Income Comparisons and Life Satisfaction: Evidence from British Panel Data

Abstract

This is the first article that uses panel data to investigate the impact of individuals' self‐perceived relative income on life satisfaction. Analyses show that the self‐perceived relative income has a significant impact on life satisfaction, but the impact is asymmetric. The decline in life satisfaction is much more significant due to perceiving a lower relative income in comparison to the rise in life satisfaction because of perceiving a higher relative income. Absolute income is only significantly and positively associated with life satisfaction in the pooled ordinary least squares estimations, but the association is never significantly different from zero when individual fixed effects are controlled. Household savings have a positive but small impact on life satisfaction. Among different financial‐related shocks, people's self‐perceived relative income varies the most due to changes in household net income, total savings, and employment status.