The Easterlin Paradox revisited.

Abstract

The traditional view that well-being depends on both absolute and relative income was challenged in a 1974 paper by Richard Easterlin (Does economic growth improve the human lot? In P. David and M. Reder (Eds.), Nations and households in economic growth: Essays in honor of Moses Abramovitz (pp. 89-125), New York: Academic Press). He noted that although individual well-being is strongly positively associated with income within any country at a given point in time, the average level of measured well-being for a country changes little over time, even in the face of substantial growth in average incomes. For decades, social scientists have struggled to explain this "Easterlin Paradox." In a 2008 paper, Betsey Stephenson and Justin Wolfers (Economic growth and subjective well-being: Reassessing the Easterlin Paradox, Brookings Papers on Economic Activity, Vol. 39, pp. 1-87) argued that the Easterlin Paradox was a statistical illusion. Using richer data sets that facilitate more precise estimates of the various links between income and well-being, they assert that average well-being in a country does, in fact, rise as average income rises over time, and that rich countries are happier than slightly poorer ones. They also suggest that the link between income and well-being may run through absolute income alone-that is, that individual well-being may be completely independent of relative income. In this article, I argue that there have always been good reasons to believe that well-being is positively linked to absolute income. I also argue, however, that there is no reason to believe that individual well-being is independent of relative income.