Nova workboard

a blog from young economists at Nova SBE

Can income buy happiness?

Denmark is repeatedly announced to be the world’s happiest country. Over the last decades, happiness has become a popular research topic on the economic agenda. The economist, Richard Ainley Easterlin, concludes in his article from 1974 that there is evidence of a positive correlation between output and welfare. He supports the idea that an escalation in human aspirations itself is due to an increase in output, and thus negates the expected positive impact on welfare. Recent economic research, however, is critical towards this theory. The figure 1 illustrates the correlation between the mean of happiness for each country in terms of GDP per capita measured in Euros. I have made the diagram based on European Social Survey Round 6 from 2012, where happiness is measured as “How satisfied are you with life?” on a scale from 0 to 10, where 10 is very satisfied. Based on the trend line, it seems there is a positive, approximate linear relationship between happiness mean and GDP per capita. As you can see, Denmark is placed in the right upper-corner showing that it is the country with the highest mean of happiness – and as well has a high GDP/capita. Is there economic evidence behind this conclusion or is it a case of important omitted variables?

Skærmbillede 2016-05-06 kl. 10.59.54It is nearly 40 years ago Richard Easterlin published his celebrated article: Does Economic Growth Improve the Human Lot?” His tentative answer was: No. The same article described the so-called Easterlin Paradox. The paradox suggests that there is no link between a society’s economic development and its average level of happiness. While richer countries (rated on GDP per capita) had citizens who declared themselves more satisfied with their lives than people in less affluent countries, it was not the conclusion that happiness increased with growth. The obvious conclusion was that growth is not happiness; the correlation between income and happiness could easily be attributed to third factors. Third factors in which both happiness and growth are increasing.

Today, a lot of researchers are in the belief that the Easterlin Paradox does not hold. In retrospect, the “error” is clear: no economist expects growth and changes in happiness linearly related. At least not if you just believe a bit in diminishing marginal utility. This simple realization has turned upside down the notion of the alleged paradox. Whether one looks at individuals or across communities, income growth and increases in happiness is positively related, given the diminishing marginal utility. The Paradox is resolved.

The paper ”Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox” by Justin Wolfers and Betsy Stevenson. re-assess the paradox analyzing multiple rich datasets spanning many decades. They establish a clear positive link between average levels of subjective well-being and GDP per capita across countries, and find no evidence of a satiation point beyond which wealthier countries have no further increases in subjective well-being. They show that the estimated relationship is consistent across many datasets and is similar to the relationship between subject well-being and income observed within countries. Finally, examining the relationship between changes in subjective well-being and income over time within countries they find economic growth associated with rising happiness. Together these findings indicate a clear role for absolute income and a more limited role for relative income comparisons in determining happiness.

Personally I am skeptical of happiness research in this context. In my view it is a better argument that it has proved near impossible to increase life expectancy and education levels in the communities with low economic growth. The environment also seems to suffer in these regimes. For me this is a more tangible measure of welfare; things we all (as citizens) should appreciate. But if you think happiness indicators are meaningful and comparable across individuals and society, it is important to keep in mind that these goals increases with absolute income.

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Author: studentnovasbe

Master student in Nova Sbe

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