Easterlin and O'Connor (2022) on that Paradox

Richard A. Easterlin and Kelsey J. O'Connor, “The Easterlin Paradox.” In: Zimmermann, K.F. (ed.) Handbook of Labor, Human Resources and Population Economics. Springer, Cham. [Working paper version here.]

• From the Abstract: “The Easterlin Paradox states that at a point in time happiness varies directly with income, both among and within nations, but over time the long-term growth rates of happiness and income are not significantly related.”

• That is, the Easterlin Paradox concerns a disconnect between cross-section and time series data linking happiness and (real) income.

• The life satisfaction (happiness) data used in Easterlin and O'Connor come from the World Values Survey (WVS) and the Gallup World Poll (GWP). This analysis takes place at the national level (so income is real income per capita within a country).

• The WVS question: “All things considered, how satisfied are you with your life as a whole these days?” 1 (dissatisfied) to 10 (satisfied); 67 countries, on average over 27 years, for this study, with about 5 observations per country.

• The relevant GWP item: Cantril ladder, 0 to 10, worst possible life (0) to best possible life (10); 123 countries, 12 to 15 years of annual data.

• A major point of emphasis for Easterlin and O'Connor is that the key for testing is to ensure that you have long time-series data, so that you are not just capturing a boom or a bust (during which the usual cross-section positive connection between happiness and income will prevail).

• Easterlin and O’Connor find that in their data, the Paradox essentially holds when the East European transition countries are not included. (The conditions of transition and the time-span of the data from transition countries are such that even more than ten years of data might essentially be capturing a long boom.) 

• With the transition countries included, or if shorter (10 years or less) time spans are employed, happiness and income do show a positive relationship. Even in these circumstances, however, the effect of changes in income on changes in happiness is small.

• The authors argue that an income reference point (typically, social comparison) is what drives the Paradox. As everyone's income rises, your reference point (other folks' income) shifts up, so your higher income does not bring more happiness. In a recession, alternatively, the relevant reference point is your own previous income, so people on average become less happy. (That is, the Paradox might hold even in the short-run during an expansion, but a recession will cause both happiness and income to fall.) 

• China, Japan, India – all have experienced tremendous income boosts without increases in happiness.

• The authors argue that the “threshold” claim (that increased income does increase happiness until you are fairly well-off, at which point more income doesn't lead to more happiness) also is wrong: the Paradox applies to rich and poor individuals, not just the rich.

• Public policies can still raise happiness! Promotion of employment and a social safety net are good for happiness.