), inspired heavily by Easterlin’s paper, attempted to find the relationship between absolute income, relative income, and happiness. Their study concluded that both relative and absolute income matter when influencing a person’s happiness. Their findings reject Easterlin’s stringent hypothesis that only relative income matters, while also rejecting economic models in which only absolute income is used for a utility function. Their findings also imply that an increase in average income will make everyone in the population happier, which contradicts both Easterlin and Blanchflower et al.’s findings.

Tao and Chiu (2009) found that the effect of income growth on subjective well-being is likely to be negligible. It was found that the absolute income effect is very weakly significant in the study when relative income was factored in. The absolute income effect and the relative income effects served to counteract one another. They claimed that these findings showed why income growth generally does not improve a society’s well-being as observed by economists such as Easterlin.

References

• Ball, Richard, and Kateryna Chernova. “Absolute Income, Relative Income, and Happiness.” Social Indicators Research, vol. 88, no. 3, 2007, pp. 497–529., doi:10.1007/s11205-007-9217-0.
• Blanchflower, David, and Andrew Oswald. “Well-Being Over Time in Britain and the USA.” Journal of Public Economics, vol. 88, no. 7-8, 2000, pp. 1359–1386., doi:10.3386/w7487.
• Diener, Ed, and Micaela Chan. “Happy People Live Longer: Subjective Well-Being Contributes to Health and Longevity.” PsycEXTRA Dataset, 2011, doi:10.1037/e675972011-001.
• Easterlin, Richard A. “Does Economic Growth Improve the Human Lot? Some Empirical Evidence.” Nations and Households in Economic Growth, 1974, pp. 89–125., doi:10.1016/b978-0-12-205050-3.50008-7.
• Edgerton, Robert B. Sick Societies: Challenging the Myth of Primitive Harmony. Free Press, 1992.
• Inglehart, Robin et al.  “World Values Surveys and European Values Surveys, 1981-1984, 1990-1993, and 1995-1997.” ICPSR Data Holdings, 2000, doi:10.3886/icpsr02790.
• Tao, Hung-Lin, and Shih-Yung Chiu. “The Effects of Relative Income and Absolute Income on Happiness.” Review of Development Economics, vol. 13, no. 1, 2009, pp. 164–174., doi:10.1111/j.1467-9361.2008.00492.x.
• Tella, Rafael Di, et al. “The Macroeconomics Of Happiness.” SSRN Electronic Journal, vol. 85, no. 4, 2003, pp. 809–827., doi:10.2139/ssrn.285918.