Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox

1. Economic Growth and Subjective Well-Being:Reassessing the Easterlin Paradox Betsey Stevenson and Justin Wolfers Wharton School, University of Pennsylvania and NBER The 2008 World Congress on NAEP Measures for Nations, May 14 2008.

2. Research Question: What is the relationship between income & happiness? Why revisit the stylized facts? • Theoretical implications: Reference-dependent preferences • Yielding important policy implications (and big policy claims) • New data: Longer time series (1946-2008); More countries (n=132) • Statistical inference: Absence of evidence v. evidence of absence • What are “big” versus small effects?  Focus on the magnitudes What we won’t do: • Assess causality: Happiness = β log(Income) • Revisit what subjective well-being data “mean” Stevenson & Wolfers, Economic Growth and Happiness

3. Measuring Subjective Well-Being • Subjective well-being questions • Happiness: “Taking all things together, would you say you are: very happy; quite happy; not very happy; not at all happy.” • Life satisfaction: “All things considered, how satisfied are you with your life as a whole these days?” [1=Dissatisfied – 10=Satisfied] • Satisfaction ladder: “Here is a ladder representing the ‘ladder of life’. Let's suppose the top of the ladder represents the best possible life for you, and the bottom, the worse possible life for you. On which step of the ladder do you feel you personally stand at the present time? [0-10 steps].” • Creating a cardinal measure • Macro data: Two steps • Estimate “Gross national happinessc,t”Ordered probit: Happinessi,c,t = μc,t * I(country)*I(year) + ε ε~N(0,1) • Regress GNH on GDP: μc,t = β log(Incomec,t ) + ν • Micro data: • Ordered probit: Happinessi,c,t = β log(Incomeindividual country or period )+ ε ε~N(0,1) Stevenson & Wolfers, Economic Growth and Happiness

4. Outline: Assessing the Happiness-Income link • Within-country comparisons • USA • All countries • Between countries: • Through time • Multiple datasets • For both happiness and life satisfaction • No evidence of satiation • National Time Series • Japan • Europe • USA Stevenson & Wolfers, Economic Growth and Happiness

5. Within-Country Comparisons “Taken all together, how would you say things are these days?” Source: U.S. General Social Survey, 2006 “When we plot average happiness versus income for clusters of people in a given country at a given time, we see that rich people are in fact much happier than poor people. It’s actually an astonishingly large difference. There’s no one single change you can imagine that would make your life improve on the happiness scale as much as to move from the bottom 5 percent on the income scale to the top 5 percent.” - Robert Frank (2005) Stevenson & Wolfers, Economic Growth and Happiness

6. Within-Country: USA Stevenson & Wolfers, Economic Growth and Happiness

7. Histogram: Within-Country Estimates Stevenson & Wolfers, Economic Growth and Happiness

8. Outline: Assessing the Happiness-Income link • Within-country comparisons • USA • All countries • Between countries: • Through time • Multiple datasets • Both happiness and life satisfaction • No evidence of satiation • National Time Series • Japan • Europe • USA βwithin ≈ 0.2 – 0.4 “the happiness differences between rich and poor countries that one might expect on the basis of the within country differences by economic status are not borne out by the international data.” – Easterlin, (1974) Stevenson & Wolfers, Economic Growth and Happiness

9. Early Cross-National Studies Stevenson & Wolfers, Economic Growth and Happiness

10. World Values Survey: 1981-2004 Stevenson & Wolfers, Economic Growth and Happiness

11. Pew Global Attitudes Survey, 2002 Stevenson & Wolfers, Economic Growth and Happiness

12. Between: Gallup World Poll Stevenson & Wolfers, Economic Growth and Happiness

13. Comparing within- and between-country estimates Stevenson & Wolfers, Economic Growth and Happiness

14. Outline: Assessing the Happiness-Income link • Within-country comparisons • USA • All countries • Between countries: • Through time • Multiple datasets • Both happiness and life satisfaction • No evidence of satiation • National Time Series • Japan • Europe • USA βwithin ≈ 0.2 – 0.4 βbetween ≈ 0.2 – 0.4 “income growth in a society does not increase happiness”. - Easterlin (1995) Stevenson & Wolfers, Economic Growth and Happiness

15. Time Series: No rise in happiness, despite growth Stevenson & Wolfers, Economic Growth and Happiness

16. Japan: Well-Being versus GDP Stevenson & Wolfers, Economic Growth and Happiness

17. Japan: Economic Conditions and Well-Being Satisfactiont= 0.24*log(GDPt) – 0.06*Unemp -0.39*Break 1 – 0.57*Break 2 – 0.52*Break 3 n=51 (se) (0.06) (0.02) (0.07) (0.11) (0.14) Stevenson & Wolfers, Economic Growth and Happiness

18. European happiness trends Stevenson & Wolfers, Economic Growth and Happiness

19. International Panel Data Stevenson & Wolfers, Economic Growth and Happiness

20. Eurobarometer: Nine countries Stevenson & Wolfers, Economic Growth and Happiness

21. USA: Is it surprising that happiness hasn’t grown? Happinesst = 0.048 * Average log household income in GSSt [95% ci: -0.25 - +0.34]Happinesst = 0.058 * Average log household income in CPSt [95% ci: -0.21 – 0.33] Stevenson & Wolfers, Economic Growth and Happiness

22. Conclusion: Stylized facts about Wellbeing and Income • Within-country comparisons • USA • All countries • Between countries: • Through time • Multiple datasets • Both happiness and life satisfaction • No evidence of satiation • National Time Series • USA • Japan • Europe βwithin ≈ 0.2 – 0.4 βbetween ≈ 0.2 – 0.4 βtime series ≈ 0.2 – 0.4 Stevenson & Wolfers, Economic Growth and Happiness

