Stevenson and Wolfers (2008) on the Easterlin Paradox

Betsey Stevenson and Justin Wolfers, “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox.” Brookings Papers on Economic Activity, pages 1-87, Spring 2008.

• The Easterlin “Paradox”: Within countries at a point in time, income and subjective well-being (SWB) are positively correlated: richer people are happier. This relationship between income and SWB does not seem to hold when looking between countries, or in data over long periods of time within a country. 

• One possible resolution of the Easterlin Paradox is that reference-dependent preferences might be at work. People are happier if they are relatively rich within their country, but they don’t compare themselves with people in other countries or people thirty years ago. If happiness depends on relative income, maybe we need to have highly progressive taxation, as higher income (or work effort) for one person “imposes” a relative deprivation cost upon everyone else. 

• Stevenson and Wolfers re-examine the evidence, and the Easterlin Paradox disappears: time series and cross-country studies display essentially the same correlation between SWB and (log) income as is calculated from within-country cross-sections. On average, higher income goes with higher SWB. 

• Life satisfaction and happiness are not identical concepts, with happiness more about affect (in Kahneman's typology, System 1). Happiness is less strongly correlated than is SWB with income. Tanzania and Nigeria exhibit high happiness, low SWB. 

• A rise in income of $100 contributes more to happiness in poor countries than in rich countries – but it contributes to higher happiness in both rich and poor countries. 

• The US is the exception, with a small fall in SWB between 1972 and 2006, despite rising average income. The US data might reflect stagnation in middle-class income.