1. Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox Betsey Stevenson and Justin Wolfers Wharton School, University of Pennsylvania and NBER The 2008 World Congress on NAEP Measures for Nations, May 14 2008.

2. Research Question: What is the relationship between income & happiness? Stevenson & Wolfers, Economic Growth and Happiness2 Types of comparisons“Stylized facts”Stevenson-Wolfers findings Within country: Rich v. poor members of a society Big effectsStrong effects Between country: Rich v. poor countries Small effects (if any) - No effects beyond GDP≈$15k Strong effects National time series: Country when rich v. poor No effects -Europe, Japan, USA Strong effects International panel: Countries with fast v. slow growth No effects (largely unexamined) Strong effects Implications“Easterlin paradox”Happiness-income gradient ≈ 0.2-0.4 Why revisit the stylized facts? 1. Theoretical implications: Reference-dependent preferences 2. Yielding important policy implications (and big policy claims) 3. New data: Longer time series (1946-2008); More countries (n=132) 4. Statistical inference: Absence of evidence v. evidence of absence 5. What are “big” versus small effects?  Focus on the magnitudes What we won’t do:  Assess causality: Happiness = β log(Income)  Revisit what subjective well-being data “mean”

3. Measuring Subjective Well-Being Stevenson & Wolfers, Economic Growth and Happiness3  Subjective well-being questions  Happiness: “Taking all things together, would you say you are: very happy; quite happy; not very happy; not at all happy.”  Life satisfaction: “All things considered, how satisfied are you with your life as a whole these days?” [1=Dissatisfied – 10=Satisfied]  Satisfaction ladder: “Here is a ladder representing the ‘ladder of life’. Let's suppose the top of the ladder represents the best possible life for you, and the bottom, the worse possible life for you. On which step of the ladder do you feel you personally stand at the present time? [0-10 steps].”  Creating a cardinal measure  Macro data: Two steps 1. Estimate “Gross national happiness c,t ” Ordered probit: Happiness i,c,t = μ c,t * I(country)*I(year) + ε ε~N(0,1) 2. Regress GNH on GDP: μ c,t = β log(Income c,t ) + ν  Micro data: Ordered probit: Happiness i,c,t = β log(Income individual country or period ) + ε ε~N(0,1)

4. Outline: Assessing the Happiness-Income link Stevenson & Wolfers, Economic Growth and Happiness4  Within-country comparisons  USA  All countries  Between countries:  Through time  Multiple datasets  For both happiness and life satisfaction  No evidence of satiation  National Time Series  Japan  Europe  USA

5. Within-Country Comparisons Stevenson & Wolfers, Economic Growth and Happiness5 Family incomeVery happyPretty happyNot too happy <$12,500 (bottom 10%)21%53%26% $12,500-$49,99925%61%13% $50,000-$149,99940%54%6%  $150,000 (top 10%) 53%45%2% Source: U.S. General Social Survey, 2006 “Taken all together, how would you say things are these days?” “When we plot average happiness versus income for clusters of people in a given country at a given time, we see that rich people are in fact much happier than poor people. It’s actually an astonishingly large difference. There’s no one single change you can imagine that would make your life improve on the happiness scale as much as to move from the bottom 5 percent on the income scale to the top 5 percent.” - Robert Frank (2005)

6. Within-Country: USA Stevenson & Wolfers, Economic Growth and Happiness6

7. Histogram: Within-Country Estimates Stevenson & Wolfers, Economic Growth and Happiness7

8. Outline: Assessing the Happiness-Income link Stevenson & Wolfers, Economic Growth and Happiness8  Within-country comparisons  USA  All countries  Between countries:  Through time  Multiple datasets  Both happiness and life satisfaction  No evidence of satiation  National Time Series  Japan  Europe  USA β within ≈ 0.2 – 0.4 “the happiness differences between rich and poor countries that one might expect on the basis of the within country differences by economic status are not borne out by the international data.” – Easterlin, (1974)

