money does matter! evidence from increasing real income and life satisfaction in east germany...

7/27/2019 Money Does Matter! Evidence From Increasing Real Income and Life Satisfaction in East Germany Following Reunification

1/12

American Economic Association

Money Does Matter! Evidence from Increasing Real Income and Life Satisfaction in EastGermany Following ReunificationAuthor(s): Paul Frijters, John P. Haisken-DeNew, Michael A. ShieldsSource: The American Economic Review, Vol. 94, No. 3 (Jun., 2004), pp. 730-740Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/3592950

Accessed: 04/10/2009 00:34

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at

http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless

you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you

may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at

http://www.jstor.org/action/showPublisher?publisherCode=aea.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed

page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact [email protected].

American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The

American Economic Review.

http://www.jstor.org
http://www.jstor.org/stable/3592950?origin=JSTOR-pdfhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/action/showPublisher?publisherCode=aeahttp://www.jstor.org/action/showPublisher?publisherCode=aeahttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/stable/3592950?origin=JSTOR-pdf


2/12

MoneyDoes Matter!Evidence romIncreasingReal Incomeand LifeSatisfaction n EastGermanyFollowingReunificationBy PAUL FRIJTERS, JOHN P. HAISKEN-DENEW, AND MICHAEL A. SHIELDS*

One of the most prominentpoliticalandeco-nomic events of recent decades was the fallingof the BerlinWall on November9, 1989, whichwas quicklyfollowed by the reunificationof theformerlyseparateentities of East and West Ger-many.It is well acknowledged hatthefalling ofthe wall was widely unanticipated n Germany(Stefan Bach and Harold Trabold,2000), andthus it provides some useful exogenous varia-tion with which we can more firmly establishcausality n empiricalanalyses.Inthispaper,weaim to contribute to the growing economicsliteratureon the determinants f life satisfaction(or happiness) by investigatinghow life satis-faction n EastGermany hangedover the decadefollowing reunification.1We areparticularlyn-terestedin identifyingthe contribution hat thesubstantialncreasein real householdincome inEast Germany in the post-reunificationyears(i.e., around60 percentbetween 1990 and2001)made to reported evels of life satisfaction.In orderto achieve this aim, we applya newconditionalfixed-effect ordinalestimator o ourmeasureof life satisfactionusing data from theGermanSocio-Economic Panel (GSOEP).Theestimates fromthis new model arethen decom-posed, using a new causaltechnique, n ordertoidentify the factorsthat drove average changesin life satisfactionin East Germany followingreunification.Ourmethodology exploits the fact

* Frijters:Research School for Social Sciences (Eco-nomics Program),HC Coombs Building, AustralianNa-tional University, ACT, Australia 0200 (e-mail:[email protected]); aisken-DeNew: RWI, Hohen-zollernstrasse 1-3, 45128 Essen, Germany (e-mail:[email protected]); Shields: Department ofEconomics,Universityof Melbourne,Parkville,Melbourne3010, Australia (e-mail: [email protected]).Weare gratefulto an anonymousreferee for valuable sugges-tions. We would also like to thank K. Shields, KristinaLiljefors,W. Paul DeNew, Michael Veall, Klaus Zimmer-mann,and GertWagnerfor useful comments.1A detailedinvestigationof changes in life satisfactionfor West Germans,as well as additional details for EastGermans,can be found in Frijterset al. (2004).

that the GSOEP is an evolving panel, allowingus to makea distinctionamong changesin vari-ables affecting everyone, changes in the aggre-gate unobservedfixed individual characteristicsof the panel due to new entrants(who are alsomostly youngercohorts),and panel attrition.In Section I, we brieflyreview the literatureand describeour data.In Section II, we presentthe fixed-effectmethodologyand the causal de-compositionapproach hat we adopt.SectionIIIpresents the results. Finally, Section IVconcludes.

I. Literatureand DataA. Literature

The investigationof the factorsaffectinghu-man life satisfactionor happinessis central tothe discipline of psychology, but economistshave become increasinglyactive in this field inrecent years.2 In particular,economists havebeen interested n establishingthe relationshipsbetween income, unemploymentand life satis-faction. While there is a firm consensus basedon both cross-sectional and longitudinal datathatunemploymenteadsto a substantialoss oflife satisfactionregardlessof the exact defini-tion of life satisfaction, herelationshipbetweenincome and satisfaction is less clear. Perhapsthe most widely accepted viewpoint is that in-2 For informative reviews and recent contributions butnot an exhaustive list), see Andrew Clark and AndrewOswald, 1994; Clarket al., 1996; Knut Gerlachand Gesine

