Happiness and the Persistence of Income Shocks

Christian Bayer and Falko Juessen

No 6771, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We reassess the empirical effect of income and employment on self-reported well-being. Our analysis makes use of a novel two-step estimation procedure that allows applying instrumental variable regressions with ordinal observable data. As suggested by the theory of incomplete markets, we differentiate between the effects of persistent and transitory income shocks. In line with this theory, we find that persistent shocks have a significant impact on happiness while transitory shocks do not. This has consequences also for inference about the happiness effect of employment. We find that employment per se is rather associated with a decline in happiness.

Keywords: income persistence; happiness; incomplete markets (search for similar items in EconPapers)
JEL-codes: D12 D60 E21 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2012-07
New Economics Papers: this item is included in nep-hap and nep-mac
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Citations: View citations in EconPapers (2)

Published - published in: American Economic Journal: Macroeconomics, 2015, 7 (4), 160–187

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Related works:
Journal Article: Happiness and the Persistence of Income Shocks (2015)
Working Paper: Happiness and the Persistence of Income Shocks (2013)
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