So Far So Good: Age, Happiness, and Relative Income

29 Pages Posted: 21 Dec 2011

See all articles by Felix R. Fitzroy

Felix R. Fitzroy

University of St. Andrews; IZA Institute of Labor Economics

Michael A. Nolan

University of Hull - Department of Economics

Max Friedrich Steinhardt

Free University of Berlin (FUB) - Department of Business and Economics; IZA Institute of Labor Economics; Centro Studi Luca D'Agliano (LdA); Hamburg Institute of International Economics (HWWI)

David Ulph

University College London - Department of Economics; Government of the United Kingdom - Inland Revenue

Date Written: December 1, 2011

Abstract

In a simple 2-period model of relative income under uncertainty, higher comparison income for the younger cohort can signal higher or lower expected lifetime relative income, and hence either increase or decrease well-being. With data from the German Socio-Economic Panel and the British Household Panel Survey, we first confirm the standard negative effects of comparison income on life satisfaction with all age groups, and many controls. However when we split the West German sample by age we find a positive significant effect of comparison income in the under 45s, and the usual negative effect only in the over 45 group. With the same split in UK and East German data, comparison income loses significance, which is consistent with the model prediction for the younger group. Our results provide first evidence that the standard aggregation with only a quadratic control for age can obscure major differences in the effects of relative income.

Keywords: subjective life-satisfaction, comparison income, reference groups, age, welfare

JEL Classification: D10, I31, J10

Suggested Citation

Fitzroy, Felix R. and Nolan, Michael A. and Steinhardt, Max Friedrich and Ulph, David, So Far So Good: Age, Happiness, and Relative Income (December 1, 2011). SOEPpaper No. 415-2011, Available at SSRN: https://ssrn.com/abstract=1974876 or http://dx.doi.org/10.2139/ssrn.1974876

Felix R. Fitzroy (Contact Author)

University of St. Andrews ( email )

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Michael A. Nolan

University of Hull - Department of Economics ( email )

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Max Friedrich Steinhardt

Free University of Berlin (FUB) - Department of Business and Economics ( email )

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David Ulph

University College London - Department of Economics ( email )

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