Income Comparisons Research Articles

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

The Easterlin suggests that there is no link between a society's economic development and its average level of happiness. We re-assess this paradox 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 the relationship between subject 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.

Testing for a Reference Consumer in International Comparisons of Living Standards

Matthijs van Veelen and Roy van der Weide (2008) (henceforth VW) compare the axiomatic and economic approaches to choosing multilateral index numbers for international comparisons of real income. They are right to stress the potential importance of accounting for preference heterogeneity in general, and to warn against misinterpretations of the approach advocated by Neary (2004), in particular: the preferences of the reference consumer used in the comparison may not resemble those of any actual consumer in the countries compared. VW go on to claim, however, that the axiomatic approach can make meaningful comparisons without the assumption of homogeneous tastes. They may be correct, but they offer little in the way of concrete suggestions to back up their claim. By contrast, the economic approach offers a clear path to dealing with preference heterogeneity. First, at a conceptual level, it avoids the pitfalls associated with interpersonal comparisons of utility by proposing that a particular (actual or hypothetical) consumer be selected as reference, and asking how well off that consumer would be when faced with the prices in each of the countries to be compared. Second, at a practical level, the existence of a common utility function is testable (as discussed in Neary 2004, footnote 20). If a common utility function is acceptable, then searching for an appropriate parametric system of preferences (as done in Neary 2004) is valid. If a single utility function is rejected, then we can ask how many different utility functions are needed to rationalize the data, and partition the data into corresponding subgroups. Perfectly valid international comparisons can then be made within groups. Equally, if the data reject common preferences, it might still be reasonable to use the approach in Neary (2004) to proceed on an “as if” basis and to impose, as a reference consumer, those preferences that best fit the observed demand patterns. The economic approach therefore offers very promising scope for an intellectually coherent “Plan B” (VW, p.1722) as well as a “Plan A.” To illustrate this procedure, we reexamined the data in Neary (2004) using algorithms from Ian Crawford and Krishna Pendakur (2008). We found that the data on 11 commodity groups in 60 countries are rationalizable by a single non-homothetic utility function, but not by any homothetic utility function. This is good news for the approach followed in Neary (2004) in two ways: (a) it justifies estimating a single set of preferences using the pooled data; and (b) it shows that the usual justification for the EKS method (the main alternative to the Geary method, which underlies the Penn World Table) is shaky. Finally, if we take homotheticity seriously and ask how many different sets of homothetic preferences would be needed to rationalize the data for these 60 countries, we found that the answer is 18, although only 4 were required to explain 75 percent of the data; the rest are singletons.

Comparison of agricultural income in Hungary and the New Federal States of Germany

There are a lot of literatures that investigate the agricultural transition both in Hungary and former GDR. However there is no one, which examines and compares the income situation in the above mentioned countries. The aim of this article is to analyse that. The investigation is based on the data of Economic Accounts for Agriculture (EAA). The result shows that the agricultural income is much higher in the New Federal States of Germany if we take into account the subsidies, however without subsidies it would be higher in Hungary.

Adequacy of Economic Resources in Retirement and Returns-to-Scale in Consumption

Most assessments of the adequacy of retirement resources are expressed as a comparison of preretirement income to immediate post-retirement income. Yet, among couples a substantial fraction of retirement years is eventually spent by the surviving spouse living alone. To the extent that singles need less than couples to maintain the same standard of living, assessments of the adequacy of economic resources that make no adjustment for widowing will systematically misstate economic preparation. We estimate returns-to-scale parameters in spending by older households, using data from the Consumption and Activities Mail Survey and apply these to assessments of adequacy of retirement resources.

Disparities in Prices and Income across German NUTS 3 Regions

Abstract In EU countries, knowledge on spatial disparities in overall price level is extremely scarce. When interregional price disparities are large, however, nominal income measures fail to assess prosperity and the catch-up processes of regions. Despite its importance for regional policy, no official regional price statistic is available as a standard. On account of this gap, this paper deals with the econometric estimation of regional price indices for German NUTS 3 regions. Econometric price models for the consumer price index (CPI) and the housing rent index (HRI) are developed on the ground of utility maximization in a two-goods model. The estimated price indices are used to analyse price disparities in the period 1995–2004 across German NUTS 3 regions. Real income comparisons show that the East /West gap is likely to be substantially larger than assessed from incomplete price data in previous studies.

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

The “Easterlin paradox” suggests that there is no link between a society’s economic development and its average level of happiness. We reassess this paradox, 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.

Comparing Low Income of Canada's Regions: A Stochastic Dominance Approach

Comparisons of low income between regions may have impacts on policy choices. However, it is often argued that rankings of distributions are not robust and that they are also quite sensitive to methods of defining low income. This paper avoids these problems by using a stochastic dominance approach to compare regional low income profiles in Canada without arbitrarily specifying a low-income line. This analysis is carried out for the 10 provinces using the Survey of Labour and Income Dynamics for 2000. Robustness of the results is also verified with respect to different choices of spatial price deflators and equivalence scales. The extent to which the findings are sensitive to the choice of an absolute or a relative concept of low income is also examined. We show that, in most cases, dominance relations can be determined and regional low income can be ordered for a wide range of low-income lines. We also show that dominance results are robust to the choice of equivalence scales, while rank reversal occurs when alternative cost-of-living deflators are used. Switching from an absolute to a relative low-income concept only affects low-income rankings for Ontario, Quebec and the Prairie provinces, but not in the case of other provinces. Nevertheless, for all scales, we find that low income is greatest in British Columbia.

