Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox

Abstract

ABSTRACT The suggests that there is no link between a society's economic development and its average level of happiness. We reassess this analyzing multiple rich datasets spanning many decades. Using recent data on a broader array of countries, we establish a clear positive link between average levels of subjective well-being and GDP per capita across countries, and find no evidence of a satiation point beyond which wealthier countries have no further increases in subjective well-being. We show that the estimated relationship is consistent across many datasets and is similar to that between subjective well-being and income observed within countries. Finally, examining the relationship between changes in subjective well-being and income over time within countries, we find economic growth associated with rising happiness. Together these findings indicate a clear role for absolute income and a more limited role for relative income comparisons in determining happiness. ********** Economic growth has long been considered important goal of economic policy, yet in recent years some have begun to argue against further trying to raise the material standard of living, claiming that such increases will do little to raise well-being. These arguments are based on a key finding in the emerging literature on subjective well-being, called the paradox, which suggests that there is no link between the level of economic development of a society and the overall happiness of its members. In several papers Richard Easterlin has examined the relationship between happiness and GDP both across countries and within individual countries through time. (1) In both types of analysis he finds little significant evidence of a link between aggregate income and average happiness. In contrast, there is robust evidence that within countries those with more income are happier. These two seemingly discordant findings--that income is an important predictor of individual happiness, yet apparently irrelevant for average happiness--have spurred researchers to seek to reconcile them through models emphasizing reference-dependent preferences and relative income comparisons. (2) Richard Layard offers an explanation: people are concerned about their relative income and not simply about its absolute level. They want to keep up with the Joneses or if possible to outdo them. (3) While leaving room for absolute income to matter for some people, Layard and others have argued that absolute income is only important for happiness when income is very low. Layard argues, for example, that once a country has over $15,000 per head, its level of happiness appears to be independent of its income per head. (4) The conclusion that absolute income has little impact on happiness has far-reaching policy implications. If economic growth does little to improve social welfare, then it should not be a primary goal of government policy. Indeed, Easterlin argues that his analysis of time trends in subjective well-being undermine[s] the view that a focus on economic growth is in the best interests of society. (5) Layard argues for an explicit government policy of maximizing subjective well-being. (6) Moreover, he notes that relative income comparisons imply that each individual's labor effort imposes negative externalities on others (by shifting their reference points) and that these distortions would be best corrected by higher taxes on income or consumption. Evaluating these strong policy prescriptions demands a robust understanding of the true relationship between income and well-being. Unfortunately, the present literature is based on fragile and incomplete evidence about this relationship. At the time the Easterlin paradox was first identified, few data were available to allow an assessment of subjective well-being across countries and through time. The difficulty of identifying a robust GDP-happiness link from scarce data led some to confound the absence of evidence of such a link with evidence of its absence. …