9. Early Cross-National Studies Stevenson & Wolfers, Economic Growth and Happiness9

10. World Values Survey: 1981-2004 Stevenson & Wolfers, Economic Growth and Happiness10

11. Pew Global Attitudes Survey, 2002 Stevenson & Wolfers, Economic Growth and Happiness11

12. Between: Gallup World Poll Stevenson & Wolfers, Economic Growth and Happiness12

13. Comparing within- and between-country estimates Stevenson & Wolfers, Economic Growth and Happiness13

14. Outline: Assessing the Happiness-Income link Stevenson & Wolfers, Economic Growth and Happiness14  Within-country comparisons  USA  All countries  Between countries:  Through time  Multiple datasets  Both happiness and life satisfaction  No evidence of satiation  National Time Series  Japan  Europe  USA β within ≈ 0.2 – 0.4 β between ≈ 0.2 – 0.4 “income growth in a society does not increase happiness”. - Easterlin (1995)

15. Time Series: No rise in happiness, despite growth Stevenson & Wolfers, Economic Growth and Happiness15 JapanEuropeU.S.A. Life in Nation SurveysEurobarometerGeneral Social Survey

16. Japan: Well-Being versus GDP Stevenson & Wolfers, Economic Growth and Happiness16

17. Japan: Raw data Stevenson & Wolfers, Economic Growth and Happiness17

18. Japan: Economic Conditions and Well-Being Stevenson & Wolfers, Economic Growth and Happiness18 Satisfaction t = 0.24*log(GDP t ) – 0.06*Unemp -0.39*Break 1 – 0.57*Break 2 – 0.52*Break 3 n=51 (se) (0.06) (0.02) (0.07) (0.11) (0.14)

19. European happiness trends Stevenson & Wolfers, Economic Growth and Happiness19

20. International Panel Data Stevenson & Wolfers, Economic Growth and Happiness20 WVS Life Satisfaction WVS Happiness Eurobarometer Life satisfaction Levels 0.34 *** (0.04) 0.77 *** (0.18) Country fixed effects 0.15 * (0.08) 0.15 (0.11) 0.19 *** (0.06) Country and wave fixed effects 0.27 ** (0.11) 0.25 (0.15) 0.20 ** (0.90) Sample period1981-2004 (4 waves) 1973-2007 (biannual) Countries82 32 (mostly rich) n183 759 Robust SE clustered byCountry-wave Country

21. Eurobarometer: Nine countries Stevenson & Wolfers, Economic Growth and Happiness21

22. USA: Is it surprising that happiness hasn’t grown? Stevenson & Wolfers, Economic Growth and Happiness22 Happiness t = 0.048 * Average log household income in GSS t [95% ci: -0.25 - +0.34] Happiness t = 0.058 * Average log household income in CPS t [95% ci: -0.21 – 0.33]

23. Conclusion: Stylized facts about Wellbeing and Income Stevenson & Wolfers, Economic Growth and Happiness23  Within-country comparisons  USA  All countries  Between countries:  Through time  Multiple datasets  Both happiness and life satisfaction  No evidence of satiation  National Time Series  USA  Japan  Europe β within ≈ 0.2 – 0.4 β between ≈ 0.2 – 0.4 β time series ≈ 0.2 – 0.4

24. Stevenson & Wolfers, Economic Growth and Happiness24  Blank slide: End of talk

25. Spare Slides Stevenson & Wolfers, Economic Growth and Happiness25  Background Background  Within-country Within-country  Between-country Between-country  National time series National time series  International panel data International panel data  Broader measures of subjective well-being Broader measures of subjective well-being

26. Yesterday’s Experiences Stevenson & Wolfers, Economic Growth and Happiness26

27. Recalled feelings and GDP Stevenson & Wolfers, Economic Growth and Happiness27

28. Bradburn: Recent Feelings and GDP Stevenson & Wolfers, Economic Growth and Happiness28

29. Within-Country: Rich are Happier than Poor Stevenson & Wolfers, Economic Growth and Happiness29  Similar relationship holds in other countries and eras  “As far as I am aware, in every representative national survey ever done a significant bivariate relationship between happiness and income has been found.” – Easterlin (2001) Question: “In general, how happy would you say that you are?” %Very happy rising with income %unhappy falling with income

30. Between-Country Estimates: Happiness & GNP Stevenson & Wolfers, Economic Growth and Happiness30 Easterlin (1974)Easterlin (1995) Cantrill dataEurobarometer data “What is perhaps most striking is that the personal happiness ratings for 10 of the 14 countries lie virtually within half a point of the mid-point rating of 5.” “A positive happiness-income relationship typically turns up in international comparisons”

31. Time Series: No rise in happiness, despite growth Stevenson & Wolfers, Economic Growth and Happiness31 U.S.A.JapanEurope General Social SurveyLife in Nation SurveysEurobarometer