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

The “Easterlin paradox” suggests that there is no link between a society’s economic development and its average level of happiness. We re-assess this paradox 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 the relationship between subject 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.

Relative Status and Well-Being: Evidence from U.S. Suicide Deaths

This paper empirically assesses the theory of interpersonal income comparison using individual level data on suicide deaths in the United States. We model suicide as a choice variable, conditional on exogenous risk factors, reflecting an individual's assessment of current and expected future utility. Our empirical analysis considers whether suicide risk is systematically related to the income of others, holding own income and other individual factors fixed. We estimate proportional hazards and probit models of the suicide hazard using two separate and independent data sets: (1) the National Longitudinal Mortality Study and (2) the Detailed Mortality Files combined with the 5 percent Public Use Micro Sample of the 1990 decennial census. Results from both data sources show that, controlling for own income and individual characteristics, individual suicide risk rises with reference group income. This result holds for reference groups defined broadly, such as by county, and more narrowly by county and one demographic marker (e.g., age, sex, race). These findings are robust to alternative specifications and cannot be explained by geographic variation in cost of living, access to emergency medical care, mismeasurement of deaths by suicide, or by bias due to endogeneity of own income. Our results confirm findings using self-reported happiness data and are consistent with models of utility featuring external habit or Keeping Up with the Joneses preferences.

Keeping Up with the Joneses and Staying Ahead of the Smiths: Evidence from Suicide Data

This paper empirically assesses the theory of interpersonal income comparison using a unique data set on suicide deaths in the United States. We treat suicide as a choice variable, conditional on exogenous risk factors, reflecting one's assessment of current and expected future utility. Using this framework we examine whether differences in group-specific suicide rates are systematically related to income dispersion, controlling for socio-demographic characteristics and income level. The results strongly support the notion that individuals consider relative income in addition to absolute income when evaluating their own utility. Importantly, the findings suggest that relative income affects utility in a two-sided manner, meaning that individuals care about the incomes of those above them (the Joneses) and those below them (the Smiths). Our results complement and extend those from studies using subjective survey data or data from controlled experiments.

Is poverty multidimensional? A comparison of income and asset based measures in five Southern African countries.

This paper contests the major emphasis placed on the multidimensional nature of poverty measurement. Instead, it argues that poverty pictures created by different measures and at different units of analysis tend to converge. This argument is derived from a comparison of poverty pictures created using income and asset-based measures at the national and household level in five South African Development Community countries. Although multidimensional measures have value in illuminating subtle differences, the findings indicate a single dimension of poverty that runs throughout all the measures and levels of analysis. However, despite the single poverty picture provided by different measures, the abandonment of these different measures is not supported. Multidimensional measures provide insight into particular elements of poverty that is useful and relevant to poverty interventions.

Gender Differences in the Annual Income of Psychiatrists

Female physicians have traditionally earned less than their male counterparts, even after adjustment for specialty, workload, and physician characteristics. In the 1980s female psychiatrists earned incomes that were 13% lower than those of their male counterparts; however, important explanatory variables for such differences were not incorporated into that analysis. This study examined whether a gender income gap among psychiatrists persisted in the 1990s. Survey responses were used that were obtained between 1992 and 2001 from 976 actively practicing white psychiatrists (weighted N=941). Because of low numbers of black respondents to the surveys, we were unable to examine the influence of race on psychiatrists' incomes. Linear regression modeling was performed to determine the association between gender and annual incomes after controlling for workload, provider characteristics, and practice characteristics. Among white psychiatrists, women reported working 13% fewer annual hours than their male counterparts, and women had practiced medicine for fewer years than men. Also, women were more likely to be employees of the practice, as opposed to having an ownership interest in the practice, and were more likely to be board certified, although these findings were not significant. After adjustment for workload, provider characteristics, and practice characteristics, the mean annual income for women was $140,615, or $31,962 (19%) lower than that of men (95% confidence interval of $41,834-$22,090 lower, p<.001). During the 1990s female gender was associated with lower annual incomes among white psychiatrists; compared with previous reports from earlier periods the income disparity appears to be widening. These findings warrant further exploration.

