Does Economic Growth, Absolute or Relative Income Buy Well-Being? A Statistical Appraisal of the Easterlin Paradox

Abstract

This paper tests the empirical validity of Easterlin’s paradox, the absolute and relative income theorems which underpin it, and investigates associations between subjective well-being (SWB), economic growth and the factors which shape economic development via a series of multilevel mixed-effects regression models. Results show no evidence for the existence of the Easterlin Paradox and are concurrent across multiple measures of SWB – happiness and life satisfaction. The analysis suggests richer countries have greater life satisfaction and are happier than poorer countries. Moreover, both SWB measures are positively correlated with increasing economic growth which goes hand in hand with higher income inequality though the economic significance of this increasing economic development in enhancing life satisfaction is around 3 times greater than it is for happiness. However, minimising economic inequality safeguards the happiness and life satisfaction gains induced by growth more in richer than in poorer countries. Additionally, happiness levels are slightly elevated by the inflation rises accompanying growth despite increasing happiness and economic development in countries over time being conditioned by low inflation. At the individual level, non-linear relationships between income and SWB indicate that the role absolute income plays in governing happiness and life satisfaction is determined by people’s relative incomes.