Saturday, April 26, 2008

End of Easterlin Paradox?

Justin Wolfers and Betsey Stevenson have just presented their latest paper which claims to lay to rest the "Easterlin Paradox", which had argued that only relative income matters to happiness. They claim that "the relationship between subjective well-being and
income within a country (that is, contrasting the happiness of rich and poor members of a society) is similar to that seen across countries (contrasting rich and poor countries), which in turn is similar to the time series relationship (comparing the happiness of a country as it gets richer or poorer)".

In 1974, Richard Easterlin, then an economist at the University of Pennsylvania, published a study in which he argued that economic growth didn’t necessarily lead to more satisfaction. Justin Wolfers describes the Paradox as the juxtaposition of three observations:
1) Within a society, rich people tend to be much happier than poor people.
2) But, rich societies tend not to be happier than poor societies (or not by much).
3) As countries get richer, they do not get happier.

Numerous subsequent studies, including by Nobel laureate Daniel Kahneman, pointed to a "hedonic treadmill", in which we must keep consuming more just to stay at the same level of happiness.

Marshalling an impressive array of post-war data, especially from happiness surveys from across the world, Wolfers and Stevenson observed the evolution of GDP and happiness through time, and conclude that
1) Rich people are happier than poor people.
2) Richer countries are happier than poorer countries.
3) As countries get richer, they tend to get happier.

Plotting the average level of happiness against average national incomes (log scale)for 132 countries from the 2006 Gallup World Poll, they find an incredibly high correlation of greater than 0.8.

Wolfers argues that far from there being an income "satiation point" beyond which you just don’t benefit from greater income, the slope gets steeper after national income crosses $15000! Further, a $100 rise in income has many times more effect on happiness in low income countries than in the high income ones.

Justin Wolfers tracked the evolution of happiness with increasing incomes in US, Japan and Europe (9 nations) in the 1973-2007 period, and found that in general happiness increased with incomes, though there were a few notable exceptions.

Comparing happiness within countries over a period of time and between countries, the authors get more conclusive evidence that comparisons of rich and poor yield the same conclusions as comparisons betweene rich and poor countries. The arrows in the figure below shows the slope of the well-being-income gradient for each country, while the dots show the average level of happiness and G.D.P. for each country. The dashed line shows the best fit through these dots.

Angus Deaton had dealt with the issue earlier here.

Update 1
Chris Dillow links to evidence suggesting that happiness is infectious and how other people’s high incomes might make us more aware of our relative poverty.

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