Gender Differences in the Annual Income of Psychiatrists

Gender Differences in the Annual Income of Psychiatrists

Direct Evidence on Income Comparisons and Their Welfare Effects

Direct Evidence on Income Comparisons and Their Welfare Effects

Alternative measures of output in global economic–environmental models: Purchasing power parity or market exchange rates? — Comment

Nordhaus [Nordhaus, W. 2006, Alternative measures of output in global economic–environmental models: purchasing power parity or market exchange rates? Energy Economics, doi 10.1016/j.eneco.2006.02.003] examines the question of the use of purchasing power parity versus market exchange rates in constructing global economic models. He concludes that the best approach is to use PPP measures for relative incomes and outputs and national accounts' prices and quantity indexes for time series extrapolations. In this comment we argue and show that international real income comparisons based on PPP measures overstate the real incomes of poorer countries and underestimate the real incomes of richer regions. This is the case because the PPP approach fails to account for the differences in various non-traded attributes, such as availability of public goods and the location, attached to the final sale of the goods being compared. Additionally, using a teleporting consumer model we show that the use of real exchange rates to convert real quantities and the use of market exchange rates to convert nominal incomes preserve real income rankings across nations and this approach is consistent with standard economic theory.

Keeping Up with the Joneses and Staying Ahead of the Smiths: Evidence from Suicide Data

This paper empirically assesses the theory of interpersonal income comparison using a unique data set on suicide deaths in the United States. We treat suicide as a choice variable, conditional on exogenous risk factors, reflecting one’s assessment of current and expected future utility. Using this framework we examine whether differences in group-specific suicide rates are systematically related to income dispersion, controlling for socio-demographic characteristics and income level. The results strongly support the notion that individuals consider relative income in addition to absolute income when evaluating their own utility. Importantly, the findings suggest that relative income affects utility in a twosided manner, meaning that individuals care about the incomes of those above them (the Joneses) and those below them (the Smiths). Our results complement and extend those from studies using subjective survey data or data from controlled experiments.

Las Islas de los Changos (the Monkey Islands): the economic impact of ecotourism in the region of Los Tuxtlas, Veracruz, Mexico

This study evaluates the popularity and economic impact of Las Islas de los Changos (the Monkey Islands) as an ecotourism site on Lake Catemaco in the Los Tuxtlas region of Veracruz, Mexico. Two small island colonies of exotic primates, stumptail macaques (Macaca arctoides), have proved to be highly beneficial for the local economy as the main attraction for tourists in this region. From July 1991 to June 1992, data were collected on the number of tourists who took boat trips to visit the primates, and the amount of money spent on tours to the islands. The data suggest that at least 28,470 passengers visit these primate troops annually and spend approximately 88,970 U.S. dollars (USD). Follow-up questionnaires during July 1997 to June 2000 to hotelkeepers and tourist boat operators identified the Monkey Islands as the primary destination for tourists to this region. A comparison of the net income obtained by local ecotourism operators with wages earned through other types of employment in the Los Tuxtlas region, such as working in natural reserves, agriculture, or renting grazing land for cattle, show the relative importance of Las Islas de Los Changos in sustaining the local economy.

Income Inequality and Job Satisfaction of Full-Time Employees in Germany

Using data from the German Socio-Economic Panel Study (GSOEP), it is shown that income comparison with persons who are better off has a clear impact on the job satisfaction of West German full-time employees. Two contrary effects can be identified. On the one hand, there is an aversion to disadvantageous regional income inequality, while on the other hand, individuals prefer inequality within their occupational group. The two effects are interpreted as envy and an information (or “tunnel”) effect, respectively. The analysis of income comparison with persons who are worse off suggests a prestige effect. However, downward comparison is of minor importance for job satisfaction.

The Income of the Swedish Baby Boomers

This paper study the income of Swedish households belonging to the baby boom generation, i.e those born in the 1940-50. An international comparison as well as an historical presentation of income patterns is given. However, the main purpose is to generate the future income of the baby boom generation as they get older. A major result is that the income standard of the young-old will become much higher than that of the very old. If our simulations bear the stamp of realism they suggest that we will see new and large poverty in Sweden among the very old in the future. The pension system contributes to this result. The front loaded design gives with its reduced wage indexation a higher income immediately after retirement but a much lower income at older age. From this perspective it is unfortunate that so much attention is given to the discussion of replacement rates. The replacement rate, although interesting in itself, completely miss the long run effect and just provides a comparison of incomes shortly after with incomes before retirement. If we instead focus on the relative income of older pensioners the results become quite different. Our results challenge the conception of a sustainable pension system. If the relative income of older pensioner’s drops and at the same time expenditures for health and care increase, one might wonder how the old in our society will make both ends meet. If pensions become too small to meet minimum standards the requirement of financial sustainability of the pension system results in an increasing financial burden on other parts of the general social protection system.

Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect

We present a model of income tax avoidance with heterogeneous agents, assuming the presence of a comparison income effect and of a psychic cost (disutility) of tax dodging. We analyse the policy preferences of the agents, and identify a median-voter political equilibrium. Paralleling previous results in the optimal taxation literature, we show that the comparison income effect calls for a high degree of progressivity of the income tax; additionally, we find that this tendency is strengthened by the psychic cost of avoidance. We then model the endogenous formation of the stigma attached to the act of avoidance as a conformism game. We argue that such stigma is motivated by the desire to make redistribution more effective, and that it is enhanced by the income comparison effect.