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.

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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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

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 2009www.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 Economics2004

Luttmer, Quarterly Journal of Economics 2005

GDA 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 1

Small 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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Happiness Real Income Per Capita

Life-satisfaction country averages

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1974 1982 1990 1998 2006

ItalyIreland

GermanyNetherlands

• 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

10.90

10.95

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11.15

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1991-1994 1995-1999 2000-2004

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.

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

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

0

10

20

30

40

50

1987 1999 2006

% 'cases'

males

females

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.