Report

Subjective Well-Being, Income, Economic Development and Growth

Betsey Stevenson, Daniel W. Sacks, and Justin Wolfers

Abstract

We explore the relationships between subjective well-being and income, as seen across individuals within a given country, between countries in a given year, and as a country grows through time. We show that richer individuals in a given country are more satisfied with their lives than are poorer individuals, and establish that this relationship is similar in most countries around the world. Turning to the relationship between countries, we show that average life satisfaction is higher in countries with greater GDP per capita. The magnitude of the satisfaction-income gradient is roughly the same whether we compare individuals or countries, suggesting that absolute income plays an important role in influencing well-being. Finally, studying changes in satisfaction over time, we find that as countries experience economic growth, their citizens‘ life satisfaction typically grows, and that those countries experiencing more rapid economic growth also tend to experience more rapid growth in life satisfaction. These results together suggest that measured subjective well-being grows hand in hand with material living standards.

Introduction

Does economic growth improve the human lot? 1 Using several datasets which collectively cover 140 countries and represent nearly all of the worldes population, we study the relationship between subjective well-being and income, identifying three stylized facts. First, we show that within a given country, richer individuals report higher levels of life satisfaction. Second, we show that richer countries on average have higher levels of life satisfaction. Third, analyzing the time series of countries that we observe repeatedly, we show that as countries grow, their citizens report higher levels of satisfaction. Importantly, we show that the magnitude of the relationship between satisfaction and income is roughly the same across all three comparisons, which suggests that absolute income plays a large role in determining subjective well-being.

These results overturn the conventional wisdom that there is no relationship between growth and subjective well-being. In a series of influential papers, Easterlin (1973, 1995, 2005a, 2005b) has argued that economistse emphasis on growth is misguided, because he finds no statistically significant evidence of a link between a countryes GDP and the subjective well-being of its citizens. This is despite the fact that Easterlin and others (e.g. Layard 1980) have found that richer individuals in a given country report higher levels of well-being. Researchers have reconciled these discordant findings, together called the Easterlin Paradox, by positing that well-being is determined by relative, rather than absolute, income. By this view, individuals want only to keep up with the Joneses. If true, the Easterlin Paradox suggests that focusing on economic growth is futile; when everyone grows richer, no one becomes happier. A related concern, voiced for example by Di Tella and MacCulloch (2010) is that subjective well-being adapts to circumstance. If correct, this argument implies that long run growth makes people no better off because their aspirations and expectations grow with their income. A third concern is that, even if well-being rises with income for the very poor, individuals eventually reach a satiation point, above which further income has no effect on well-being (Layard 2005). Yet in this paper, we present evidence that well-being rises with absolute income, period. This evidence suggests that relative income, adaptation and satiation are of only secondary importance.

Subjective well-being is multifaceted; it includes both how happy individuals are at a point in time and how satisfied they are with their lives as a whole (Diener 2006). In section II we briefly discuss relevant background information on the measurement of subjective well-being. Throughout this paper, we focus on life satisfaction, which is the variable that is both most often measured, and that has been the focus of much of the existing literature (even as economists have often referred to these satisfaction questions as measuring happiness..) Although life satisfaction is the focus of this paper, we consider a variety of alternative measures of subjective well-being and show that they also rise with income.

In section III we demonstrate that richer individuals are more satisfied with their lives, and that this finding holds across 140 countries, and several datasets. Across each of these countries, the relationship between income and satisfaction is remarkably similar. Our graphical analysis suggests that subjective well being rises with the log of income. This functional form implies that a 20 percent rise in income has the same impact on well-being, regardless of the initial level of income: going from $500 to $600 of income per year yields the same impact on well-being as going from $50,000 to $60,000. This specification is appealing on theoretical grounds because a standard assumption in economics is that the marginal impact of a dollar ofincome is diminishing. Indeed, estimating well-being as a function of log income fits the data much better than the simple linear function of income emphasized by previous authors, and this hold whether we are making comparisons across individuals, across countries, or over time. All of our formal analyses therefore involve the log of income rather than its level, although we present scatter plots and non-parametric fitted values to allow the reader to assess the functional form for herself.

In section IV, we turn to the cross country evidence. Using larger data sets than previous authors have examined, we find an economically and statistically significant relationship between average levels of satisfaction in a country and the log of GDP per capita. The data also show no evidence of a satiation point: the same linear-log satisfaction-income gradient we observe for poor and middle-income countries holds equally well for rich countries; it does not flatten at high income.

Whereas Easterlin (1974) had argued that the relationship between well-being and income seen within countries was stronger than the relationship seen between countries, and that this provided evidence for the importance of relative income, our evidence undermines the empirical foundation for this claim. Instead, we show that the relationship between income and well-being is similar both within and between countries, thereby suggesting that absolute income plays a strong role in determining well-being, and relative income is a less important influence than had been previously believed.

In section V we turn to the time series evidence. While the within- and between- country comparisons cast doubt on the Easterlin Paradox, they do not by themselves tell us whether economic growth in fact translates into gains in subjective well-being. This question has challenged researchers for some time because of a lack of consistent time series data on subjective well-being. We analyze the time series movements in subjective well-being using two sources of comparable repeated cross-national cross-sections. Each data sets spans over two decades and covers dozens of countries.

In analyzing the time series data we can subject the relative income hypothesis to a test: if notions of a good life change as the income of onees fellow citizens grow, then we should see only a modest relationship between growth in satisfaction and growth in average income, relative to our point-in-time estimates. We present economically and statistically significant evidence of a positive relationship between economic growth and rising satisfaction over time, although limited data mean that these estimates are less precise than are those from the within- or between- country regressions. The magnitude of the estimated gradient between satisfaction and income in the time series is similar to the magnitude of the within- and between-country gradients. These results suggest that raising the income of all does indeed raise the well-being of all.

Finally, in section VI we turn to alternative measures of subjective well-being, showing that they too rise with a countryes income. We find that happiness is positively related to per capita GDP across a sample of 69 countries. We then show that additional, affect-specific measures of subjective well-being, such as whether an individual felt enjoyment or love, or did not feel pain, are all higher in countries with higher per capita GDP. Our finding that subjective well-being rises with income is therefore not confined to an unusual data set or a particular indicator of subjective well-being.

Taken together, these new stylized facts suggest that subjective well-being, however measured, rises with income. Other recent papers have noted this as well. Deaton (2008) finds that individuals in richer countries have both higher levels of subjective well-being and better health. Stevenson and Wolfers (2008), performing an analysis parallel to this one.albeit using slightly different methods2.report similar findings to those described here, and discuss in detail why previous researchers failed to identify the strong link between subjective well-being and income.

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