Does Relative Income Matter? Are the Critics Right?

Richard Layard, Guy Mayraz and Stephen Nickell ()

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Do other peoples' incomes reduce the happiness which people in advanced countries experience fromany given income? And does this help to explain why in the U.S., Germany and some other advancedcountries, happiness has been constant for many decades? The answer to both questions is 'Yes'. Weprovide 4 main pieces of evidence. 1) In the U.S. General Survey (repeated samples since 1972)comparator income has a negative effect on happiness equal in magnitude to the positive effect ofown income. 2) In the West German Socio-Economic Panel since 1984 the same is true but with lifesatisfactionas the dependant variable. We also use the Panel to compare the effect of incomecomparisons and of adaptation as factors explaining the stable level of life-satisfaction: incomecomparisons emerge as much the more important. 3) When in our U.S. analysis we introduce"perceived" relative income as a potential explanatory variable, its effect is as large as the effect ofactual relative income - further supporting the view that comparisons matter. 4) Finally, for a panel ofEuropean countries since 1973 we estimate the effect of average income upon average lifesatisfaction,splitting income into two components: trend and cycle. The effect of trend income issmall and ill-defined. Our conclusions relate to time series and to advanced countries only. Theydiffer from those drawn in recent studies by Deaton and Stevenson/Wolfers, but those studies arelargely cross-sectional and mostly include non-advanced as well as advanced countries.

Keywords: Easterlin Paradox; happiness; relative income; growth (search for similar items in EconPapers)
JEL-codes: D31 D90 E01 H00 I31 O15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ltv
Date: 2009-03
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Working Paper: Does Relative Income Matter?: Are the Critics Right? (2009)
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