32. Implications of the Easterlin Paradox Stevenson & Wolfers, Economic Growth and Happiness32  “Why do national comparisons among countries and over time show an association between income and happiness which is so much weaker than, if not inconsistent with, that shown by within-country comparisons?” –Easterlin (1974)  Reference-dependent preferences Relative income matters [Other people’s consumption matters] Habit formation = hedonic treadmill [Other period’s consumption]  Policy implications:  Growth: “My results, along with mounting evidence from other time series studies of subjective well-being, do on balance undermine the view that a focus on economic growth is in the best interests of society.” –Easterlin (2005)  Public finance: If preferences are interdependent  Pigouvian rationale for taxing labor supply / conspicuous consumption

33. Subjective Well-being Stevenson & Wolfers, Economic Growth and Happiness33  “Subjective well-being refers to all of the various types of evaluations, both positive and negative, that people make of their lives. It includes reflective cognitive evaluations, such as life satisfaction and work satisfaction, interest and engagement, and affective reactions to life events, such as joy and sadness.” (Diener, 2005)  Typical questions:  Happiness “Taking all things together, would you say you are: very happy; quite happy; not very happy; not at all happy.”  Life satisfaction “All things considered, how satisfied are you with your life as a whole these days?” [1=Dissatisfied – 10=Satisfied]  Satisfaction ladder: “Here is a ladder representing the ‘ladder of life’. Let's suppose the top of the ladder represents the best possible life for you, and the bottom, the worse possible life for you. On which step of the ladder do you feel you personally stand at the present time? [0-10 steps].”

34. Alternative measures of average happiness Stevenson & Wolfers, Economic Growth and Happiness34

35. Income-Happiness Relationship in GSS Stevenson & Wolfers, Economic Growth and Happiness35

36. Within-Country: Rich are happier than poor Stevenson & Wolfers, Economic Growth and Happiness36 Each cell reports coefficient on log Household Income from a regression: Ordered Probit: Well-being = β log (Household Income) + Country*wave fixed effects No controlsAge*genderIV: education IV: country-specific education Gallup World Poll, 2006 Satisfaction ladder 0.310 *** (0.005) 0.307 *** (0.005) 0.645 *** (0.016) 0.575 *** (0.014) World Values Survey: Life Satisfaction 0.211 *** (0.005) 0.226 *** (0.005) 0.301 *** (0.014) 0.254 *** (0.012) World Values Survey: Happiness 0.229 *** (0.005) 0.220 *** (0.005) 0.309 *** (0.015) 0.263 *** (0.014) Pew Global Attitudes Survey Satisfaction ladder 0.313 *** (0.008) 0.317 *** (0.008) n.a. Notes:***, ** and * denote statistically significant at 1%, 5% and 10%, respectively. (Robust standard errors in parentheses, clustered by country.) Column 1: An ordered probit regression of well-being on log household income, and country fixed-effects Column 2: Adds gender, a quartic in age, and their interaction as controls Column 3: Instruments for log household income using indicator variables for levels of education. Second stage is an ordered probit regression of well-being on the predicted values, the residuals, and country fixed-effects. Column 4: The instrument set now includes indicator variables for levels of education, interacted with country dummies.

37. Within-Country Variation: Gallup World Poll Stevenson & Wolfers, Economic Growth and Happiness37

38. Between-Country GDP-Wellbeing Gradient Stevenson & Wolfers, Economic Growth and Happiness38 Each cell reports coefficient from a regression: Well-being = β log (GDP per capita) Macro Data: OLS Dep. Var: National Well-being Micro Data: Ordered Probit Dep. Var: Indiv. well-being Sample Respondents No controlsControls(clusters) Gallup World Poll, 2006 Please imagine a ladder/mountain with steps numbered from zero at the bottom to ten at the top. Suppose we say that the top of the ladder/mountain represents the best possible life for you and the bottom of the ladder/mountain represents the worst possible life for you. If the top step is 10 and the bottom step is 0, on which step of the ladder/mountain do you feel you personally stand at the present time? 0.418 *** (0.026) 0.396 *** (0.023) 0.422 *** (0.023) 139,051 (131 countries) World Values Survey: Life Sat All things considered, how satisfied are you with your life as a whole these days? [1] Dissatisfied – [10] Satisfied 4 waves combined (with wave FE) 0.316 *** (0.052) 0.296 *** (0.048) 0.302 *** (0.047) 261,490 (82 countries) World Values Survey: Happiness Taking all things together, would you say you are: [4] Very happy; [3] Quite happy; [2] Not very happy; [1] Not at all happy. 4 waves combined (with wave FE) 0.181 *** (0.063) 0.169 *** (0.056) 0.188 *** (0.055) 256,283 (82 countries) Pew Global Attitudes Survey Here is a ladder representing the ‘ladder of life’. Let's suppose the top of the ladder represents the best possible life for you, and the bottom, the worse possible life for you. On which step of the ladder do you feel you personally stand at the present time? [0-10 steps]. 20020.224 *** (0.041) 0.223 *** (0.041) 0.242 *** (0.040) 37,974 (44 countries)