Stephan,1996; Tomas Korpi, 1997; Oswald, 1997; IoannisTheodossiou, 1998; Liliana Winkelmann and RainerWinkelmann,1998;Daniel Kahneman t al., 1999;BrunoS.Frey and Alois Stutzer, 2000; Frijters, 2000; MarianneBertrand and Sendhil Mullainathan, 2001; Clark et al.,2001; RaphaelDi Tella et al., 2001; RichardA. Easterlin,2001; Michael McBride, 2001; MartinRavallion and Mi-chael Lokshin, 2001; Ada Ferrer-i-Carbonell nd BernardM. S. van Praag,2002; Freyand Stutzer,2002; Shields andAllan Wailoo, 2002; Clark, 2003; Di Tella et al., 2003;Ferrer-i-Carbonellnd Frijters,2004; Frijterset al., 2004.730


3/12


4/12

THEAMERICANECONOMICREVIEWTABLE 1 THE DISTRIBUTION OF LIFE SATISFACTION INEASTGERMANYYGENDER,991 AND 001

1991 2001Percentage Males Females Males Females10 (very satisfied) 1.5 1.6 1.0 1.5(0.32) (0.30) (0.28) (0.34)9 3.7 4.2 3.5 4.8

(0.48) (0.50) (0.53) (0.60)8 18.7 17.6 25.4 25.3

(0.10) (0.96) (1.25) (1.2)7 21.8 19.3 27.3 27.0(1.07) (0.99) (1.28) (1.3)6 14.1 14.4 15.7 12.5(0.90) (0.88) (1.05) (0.93)5 22.4 25.2 15.0 18.3(1.08) (1.11) (1.03) (1.09)4 7.3 6.5 5.4 5.5(0.67) (0.63) (0.65) (0.64)3 6.1 6.5 4.5 3.1(0.62) (0.62) (0.60) (0.49)2 2.5 2.5 0.7 1.1(0.40) (0.39) (0.25) (0.29)

1 0.7 0.8 1.0 0.8(0.22) (0.22) (0.28) (0.25)0 (very unsatisfied) 1.2 1.5 0.5 0.1(0.28) (0.30) (0.20) (0.10)

Mean 6.00 5.93 6.42 6.51Observations 1,504 1,582 1,211 1,262Notes: Standarderrors of mean values are in parentheses.The mean values for 2001 are significantlyhigher at the95-percentconfidence level than for 1991, for both malesand females.

between 1991 and 2001. The mainchangeis theincrease in the percentage of respondentsre-porting satisfaction scores of 7 and 8, and adecline in those reportingscores between 1 and5. Thereappearsto be little change in the per-centage reportingscores of 9 or above over thisperiod.II. Econometric Framework and Decomposition

ApproachA. Fixed-Effects

The recent psychology literature has foundthat fixed personality traits are very importantpredictors of general satisfaction (see, for ex-ample, Michael Argyle, 1999; Diener and Rich-

ard E. Lucas, 1999). Lacking these variables,we use the following fixed-effect ordered ogitmodel developedin Ferrer-i-CarbonellndFri-jters (2004) in order to correct for the presenceof such unobservables:5(1) GS* = x,t + 8, + fi + Ei,

GS,, = k X GS* E [Ak, Ak+ )where GS* is latent life satisfaction; GSit isobserved satisfaction; Ak is the cut-off point(increasing n k) for the satisfactionanswers;xi,are the observabletime-varyingcharacteristics;8, denotesunobserved ime-varyinggeneralcir-cumstances; i is an individual fixed character-istic and sit is a time-varying logit-distributederrorterm that is orthogonalto all characteris-tics. Our conditional estimator for 6, and ,3maximizesthefollowing conditional ikelihood:

(2) L I(GSi > ki),... I(GSiT> ki)

I(GS >ki) = ctT

eE I(GSi,>ki)xi,_ TTe e, I(GSit>ki)xit

GSS(ki ,c)

which is the likelihood of observing which ofthe T satisfactions of the same individual areabove ki, given that there are c out of the Tsatisfactions that are above ki. Here, S(ki, c)denotes the set of all possible combinationsof{GSi, ..., GSiT} such that Et I(GSit > ki) = c,where GSit is used to denote the randomvari-able and GSit,the realization.

5Most of the studies thathave used panel datato exam-ine the determinantsof life satisfaction have tested theappropriateness f the random effects versus fixed-effectsspecifications. In each case, the random-effects model,based on the assumptionthat the unobservable ndividualeffect (e.g., personalitytraits)is uncorrelatedwith the ex-planatoryvariables, s clearlyrejected.Our own test resultssupport his finding; hereforewe only reportresultsfor thefixed-effects specification n this paper.

