Transcript OswaldHappinessLecture3

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
Life Satisfaction and GDP Per Capita
World Values Survey
Life Satisfaction = -0.9 + 0.8 * Log GDP (t=8.3)
COL
8
7
NGA
6
5
4
TZA
DNK
IRL
CHE
ISL
AUT
NLD
FIN
CAN
NZLSWE
NOR
DEU
BEL USA
Australia GBR
VEN
SLV
ARG
SVN ITA
BRA
SGP
DOM
CHL
URY
CZE
ESP
ISR
PRT
IDN
FRA
GRC
PHL
CHN
VNM
JPN
HRV
PER IRN
POL
KOR
MAR
SVK
ZAFEST
BGD
BIH
HUN
JOR DZA
TUR
UGA
AZEEGY
BGRLVA
ROM
ALB
IND
MKD
LTU
PAK
BLR
RUS
GEO
MDA
UKR
ARM
MEX
MLT
LUX
ZWE
2000
5000
10000
20000 35000 60000
GDP per capita in US$ at PPP (log scale)
The macroeconomics of happiness
Countries are happier if they have low
unemployment and inflation, and
generous welfare benefits.
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.
“Emphasis on growth is
misguided”
“Beyond GDP”
“Measuring
what matters”
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 wellbeing data
Recommendation 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
2004
Luttmer, Quarterly Journal of Economics 2005
GDA 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)
Log comparison income (y*)
-0.02
(0.039)
---
Log NES comparison income (y**)
-0.26
0.11
(0.050)
-0.20
(0.062)
---
-0.001
(0.04)
----(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
1
2
3
4
5
Very important
23.80
17.01
13.86
16.95
13.52
9.42
5.44
In the Netherlands and in
Switzerland, people seem to do
less comparing-against-others.
he
rla
Sw nds
ite
rla
n
Fi d
nl
a
Ge nd
rm
an
Au y
str
Un
Be ia
ite
lg
d
i
Ki um
ng
do
Po m
rtu
ga
Ir e l
l
Da and
ne
m
a
No r k
rw
a
Bu y
lg
ar
ia
Fr
an
Hu ce
ng
a
Sw ry
ed
Sl en
ov
en
ia
Ru
ss
i
Es a
to
ni
a
Po
lan
Uk d
ra
in
e
Sp
a
Sl in
ov
ak
ia
Ne
t
2.9
2.7
2.5
2.3
2.1
1.9
1.7
1.5
Work colleagues
Family members
Friends
Others
Don't compare
Observations
6 159
929
2 382
1 192
5 185
Weighted %
38.93
6.03
14.94
7.39
32.72
Other evidence for relativity
effects.
1) This is Denmark
Clark and colleagues use new georeferenced 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 1
Small neighbourhoods in the area of Taastrupgård, Høje Tåstrup
Source: Damm and Schultz-Nielsen (2008).
Economic Satisfaction, Income and Rank within Small
Neighbourhoods: Panel Results
Ln(HH income)
Ln(median grid HH income)
Ln(median municipality HH income)
Relative rank in small grid
See Neighbours Often
Single
Health problems dummy
Age dummies (9)
Education dummies (6)
Socio-Economic Group dummies (3)
No. and Ages of children dummies (5)
No. Years in Grid dummies (5)
Regional dummies (13)
Year dummies (8)
Observations
Baseline
Baseline and
Municipality
Baseline and
Rank
0.390**
(0.021)
0.228**
(0.052)
---------0.019
(0.016)
-0.057*
(0.027)
-0.023
(0.017)
0.390**
(0.021)
0.236**
(0.055)
-0.062
(0.156)
-----0.019
(0.016)
-0.057*
(0.027)
-0.023
(0.017)
0.070*
(0.028)
0.634**
(0.057)
----1.124**
(0.068)
-0.016
(0.016)
0.025
(0.028)
-0.023
(0.017)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
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
The blue lines show the
countries.
estimated relationship
between income and
happiness
Japan
Japan was in the middle of the income distribution in the early 1960s, and had
a middling level of 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”
2.2
1.8
15000
2
18000
21000
Mean Happiness
2.4
24000
2.6
Average Happiness and Real GDP per Capita
for Repeated Cross-sections of Americans.
1975
1980
1985
Year
Real GDP per Capita
1990
1995
Mean Happiness
2.5
Average Happiness
30000
2
20000
1.5
1
FIGURE 1: Happiness and Real Income Per Capita in the US, 1973-2004
Happiness
Real Income Per Capita
10000
0.5
0
0
1973
1977
1981
1985
1989
Year
1993
1998
2003
Real Income Per Capita (2000 US$)
40000
3
Life-satisfaction country averages
Italy
Ireland
Germany
Netherlands
3.8
3.6
3.4
3.2
3
2.8
2.6
1974
1982
1990
1998
2.4
2006
• 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
11.30
Average GHQ-12 (likert)
11.25
11.20
11.15
11.10
11.05
11.00
10.95
10.90
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). “Ageperiod-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.
Proportion of High-Strain Jobs
30
25
20
% 15
10
5
0
1992
1997
Males
2001
2006
Females
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
50
% 'cases'
40
30
males
females
20
10
0
1987
1999
2006
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 StevensonWolfers.
[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.