39. Is there any evidence of satiation? Stevenson & Wolfers, Economic Growth and Happiness39  Rich countries (GDP>$15,000)  Happiness=1.08*log(GDP) [se=0.19]  Poor countries (GDP<$15,000)  Happiness=0.35*log(GDP) [se=0.04]  A 1% rise in GDP:  Has three times larger effects in rich countries than poor countries  A $100 rise in GDP  3x larger effect in Jamaica than US  20x larger effect in Burundi than US  “if we compare countries, there is no evidence that richer countries are happier than poorer ones – so long as we confine ourselves to countries with incomes over $15,000 per head.” - Layard (2005)

40. Satisfaction v. Happiness (WVS) Stevenson & Wolfers, Economic Growth and Happiness40

41. Happiness v. Life Satisfaction Stevenson & Wolfers, Economic Growth and Happiness41

42. WVS: Comparing within- and between Stevenson & Wolfers, Economic Growth and Happiness42

43. Income and Happiness: Cross-section v. Cross-country Stevenson & Wolfers, Economic Growth and Happiness43

44. China Stevenson & Wolfers, Economic Growth and Happiness44 Very satisfied Somewhat satisfied Neither satisfied nor dissatisfied Somewhat dissatisfied Very dissatisfied 19949%41%38%12%2% 199719%53%n.a.20%7% 199919%50%n.a.22%8% 200412%51%n.a.29%8% “Overall how satisfied or dissatisfied are you with the way things are going in your life today?”

45. Happiness and the Output Gap Stevenson & Wolfers, Economic Growth and Happiness45

46. U.S. trends by education Stevenson & Wolfers, Economic Growth and Happiness46

47. U.S. Happiness Trends by Race Stevenson & Wolfers, Economic Growth and Happiness47

48. Gender Happiness Trends in the United States

49. World Values Survey Changes Stevenson & Wolfers, Economic Growth and Happiness49

50. WVS: First diffs Stevenson & Wolfers, Economic Growth and Happiness50

51. International Panel Data Stevenson & Wolfers, Economic Growth and Happiness51 Each cell reports coefficient from a regression: Well-being c,t = β log (GDP per capita c,t ) Microdata Estimates (Respondent observations) Macro Estimates (Country-wave obs) Sample Dep Var: Life Satisfaction (WVS) All things considered, how satisfied are you with your life as a whole these days? [1] Dissatisfied – [10] Satisfied Levels 0.317 *** (0.036) 0.339 *** (0.031) 259,165 (182 country-waves) Levels | Country FE 0.159 ** (0.078) 0.155 ** (0.078) 259,165 (182 country-waves) Levels | Country and Wave FE 0.265 ** (0.110) 0.251 ** (0.100) 259,165 (182 country-waves) First Differencesn.a. 0.412 *** (0.109) 101 diffs Long Differences 0.169 (0.116) 0.180 (0.113) 150,952 (110 cty-waves= 55 diffs) Happiness (WVS) Taking all things together, would you say you are: [4] Very happy; [3] Quite happy; [2] Not very happy; [1] Not at all happy. Levels 0.168 *** (0.043) 0.181 *** (0.035) 253,986 (182 country-waves) Levels | Country FE 0.290 *** (0.075) 0.281 *** (0.099) 253,986 (182 country-waves) Levels | Country and Wave FE 0.033 (0.103) 0.008 (0.127) 253,986 (182 country-waves) First Differences 0.073 (0.134) 101 diffs Long Differences-0.015 (0.109) -0.026 (0.126) 152,452 (112 cty-waves= 56 diffs)