23. Blank slide: End of talk Stevenson & Wolfers, Economic Growth and Happiness

24. Spare Slides • Background • Within-country • Between-country • National time series • International panel data • Broader measures of subjective well-being Stevenson & Wolfers, Economic Growth and Happiness

25. Yesterday’s Experiences Stevenson & Wolfers, Economic Growth and Happiness

26. Recalled feelings and GDP Stevenson & Wolfers, Economic Growth and Happiness

27. Bradburn: Recent Feelings and GDP Stevenson & Wolfers, Economic Growth and Happiness

28. Within-Country: Rich are Happier than Poor • Similar relationship holds in other countries and eras • “As far as I am aware, in every representative national survey ever done a significant bivariate relationship between happiness and income has been found.” – Easterlin (2001) Question: “In general, how happy would you say that you are?” %Very happy rising with income %unhappy falling with income Stevenson & Wolfers, Economic Growth and Happiness

29. Between-Country Estimates: Happiness & GNP Stevenson & Wolfers, Economic Growth and Happiness

30. Time Series: No rise in happiness, despite growth Stevenson & Wolfers, Economic Growth and Happiness

31. Implications of the Easterlin Paradox • “Why do national comparisons among countries and over time show an association between income and happiness which is so much weaker than, if not inconsistent with, that shown by within-country comparisons?” –Easterlin (1974) • Reference-dependent preferences • Relative income matters [Other people’s consumption matters] • Habit formation = hedonic treadmill [Other period’s consumption] • Policy implications: • Growth: “My results, along with mounting evidence from other time series studies of subjective well-being, do on balance undermine the view that a focus on economic growth is in the best interests of society.”–Easterlin (2005) • Public finance: If preferences are interdependent Pigouvian rationale for taxing labor supply / conspicuous consumption Stevenson & Wolfers, Economic Growth and Happiness

32. Subjective Well-being • “Subjective well-being refers to all of the various types of evaluations, both positive and negative, that people make of their lives. It includes reflective cognitive evaluations, such as life satisfaction and work satisfaction, interest and engagement, and affective reactions to life events, such as joy and sadness.” (Diener, 2005) • Typical questions: • Happiness • “Taking all things together, would you say you are: very happy; quite happy; not very happy; not at all happy.” • Life satisfaction • “All things considered, how satisfied are you with your life as a whole these days?” [1=Dissatisfied – 10=Satisfied] • Satisfaction ladder: • “Here is a ladder representing the ‘ladder of life’. Let's suppose the top of the ladder represents the best possible life for you, and the bottom, the worse possible life for you. On which step of the ladder do you feel you personally stand at the present time? [0-10 steps].” Stevenson & Wolfers, Economic Growth and Happiness

33. Alternative measures of average happiness Stevenson & Wolfers, Economic Growth and Happiness

34. Income-Happiness Relationship in GSS Stevenson & Wolfers, Economic Growth and Happiness

35. Within-Country: Rich are happier than poor Notes: ***, ** and * denote statistically significant at 1%, 5% and 10%, respectively. (Robust standard errors in parentheses, clustered by country.) Column 1: An ordered probit regression of well-being on log household income, and country fixed-effects Column 2: Adds gender, a quartic in age, and their interaction as controls Column 3: Instruments for log household income using indicator variables for levels of education. Second stage is an ordered probit regression of well-being on the predicted values, the residuals, and country fixed-effects. Column 4: The instrument set now includes indicator variables for levels of education, interacted with country dummies. Stevenson & Wolfers, Economic Growth and Happiness

36. Within-Country Variation: Gallup World Poll Stevenson & Wolfers, Economic Growth and Happiness

37. Between-Country GDP-Wellbeing Gradient Stevenson & Wolfers, Economic Growth and Happiness

38. Is there any evidence of satiation? • “if we compare countries, there is no evidence that richer countries are happier than poorer ones – so long as we confine ourselves to countries with incomes over $15,000 per head.” - Layard (2005) • Rich countries (GDP>$15,000) • Happiness=1.08*log(GDP) [se=0.19] • Poor countries (GDP<$15,000) • Happiness=0.35*log(GDP) [se=0.04] • A 1% rise in GDP: • Has three times larger effects in rich countries than poor countries • A $100 rise in GDP • 3x larger effect in Jamaica than US • 20x larger effect in Burundi than US Stevenson & Wolfers, Economic Growth and Happiness

39. Satisfaction v. Happiness (WVS) Stevenson & Wolfers, Economic Growth and Happiness

40. Happiness v. Life Satisfaction Stevenson & Wolfers, Economic Growth and Happiness

41. WVS: Comparing within- and between Stevenson & Wolfers, Economic Growth and Happiness

42. Income and Happiness: Cross-section v. Cross-country Stevenson & Wolfers, Economic Growth and Happiness

43. China “Overall how satisfied or dissatisfied are you with the way things are going in your life today?” Stevenson & Wolfers, Economic Growth and Happiness

44. Happiness and the Output Gap Stevenson & Wolfers, Economic Growth and Happiness

45. U.S. trends by education Stevenson & Wolfers, Economic Growth and Happiness

46. U.S. Happiness Trends by Race Stevenson & Wolfers, Economic Growth and Happiness

47. Gender Happiness Trends in the United States

48. World Values Survey Changes Stevenson & Wolfers, Economic Growth and Happiness

49. WVS: First diffs Stevenson & Wolfers, Economic Growth and Happiness

50. International Panel Data Stevenson & Wolfers, Economic Growth and Happiness