JUNE 200432


5/12

FRIJTERSET AL.: REALINCOMEAND LIFE SATISFACTIONThis model is an extension of the fixed-effect

logit model by Gary Chamberlain 1980). Un-like the Chamberlainmethodology, which im-poses a common threshold oreveryone (say, k),our model uses person-specificthresholds(say,ki). When some individualsonly reportvaluesbetween4 and6, andothersonly between7 and9, thenthe use of the same barrier or everyonecannot recordchanges for both groupsof indi-viduals. Some individuals then have to bedroppedfrom the estimation procedure.Withindividual specific barriers all individualswhose satisfactionsdiffer over time can be in-cluded. The most importantadvantageis thatthis allows us to use more than 90 percentof theobservations.In comparison, he loss of datainapplications with the Chamberlain method isusually close to 50 percent (see, for example,Winkelmann and Winkelmann, 1998; Clarketal., 2001; Daniel S. Hamermesh,2001; Clark,2003).

B. ExplanatoryVariablesFollowing the previousliteraturewe includethe most commonly used observable time-varying predictorsof life satisfaction,which aremaritalstatus,numberof children,health, em-ployment status, and real household monthlyincome.Ourmeasureof health s less subjectivethan most, and is based on whetheror not theindividual is registeredas being disabled andthe extent of theirdisability(which is measuredin percentage terms). In addition, given the"caring" esponsibilitiesthatmany of the sam-ple respondents report we also control forwhether there is an invalid in the household

(usually the spouse or a parent).We have alsobeen ableto derivea "Border" ariableequalingunity if the respondentlives on the border ofEast and West Germany(zero otherwise). Thelatter variable is included because we mightexpect the immediate effect of reunificationonthose living in a region on the border to berelatively higher.In orderto capturechanges inaggregate circumstances we also includedummyvariables for each year. Since we can-not simultaneously dentify the effects of agingand time with our panel data, the aging of thepanel complicatesthe interpretation f the timedummies.We will discuss this in more detail inthe results section. We fit separatemodels for

males andfemales to allow the determinantsoflife satisfactionto differ by gender.C. Causal DecompositionAnalysis

We decompose changes in expected latentsatisfactionfor East Germanmen and womenseparately n the post-reunification eriodusingthe estimates from the fixed-effects models.This means we analyze:(3) E{GS*+ - GS*} = (x,+ -x,)

+ (ST+- ^) + (E,+If- Etf).Denote the set of East Germanswho are in thesampleat time t andat time t + 1 as St.For theindividualsn St(thebalancedpanel), his decom-positionis straightforward,ecausefor these in-dividuals,(Et+ f - Etf) = 0. A complicatingfactorariseswhenwe consider he importance fthoseindividualswho areonly observed n eithert or t + 1, i.e. the inflows and outflowsof theGSOEP.For these individuals, t+ l - xt)/ +(6t+ - t) is still easily computed, but the un-knowncomponent Et+ f - Etf) poses a prob-lem. This term is only equal to zero when thedistributionf the unknown haracteristicss con-stantover time. This is clearlyvery improbablebecause, orexample,educationevels andexpec-tationswill differ.Fromthe fixed-effectorderedlogit results alone, there is no informationon(E+ if - Etf). So we haveto use extra nforma-tion in order o get an estimateof this term.In order to obtain an estimate of (Et+ f -Etf), we make the following assumption:(4)E{GS(GS* + A) - GS(GS*)} = Ai + o-(A)where A is an arbitrary mall increasein latentlife satisfaction,andthe o-(A)is the approxima-tion errorwhich we will ignore in the remain-der.This assumption mplies that the change inobservedsatisfaction s (by approximation)in-ear in the change in latent satisfaction. Theresponsivenessitself, L, is takento be constantover time. This first-orderapproximationcannow be used by noting that we can estimate ,Lby calculating,for those individualswhom weobservein all time periods,whatthe responseis

733OL.94 NO. 3


6/12

THEAMERICANECONOMICREVIEWof the observed satisfactionlevels to the esti-mated changes in latent satisfaction. A consis-tent estimatorfor ,J is therefore:

E E (GSt +- Gs,)(5) 1 t StE (Zit+ - Zit)

t St

wherez, includesbothxt and the time dummies,and where y includes j3 and 6. Having thisestimate of pL,we can now use this to obtainanestimate of (E,+ f - Etf):(6)

GSt+1 - GSt(E,f- E,f) = -(+ -

This captures he degreeof changesin the sam-ple compositionover time. In order to provideadditional nsight into the factors affecting lifesatisfactionwe furtherdecompose (Zt+ - zt)7into separategroups of variables. In particular,we decompose the total changes in latent satis-faction into changes in:1. Householdincome.2. Employment status variables: employed,nonparticipation,part-time employed, onmaternity eave.3. Family-relatedvariables: he numberof chil-dren, marital status, divorced, separated,widowed.4. Health-related ariables:whethersomeone isdisabledandthe level of disability, nvalid inhousehold.5. Living in a region on the border.6. Time (which also includes the effects ofaging).7. Theunobservedndividual-effectsistribution.

