The Easterlin Paradox: Empirics on the Income-Happiness Relationship sans Hedonic Adaptation

Dr. Edsel L. Beja Jr.

ATENEO DE MANILA UNIVERSITY

Easterlin Paradox

Easterlin

• long run relationship between income and happiness is nil

Stevenson-Wolfers

• long run relationship between income and happiness is positive (and stat. significant)

Methodology: Intro

• hi = b0 + b1 gi + errori,

where:

hi = ΔH, and H is ave happiness of country

gi = ΔY, and Y is log income of country

• using h as dependent variable implies no happiness adaptation

Methodology: Intro

• H = f(Y – AY) where AY is adaptation level

• ΔH = f(ΔY – ΔAY)

• Define AY = aY-1 + (1 – a)AY-1 … where a represents the rate of adaptation

• Rearranging, ΔAY = a(Y-1 – AY-1)…

• Substituting… ΔH = ΔY – a(Y-1 – AY-1)

• ΔH = f(ΔY – aH-1)

• Or, H = ΔY + (1 – a)H-1

Methodology: Intro

• ΔH = f(ΔY)

• hi = b0 + b1 gi + errori,

where:

hi = ΔH, and H is ave happiness of country

gi = ΔY, and Y is log income of country

Methodology: Dynamic

• hit = a0 + Σbj gi,t-j + Σdk-1 hi,t-k + errorit

• where:

j = 0…p lags

k = 1…q lags

• autoregressive distributed lag model with p lags on economic growth and q lags on happiness on the assumption that current and past information on both economic growth and happiness are relevant.

Methodology: Multilevel

• hit = a0 + Σbj gi,t-j + Σdk-1 hi,t-k + errorit

a0 = φ00 + u0t

• where:

φ00 is b/w country-averages across time

u0t is the b/w country-averages variation

• hit = φ00 + Σbj gi,t-j + Σdk-1 hi,t-k + (u0t + errorit)

Results

Dynamic panel Multilevel reg

Growth(t) 0.002, p = 0.095 0.001, p = n.s.

Growth(t-1) 0.003, p < 0.001 0.003, p < 0.05

• Sum (dynamic) = 0.005, p < 0.01 0.0038 LR

• Sum (multilevel) = 0.004, p < 0.05 0.0032 LR

Analysis

• A unit of (LR) economic growth has 0.003 impact on happiness

• If ave. long-run growth rate is 1.95, then 0.003 x 1.95 = 0.00585

• Suppose ave. happiness is 3.0 in a 4 unit scale.

• To raise ave. happiness to 3.1, then 0.1 / 0.00585 = 17.09 years.

Conclusion

• Reject the Easterlin Paradox based on the statistical significance of results (i.e. that is, there is indeed positive income-happiness relationship)

• Accept the Easterlin Paradox based on the economic non-significance of results. The estimates can be taken as a refutation of the Easterlin Paradox if they have econo-mic meaning.