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Easterlin’s Paradox and the Macroeconomics of
Happiness
Andrew OswaldUniversity of Warwick
I would like to acknowledge that much of this work is joint
with coauthors Andrew Clark, Nick Powdthavee,
David G. Blanchflower, and Steve Wu.
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Is modern society going
in a sensible direction?
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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.
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The Man Behind the Easterlin
Paradox
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The relationship between income and well-being in
Japan over 25 years
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TZA
NGA
UGA
MDA
BGD
PAKGEO
VNM
ZWE
IND
ARM
IDN
AZE
MAR
EGY
PHL
JOR
ALB
CHN
UKR
SLV
PER
VEN
BLR
BIHDZA
COL
TUR
MKD
IRN
DOM
ROMBGR
URYBRA
RUS
MEX
LVA
CHL
ZAF
HRV
LTU
POL
ARG
ESTSVK
HUN
CZE
KOR
MLT
PRT
SVN
GRC
ISRESP
NZL
SGP
SWE
GBR
ITA
FIN
JPN
FRA
DEUBEL
NLDAUTISL
CAN
CHEDNK
USA
IRL
NORLUX
Australia
4
5
6
7
8
Life
Sa
tisfa
ction
, W
VS
Avera
ge
Sco
re (
1=
'Dis
sa
tisfied
' to 1
0=
'Sa
tisfie
d')
2000 5000 10000 20000 35000 60000GDP per capita in US$ at PPP (log scale)
Life Satisfaction = -0.9 + 0.8 * Log GDP (t=8.3)
World Values Survey
Life Satisfaction and GDP Per Capita
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Countries are happier if they have low
unemployment and inflation, and
generous welfare benefits.
The macroeconomics of happiness
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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.
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In a recession
there is a widespread decline in
mental well-being, we think
because of the generalized
insecurity.
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• In the early 70s, 33% of Americans
described their lives as very
happy, 52% as pretty happy, and
15% as not too happy.
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• 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%.
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A few years ago
Economists started thinking
harder about all this.
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Stiglitz Report 2009www.stiglitz-sen-fitoussi.fr
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The Stiglitz Commission Report
• advocates a shift of emphasis from
a “production-oriented”
measurement system … toward
broader measures of social
progress.
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“Emphasis on growth is
misguided”
“Beyond GDP”
“Measuring what matters”
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Happiness is the new GDP
Smile, and the economy smiles with you. Factory workers in Macedonia.
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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.
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Are there any questions people
would like to ask?
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We are constrained by
human nature:
Easterlin argued:
u = u(y, others’ y)
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• But is it right to believe that
humans are deeply concerned
with relative position?
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It has been found that
Relative-income variables show up consistently in well-being equations.
Blanchflower-Oswald, Journal of Public Economics2004
Luttmer, Quarterly Journal of Economics 2005
GDA Brown et al, Industrial Relations 2008
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Against whom do we compare
ourselves?
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Possibilities
Peer group/people like me
Others in the same household
Spouse/partner
Myself in the past
Friends
Neighbours
Work colleagues
“Expectations”
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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).
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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
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In the Netherlands and in
Switzerland, people seem to do
less comparing-against-others.
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1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
Net
herla
nds
Swite
rland
Finla
nd
Ger
man
y
Aust
ria
Belgiu
m
Unite
d Kin
gdom
Portugal
Irelan
d
Dan
emar
k
Norw
ay
Bul
garia
France
Hung
ary
Swed
en
Sloven
ia
Rus
sia
Eston
ia
Poland
Ukra
ine
Spain
Slovak
ia
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
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Other evidence for relativity
effects.
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1) This is Denmark
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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.
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• 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).
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Figure 1
Small neighbourhoods in the area of Taastrupgård, Høje Tåstrup
Source: Damm and Schultz-Nielsen (2008).
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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
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People like having a rich neighbourhood…and being on top of the ‘rank’ pile.
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Also, suicide and comparisons:
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“Dark contrasts: The paradox of high rates of
suicide in happy places” Daly et al JEBO 2011
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The pattern also holds in Europe
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US states in modern data
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Suicide dropped in NY after 9-11
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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).
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Overall, in humans
‘Relativity’ effects seem strong –
and not just in incomes.
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So what?
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So what?
Why might it matter to social
scientists if utility depends on
relative things?
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Some results from:
Easterlin, R. A. (2005). “Diminishing Marginal Utility of Income? Caveat Emptor”. Social Indicators Research. pp. 243-255.
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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.
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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
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So what happened as Japan became richer?
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Look at annual indices (1962=100) of
life satisfaction and real GNP per capita
for Japan, 1958-1987.
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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.
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In fact, happiness remained constant
despite Japan’s remarkable growth
What “should” have happened
What did happen
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The road to nowhere?
• Growth in income is now not
correlated with growth in
happiness
• This is the “Easterlin paradox”
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Average Happiness and Real GDP per Capita
for Repeated Cross-sections of Americans.
1.8
22.
22.
42.
6
Mea
n H
app
ines
s
1500
018
000
2100
024
000
Re
al G
DP
pe
r C
apita
1975 1980 1985 1990 1995Year
Real GDP per Capita Mean Happiness
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FIGURE 1: Happiness and Real Income Per Capita in the US, 1973-2004
0
0.5
1
1.5
2
2.5
3
1973 1977 1981 1985 1989 1993 1998 2003
Year
Aver
age
Hap
pin
ess
0
10000
20000
30000
40000
Real
Inco
me P
er
Cap
ita (
20
00
US
$)
Happiness Real Income Per Capita
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Life-satisfaction country averages
2.4
2.6
2.8
3
3.2
3.4
3.6
3.8
1974 1982 1990 1998 2006
ItalyIreland
GermanyNetherlands
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• There is also evidence, perhaps
not known to many economists, of
worsening mental health through
time in some countries.
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Average GHQ Psychological Distress Levels
Over Time in Britain: BHPS, 1991-2004
10.90
10.95
11.00
11.05
11.10
11.15
11.20
11.25
11.30A
vera
ge G
HQ
-12 (
likert
)
1991-1994 1995-1999 2000-2004
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Equivalent results have been
found for adults in the
Netherlands, UK and Belgium.
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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.
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Might this have something to do with work getting more stressful?
[Yes]
Work by Francis Green, Keith Whitfield, et al.
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0
5
10
15
20
25
30
1992 1997 2001 2006
%
Males Females
Proportion of High-Strain Jobs
Green (2008) Work Effort and Worker Well-Being in the Age of Affluence
Source: Skills Survey series
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What of well-being among
the young?
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Helen Sweeting et al
“GHQ increases among Scottish 15
year olds 1987–2006” Social Psychiatry
& Psychiatric Epidemiology (2008).
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Her team assesses whether life
is getting more stressful for
young people.
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It is.
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Mental strain in young Scots
0
10
20
30
40
50
1987 1999 2006
% 'cases'
males
females
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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.
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There has recently been a
critique of Easterlin’s idea
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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
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Their work is extremely valuable
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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.
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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
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Moreover, Stevenson and Wolfers
agree that Americans have if
anything become less happy over
the last 40 years.
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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]
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There is considerable evidence:
• (i) In the rich countries,
happiness is running flat or
declining
• (ii) Levels of GHQ mental-strain
are rising.
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These (uncomfortable) facts
raise fundamental intellectual
and policy questions for our
generation and beyond.
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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.