It is possible to attacha causalexplanation othe changes due to groups 1 to 5. Given thechangesin characteristics,hey explaina partofthe changes in latent satisfaction levels. Thechangesdueto groups6 and 7 arenotexplainedby anythingobservedandhence formthe "true"unexplainedpartof the changes over time. Thelarger these terms, the less well our variables

capture the importantaspects of the changesover time.We can construct confidence intervals formost elements in the decompositionby notingthat,because 3 -~ N(3, E), it holds that(x+1 -X ~N((x- , - xf, (X,l -x -xt'). When we replace E with its MaximumLikelihood estimate, this yields confidence in-tervals. Since the term (GSt+1 - GSt)/I inthe formula (Et+1f - Etf) in (6) is not wellbehaved (i.e., there is no a priorireason for itto have a bounded mean or variance), wecannotuse standard nference or bootstrappingmethods to compute confidence bands for(Et+ f - Etf). So what we reportis whether(Et+ f - Etf) containszeroin the set of valueswhen each of the stochastic elements in(E+ lf - Etf) can range in its 95-percentconfidenceinterval.

III. EmpiricalResultsA. Fixed-EffectsResults

Table 2 provides the causal estimates fromthe fixed-effect orderedlogit models for EastGermanmales and females, respectively. Un-fortunately, the fixed-effects model does notprovideestimatesof the probabilitiesof havinga particularevel of life satisfaction,so it has noMarginalEffects (ME) proper. By approxima-tion, however, an increase of 1 in a variablewith coefficient f has an effect of i/3 on ex-pected life satisfaction.We find thatbothemploymentstatusandrealhousehold ncome areimportant redictors f lifesatisfaction for East Germans. A one-unit in-crease in log income leads to around a 0.5increase in life satisfaction for both men andwomen.This largeeffect concurswiththeecon-omists' intuition that money should matter agreatdeal, even thoughmany otherstudiesfindonly small effects (see Oswald, 1997). Simi-larly, being employed, either full or parttime,leads to a substantialsatisfactiongain for bothgenders. In fact, being a nonparticipant, venfor males, is associatedwith a far higher satis-factionrelativeto being unemployed.These ef-fects are large, with full-time employment

734 JUNE 2004


7/12

FRIJTERSET AL.: REALINCOMEAND LIFESATISFACTIONTABLE 2-THE DETERMINANTS OF LIFE SATISFACTION FOR EAST GERMAN MALES AND

FEMALES: ORDERED LOGIT MODELS WITH FIXED EFFECTS

Males FemalesCovariates 3 t-stat /3 t-statMarriedSeparatedDivorcedWidowed

0.2710.0690.3060.464

1.980.291.461.49

-0.0380.1340.2090.192

0.270.641.140.81Numberof childrenDisabledLevel of disabilityInvalidin household

0.110-0.260-0.009-0.310

Employedfull timeEmployedparttimeMaternity eaveNonparticipantLog real householdincome(post-tax)

0.7040.4680.561

2.76 0.0670.981.921.99

11.452.306.22

0.855 12.44

Live on the border of East andWest Germany1992199319941995199619971998199920002001Mean log-likelihood

IndividualsIndividuals

-0.572

-0.074-0.0310.1140.3070.2350.1040.2930.5310.3600.288-3.5750.641

1,796

3.68

0.920.381.423.672.811.243.446.104.083.20

0.108

0.0730.1520.0600.2300.2890.1590.3420.5280.3870.456

0.70

0.931.930.762.843.521.904.056.224.535.12

-3.7040.764

1,852Notes: The omittedcategories are single, no disability, no invalid in the household, unem-ployed (maternityeave was not included n the male model), not living on the borderof EastandWestGermanyand 1991.By approximation, n increaseof 1 in a variablewith coefficientB has an effect of Ap on expectedlife satisfaction.

leading to a 0.451 (=0.704*0.641) increase insatisfactionor males anda 0.574 (=0.751*0.764)increase or females. It is thereforeclear that t isnot the most unobservably"unhappy" r "pes-simistic" who are observed in unemployment,and this firmlypoints to the involuntarynatureof unemployment for both sexes (Clark andOswald, 1994).As to marriage,divorce, separationand wid-

owhood, it is importanto keep in mindthatthereferencegroup is those who have never beenmarried.Having been married s hence clearlyfavored above never being marriedfor males,but no such effect is found for females. Incontrast to our expectations, we find no evi-dencethatbecomingseparated rdivorcedcausesa loss in satisfaction or East Germans.Forbothmales and females, children have a positive

