Does Relative Income Matter? Are the Critics Right?

37 Pages Posted: 1 Aug 2009

See all articles by Richard Layard

Richard Layard

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Guy Mayraz

Department of Economics, University of Melbourne; CIFAR

Stephen John Nickell

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Centre for Economic Policy Research (CEPR)

Date Written: July 2009

Abstract

Do other peoples’ incomes reduce the happiness which people in advanced countries experience from any given income? And does this help to explain why in the U.S., Germany and some other advanced countries, happiness has been constant for many decades? The answer to both questions is ‘Yes’. We provide 4 main pieces of evidence. 1) In the U.S. General Survey (repeated samples since 1972) comparator income has a negative effect on happiness equal in magnitude to the positive effect of own income. 2) In the West German Socio-Economic Panel since 1984 the same is true but with life satisfaction as the dependant variable. We also use the Panel to compare the effect of income comparisons and of adaptation as factors explaining the stable level of life-satisfaction: income comparisons emerge as much the more important. 3) When in our U.S. analysis we introduce “perceived” relative income as a potential explanatory variable, its effect is as large as the effect of actual relative income - further supporting the view that comparisons matter. 4) Finally, for a panel of European countries since 1973 we estimate the effect of average income upon average lifesatisfaction, splitting income into two components: trend and cycle. The effect of trend income is small and illdefined. Our conclusions relate to time series and to advanced countries only. They differ from those drawn in recent studies by Deaton and Stevenson/Wolfers, but those studies are largely cross-sectional and mostly include non-advanced as well as advanced countries.

Keywords: Easterlin Paradox, happiness, relative income, growth

JEL Classification: D31, D90, E01, H00, I31, O15

Suggested Citation

Layard, Richard and Mayraz, Guy and Nickell, Stephen John, Does Relative Income Matter? Are the Critics Right? (July 2009). SOEPpaper No. 210. Available at SSRN: https://ssrn.com/abstract=1441927 or http://dx.doi.org/10.2139/ssrn.1441927

Richard Layard (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Guy Mayraz

Department of Economics, University of Melbourne ( email )

Melbourne, 3010
Australia
+61 3 9035 8141 (Phone)

HOME PAGE: http://www.mayraz.com

CIFAR ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

Stephen John Nickell

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
England
+44 20 7955 7497 (Phone)
+44 20 7831 1840 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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