easterlins paradox and the macroeconomics of happiness andrew oswald warwick and iza i would like to...
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Easterlin’s Paradox and the Macroeconomics of
Happiness
Andrew Oswald Warwick and IZA
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
TZA
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MDA
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PAKGEO
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IND
ARM
IDN
AZE
MAR
EGY
PHL
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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
PRTSVN
GRC
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SGP
SWEGBRITA
FIN
JPN
FRA
DEUBEL
NLDAUTISLCAN
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USA
IRL
NORLUX
Australia
4
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Life
Sa
tisfa
ctio
n, W
VS
Ave
rage
Sco
re (
1='D
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o 10
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atis
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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 2009 www.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.
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 Economics 2004Luttmer, Quarterly Journal of Economics 2005GDA 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.
1.5
1.7
1.9
2.1
2.3
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Switerla
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Finlan
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German
y
Austria
Belgium
United K
ingdo
m
Portugal
Irelan
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Danem
ark
Norway
Bulgari
a
France
Hungary
Sweden
Sloven
ia
Russia
Estonia
Poland
Ukraine
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
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 1Small 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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Mea
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iness
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eal G
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1975 1980 1985 1990 1995Year
Real GDP per Capita Mean Happiness
FIGURE 1: Happiness and Real Income Per Capita in the US, 1973-2004
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1973 1977 1981 1985 1989 1993 1998 2003
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rage
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Happiness Real Income Per Capita
Life-satisfaction country averages
2.4
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3.2
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1974 1982 1990 1998 2006
ItalyIrelandGermanyNetherlands
• 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
11.00
11.05
11.10
11.15
11.20
11.25
11.30A
vera
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Q-1
2 (l
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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
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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
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1987 1999 2006
% 'c
ases
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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.
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