-0.009-0.003-0.5970.7510.7410.8640.6380.717

1.640.040.723.92

12.209.407.327.93

11.30

735OL.94 NO. 3


8/12

THEAMERICANECONOMICREVIEWeffect on life satisfaction.Interestingly, he gainin satisfactionof having an additional child isgreater or men (0.071) than for women (0.051).Both having a disability and the extent ofdisabilityarenegativelyassociatedwith life sat-isfaction. However, these effects are not pre-cisely determined,with the level of disabilityfor males being the only variableto be statisti-cally significant.In contrast,having an invalidin the household(otherthanoneself) leads to asubstantial loss in life satisfaction, which ismuch greater for females (0.456) than males(0.199). This could tentativelyreflect the factthatfemales typically carrymuch of the caringresponsibilityfor an invalid spouse or parent.Turningo thereunificationariables, e find hatlivingon the borderof East and WestGermanysassociatedwith a large oss of life satisfactionormales (0.367), but not for females. This is a dif-ficult result to explain,as our expectationwouldbe that ivingon the borderwould be satisfaction-enhancinggiven the close proximity o manyofthe "better" ublic amenities n the West (espe-cially in the first few years following reunifica-tion).Perhapshereason or this result s preciselybecauseEastGermansnearthe borderare moreinfluencedby unfavorable omparisonswith theWest Germans han the other East Germansare.

The time profilestell an interesting tory.Forbothmales and emales herewas a clear mprove-mentin aggregate ircumstances ver the decade.Life satisfaction,however,peakedin 1999, withsatisfactionbeing 0.340 and 0.404 higher formales and females, respectively,than in 1991.Examples of such improvedcircumstancesaregreaterpersonal reedomandmobility,and betterhousingand public services.However,as notedearlier,given the panel nature of our data wecannotdisentanglehe effects of aging nthepanelfrom the time effects. While many studiesusingcross-sectional or random-effectsmodels havefound a U-shaped relationshipbetween age andlife satisfaction, he marginaleffect of an addi-tionalyearof age at any pointin the age distribu-tionis typicallyverysmall. Thus we wouldarguethat the agingof the panelis not the maincom-ponentof the time effects.

B. DecompositionResultsThe results from our decomposition analysesfor East German males and females are pro-

videdin Tables 3 and4, respectively.In order oexplore whether reunification benefited somegroups more than others,we also provide sep-arateresults for younger (i.e., those undertheage of 40, 61 percentof sample)and older(i.e.,40 years or over, 39 percent of sample) EastGermans,as well as for the more highly edu-cated (i.e., 12 or more years of schooling, 35percentof sample)and the lower educated(i.e.,less than 12 years of schooling, 65 percentofsample).Beginning with females, we see that in thefive years after transition average latent lifesatisfaction increased by 0.567. Higher realhouseholdincome accountedforjust over two-fifths (0.255) of this increase,with unobservedaggregate variables accounting for the lion'sshareof the rest(0.289). Real household ncomeincreaseswere from DM 2,662 to DM 3,751 (a41-percent increase) per month in this period.These gains were somewhatoffset by negativechanges in job status (the unemploymentrateincreased or females from 10.4 percent n 1991to 16.8 percent by 1996). Changes in familycircumstancesand health circumstancesseemon averageto have had little effect on life sat-isfaction in this period. The findings on theunobserved component suggest that the newentrants into the panel (who were typicallyyounger) were structurallyhappier than theolder female cohorts.The decomposition results differ consider-ably for the lateryears following reunification.Although average latent life satisfaction in-creasedby 0.177 between 1996 and 2001, thiscan mostly be attributedo the higher aggregateunobservedvariables: he generalchangein lifesatisfactioncapturedby the year variablesre-mained important(0.167), suggesting that thegeneral living environment for example,polit-ical and social, since we capture economicchanges throughthe income andjob variables)for EastGerman emales further mprovedafter1996. Therewere additional small negative ef-fects stemmingfromfamily and healthchanges.Turningto East Germanmales, we find thataveragelatent life satisfaction n East Germanyroseby 0.689 over theperiod1991 to 2001 (i.e.,=0.545 + 0.144). As with the total changefound for females (0.744), the size of this im-provementin life satisfaction for males over aone decade time period is very large by inter-

JUNE 200436


9/12

FRIJTERSET AL.: REALINCOMEAND LIFE SATISFACTIONTABLE3-DECOMPOSITIONRESULTS OREAST GERMANMALES

From -> to Year Income Job Family Health Border f TotalAll males1991 - 1996 0.235* 0.281* -0.042* -0.039* 0.002* -0.006* 0.115 0.5451996 -2001 0.052 -0.004* -0.019* -0.028* -0.002* -0.005* 0.150* 0.144Youngermales1991 - 1996 0.303* 0.238* -0.030* -0.044* 0.010* -0.009* 0.210* 0.6781996 2001 -0.084 0.007* -0.039* -0.031* -0.007* 0.000* 0.181* 0.027Oldermales1991 -- 1996 0.153 0.378* -0.078* -0.048* 0.000 -0.002 -0.104 0.2981996 - 2001 0.430* -0.054* -0.023* -0.013 -0.006 -0.005 -0.077 0.253Low-educatedmales1991 - 1996 0.205* 0.236* -0.059* -0.041* 0.003 0.000 0.160* 0.5041996 2001 0.032 -0.003* -0.025* -0.025* -0.002 -0.002 0.156* 0.131High-educatedmales1991 - 1996 0.262 0.399* -0.025* -0.001 0.007 -0.044* 0.021 0.6191996 2001 0.093 -0.006* 0.008 -0.013 -0.005 -0.007* 0.100 0.169Notes: * indicates statisticalsignificanceat the 95-percentconfidence level. No significancelevel is providedfor "Total."Youngermales andfemales aredefined as those underthe age of 40, Oldermales and females aredefinedas being over 39years of age. Low educatedis defined as having less than 12 years of schooling, High educatedis definedas having 12 ormore yearsof schooling. To aid interpretation f these results we providethe following example: Looking at the resultsforall males over the period 1991-1996, averagelatent life satisfaction ncreasedby 0.545. Of this increase,0.281 is explainedby real income changes,0.235 is explained by aggregatechanges affectingall EastGermans,andthe remainders accountedfor by changesin the fixed-effectsdistribution 0.115). Very little is explainedby changes in the otherexplanatoryvariablesused in the model, e.g., health-relatedvariables.

TABLE4--DECOMPOSITIONESULTSFOREASTGERMANFEMALES

From -- to Year Income Job Family Health Border f TotalAll females1991 -- 1996 0.289* 0.255* -0.051* -0.006 0.001 0.000 0.080 0.5671996 - 2001 0.167* 0.005* 0.011 -0.007 -0.003 0.001 0.003 0.177Youngerfemales1991 -1996 0.222* 0.257* -0.038* 0.000 0.006* 0.002 0.146 0.5951996 - 2001 0.013 -0.008* -0.008 -0.004 0.004 0.003 0.181* 0.181Olderfemales1991 - 1996 0.324* 0.256* -0.057* -0.032* -0.004 0.004 0.023 0.5141996 - 2001 0.457* 0.006* 0.015* -0.013 -0.030* 0.000 -0.370* 0.064Low-educatedfemales

1991 > 1996 0.290* 0.219* -0.074* -0.003 0.001 -0.002 -0.021 0.4111996 - 2001 0.060 0.004* 0.016* -0.003 -0.003 0.002 0.035 0.112High-educated emales1991 -- 1996 0.292* 0.310* -0.015 -0.012 0.005 -0.004 0.318* 0.8951996 - 2001 0.344* -0.016* -0.009 -0.004 -0.007 -0.004 -0.063 0.241

Note: See notes to Table 3.

national standards. About one-third of this is year variables, increased life satisfaction byexplained by increases in real income (0.276), 0.288; however, once again this occurred in thewhich entirely occurred between 1991 and first few years following reunification. The con-1996. General circumstances, captured by the tribution of the combined effect of new entrants

VOL.94 NO. 3 737


10/12

THE AMERICANECONOMICREVIEW

and exits from the panel was to increaseunob-served individual effects steadily throughoutthis period by a cumulative 0.265 (i.e., =0.115 + 0.150). Apartfromthese main effects,we finda small fall attributableo worsening oboutcomes (unemploymentrose for men from7.1 percentin 1991 to 12.2 percent by 2001).Family circumstancesalso slightly deterioratedin this period,with the health and bordervari-ablescontributingittle to the aggregate hanges.From separate analyses, we also find evi-dence of differentialschangesin life satisfactionin the post-reunificationby age groupand edu-cation level.6 Most notably,for both males andfemales,those agedunder40 experienced argersatisfactiongains than their older counterparts.For example, latent life satisfactionfor youngmales increased by 0.705 between 1991 and2001, with the vast majorityof this improve-mentoccurringbetween 1991 and 1996. In con-trast,oldermales experienceda total increase of0.551 between 1991 and 2001. Interestingly,real income increasesexplaineda largerpropor-tion of these total changes for the older group(for males 59 percent;for females 45 percent)than the younger group (for males 35 percent;for females 32 percent). Similarly, the morehighly educatedsaw greatersatisfactiongrowthover the decade than the less educated. Thelatter differential is clearly more pronouncedfor females (1.136 compared to 0.523) thanmales (0.788 compared o 0.635). However,therole played by income changes was greaterfor the more educated males than those withfewer years of education(50 percent comparedto 37 percent),while the opposite was the casefor females (26 percent compared to 43percent).The main conclusions from the decomposi-tion analyses are that higher real householdincomes following reunification ed to signifi-cant gains in satisfaction levels for East Ger-many. The largest effects, however, wereclearly seen in the immediatepost-reunificationyears.Furthermore,he improvementn life sat-isfactionwas greatestfor the youngerandmorehighly educatedEast Germans.

6 For brevity,we do not includethe parameter stimatesfor these separatemodels.However,they are availablefromthe authorson request.

IV. ConclusionsRecent years have seen a growth of interestby economists in the determinantsof life satis-factionandhappiness.In thispaper,we contrib-

ute to this literatureby investigatinghow lifesatisfactionchangedas a result of a large-scaleexogenous shock-German reunification. Inparticular,we are interested n establishingtherole of the increased real householdincome inimprovinglife satisfaction.Life satisfactioninEast Germanywas significantlybelow that ofWestGermany hroughouthe decadefollowingreunification.However,there was clearconver-gence resultingfrom a continual ncreasein lifesatisfactionin East Germanyup until 1999.We implementeda new fixed-effectestimatorfor ordinal life satisfaction in the GermanSocio-EconomicPanel (1991-2001) anddevel-oped a decompositionapproachwhich accountsfor the differingunobservablecharacteristics fnew entrantsand exits from the panel. As withpreviousstudies for othercountries,we findthatincome and employmentstatus are very impor-tantpredictorsof life satisfaction.Importantly,our decompositionresults suggest that around35-40 percentof the increase n life satisfactionin East Germanywas attributable o the largeincreasein real householdincomes. Therewerealso clear improvementsin aggregatecircum-stances,such as improvedpersonal reedomandpublicservices.We further ind thattheyoungerand more highly educatedEast Germansexpe-rienced the largest improvements n life satis-faction following reunification.Finally,our resultsclearly emphasizethe im-portanceof controllingfor changesin the fixed-effects distributionwhen using an unbalancedpanel (with new entrantsand attrition)dataforeconometricanalysis.Failure o control forsucheffects would have led us to overestimatetherole that exogenous income changes had onimprovinglife satisfaction. Our futureresearchaims to furtheruntangle the improvementinaggregatecircumstancesby using disaggregatedregionaldata on housing and public services.

REFERENCESArgyle,Michael."Causesand Correlatesof Hap-

piness,"in Daniel Kahneman,Ed Diener,andNorbertSchwarz, eds., Foundationsof hedo-

JUNE 200438


11/12

FRIJTERSETAL.: REALINCOMEAND LIFESATISFACTIONnicpsychology: Scientificperspectiveson en-joyment and suffering. New York: RussellSage Foundation, 1999, pp. 353-73.Bach, Stefanand Trabold,Harold. "Ten Yearsafter GermanMonetary,Economic and So-cial Union: An Introduction." QuarterlyJournal of EconomicResearch, 2000, 69(2),pp. 149-51.Bertrand,Marianne and Mullainthan,Sendhil."Do People Mean What They Say? Implica-tions for SubjectiveSurveyData."AmericanEconomic Review, May 2001 (Papers andProceedings), 91(2), pp. 67-72.Chamberlain,Gary. "Analysis of Covariancewith QualitativeData."Review of EconomicStudies,January1980, 47(1), pp. 225-38.

Clark,AndrewE. "Unemploymentas a SocialNorm: Psychological Evidence from PanelData." Journal of Labor Economics, April2003, 21(2), pp. 323-51.Clark,AndrewE.; Georgellis,Yannisand San-frey,Peter."Scarring:The Psychological Im-pact of Past Unemployment."Economica,May 2001, 68(270), pp. 221-41.Clark,AndrewE. and Oswald,AndrewJ. "Un-happiness and Unemployment." EconomicJournal,May 1994, 104(424), pp. 648-59.Clark,AndrewE.; Oswald,AndrewJ. andWarr,PeterB. "IsJob SatisfactionU-shapedn Age?"Journal of Occupationaland OrganizationalPsychology,March1996,69(1), pp. 57-81.Diener,Ed and Lucas,Richard E. "Personalityand SubjectiveWell-Being,"in Daniel Kah-neman, Ed Diener, and Norbert Schwarz,eds., Foundations of hedonic psychology:Scientificperspectiveson enjoymentand suf-fering. New York:Russell Sage Foundation,1999, pp. 213-29.Diener, Ed and Oishi, Shigehiro."Money andHappiness: Income and Subjective Well-Being across Nations," in Ed Diener andEunkookM. Suh, eds., Culture and subjec-tive well-being. Cambridge,MA: MIT Press,2000, pp. 185-218.Di Tella, Raphael;MacCulloch,Robert J. andOswald,AndrewJ. "Preferencesover Infla-tion andUnemployment:Evidence from Sur-veys of Happiness." American EconomicReview,March2001, 91(1), pp. 335-41.. "TheMacroeconomicsof Happiness."Reviewof Economicsand Statistics,Novem-ber 2003, 85(4), pp. 809-27.

Easterlin,RichardA. "Will Raising the Incomeof All Increasethe Happinessof All?"Jour-nal of Economic Behaviour and Organiza-tion, June 1995, 27(1), pp. 35-47.. "Incomeand Happiness:TowardsanUnified Theory." Economic Journal, July2001, 111(473), pp. 465-84.Ferrer-i-Carbonell, da and Frijters,Paul."TheEffect of Methodology on the Determinantsof Happiness." Economic Journal, 2004(forthcoming).Ferrer-i-Carbonell, da and van Praag,BernardM.S."TheSubjectiveCosts of HealthLossesDue to Chronic Diseases: An AlternativeModel for MonetaryAppraisal."HealthEco-nomics, December2002, 11(8), pp. 709-22.

Frey, Bruno S. and Stutzer,Alois. "Happiness,Economy and Institutions."EconomicJour-nal, October2000, 110(466), pp. 918-38.. "What Can Economists Learn fromHappinessResearch?"Journal of EconomicLiterature,June 2002, 40(2), pp. 402-35.Frijters,Paul."Do IndividualsTryto MaximizeGeneralSatisfaction?"Journal of EconomicPsychology, June2000, 21(3), pp. 281-304.Frijters, Paul; Haisken-DeNew,John P. andShields,MichaelA. "InvestigatinghePatternsandDeterminantsof Life Satisfaction n Ger-many following Reunification." Journal ofHumanResources,2004 (forthcoming).Gerlach,KnutandStephan,Gesine."APaperonUnhappiness and Unemployment in Ger-many."EconomicsLetters,September1996,52(3), pp. 325-30.Haisken-DeNew,John P. and Frick, Joachim."DesktopCompanionto the GermanSocio-Economic Panel Study (GSOEP)."GermanInstitute for Economic Research, Berlin,2000.

Hamermesh,Daniel S. "TheChangingDistribu-tion of Job Satisfaction."Journal of HumanResources,Winter2001, 36(1), pp. 1-30.Kahneman,Daniel; Diener, Ed and Schwarz,Norbert, eds. Foundations of hedonic psy-chology:Scientificperspectiveson enjoymentand suffering.New York:Russel Sage Foun-dation, 1999.Korpi, Tomas. "Is Utility Related to Employ-ment Status? Employment, Unemployment,LaborMarketPolicies and SubjectiveWell-Being among Swedish Youth." LabourEco-nomics, June 1997, 4(2), pp. 125-47.

VOL. 94 NO. 3 739


12/12

THEAMERICANECONOMICREVIEW

McBride, Michael. "Relative-Income Effectson Subjective Well-Being in the Cross-Section." Journal of Economic Behaviourand Organization, July 2001, Spec. Iss.,45(3), pp. 251-78.Oswald,AndrewJ. "Happinessand EconomicPerformance."EconomicJournal,November1997, 107(445), pp. 1815-31.Ravallion,Martinand Loskin,Michael. "Identi-fying WelfareEffects from SubjectiveQues-tions." Economica, August 2001, 68(271),pp. 335-57.Shields,MichaelA. and Wailoo,Allan."Explor-

ing the Determinants f Unhappiness or Eth-nic Minority Men in Britain." ScottishJournal of Political Economy, September2002, 49(4), pp. 445-66.Theodossiou, oannis."The Effects of Low-Payand Unemploymenton Psychological Well-Being: A Logistic Regression Approach."Journalof Health Economics,January1998,17(1), pp. 85-104.Winkelmann,Lilianaand Winkelmann,Rainer."Why Are the Unemployed So Unhappy?EvidencefromPanelData."Economica,Feb-ruary1998, 65(257), pp. 1-15.

740 JUNE 2004

money does matter! evidence from increasing real income and life satisfaction in east germany...

Documents