Lecture 3: Income and Well-Being

Lecture 3: Income and Well- Being Nick Powdthavee Professor of Economics In this third lecture What motivates people’s choices Is money one of the most important predictors of people’s preferences? Can money buy happiness? If...

Lecture 3: Income and Well- Being Nick Powdthavee Professor of Economics In this third lecture What motivates people’s choices Is money one of the most important predictors of people’s preferences? Can money buy happiness? If so, how much does it buy? What is the Easterlin Paradox? Can improve income for all increase happiness for all?  Some useful readings Benjamin, D.J., Heffetz, O., Kimball, M.S., Rees-Jones, A., 2012. What do you think would make you happier? What do you think you would choose?. American economic review, 102(5), pp.2083-2110 Clark, A.E., Frijters, P. and Shields, M.A., 2008. Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. Journal of Economic literature, 46(1), pp.95-144. Kahneman, D. and Deaton, A., 2010. High income improves evaluation of life but not emotional well-being. Proceedings of the national academy of sciences, 107(38), pp.16489-16493.  Join at vevox.app Or Search Vevox in the app store ID: 187-500-512 Join: vevox.app ID: 187-500-512  POLL OPEN Imagine you’re 40 – you are married with two children living in Singapore, how much money (SG$) do you think would you need to earn per year (all prices adjusted) to be satisfied with your life?  Let us begin this lecture with the happiness of millionaires!  Two studies of 4,000 millionaires  Only at high levels of wealth ($8 million or more in Sample 1, and $10 million or more in Sample 2) were respondents found to be “happier” than those with lower levels of wealth However, the differences were only modest; for example, only 0.06 on a 7- point scale for Sample 1. The correlation between marriage and life satisfaction is bigger at 0.1 I. What Motivates Your Life Choices?  POLL OPEN From this list, please select your top three most important things in your life Vote for up to 3 choices 1 Health 0% 2 Money 0% 3 Having children (in the future) 0% 4 Having a good job 0% 5 Good partnership 0% 6 Good friends 0% 7 Other things not in this list 0% (% = Percentage of Voters) The Importance of Money Against Other Things in Life Importance of: 9.38 9.19 8.85 7.83 7.58 6.46 Health Money Having children Having a good job Good partnership Good friends British Household Panel Survey, 2008-2009 The Importance of Money Against Other Things in Life Importance of: 10 9 9.17 9.35 8.98 9.1 8.52 8.65 8 8.42 8.26 7 7.01 6.98 6.76 6 6.1 5 Men (age 16-24) 4 Women (age 16-24) 3 2 1 0 Health Money Having children Having a good job Good partnership Good friends A lot of people seem to agree that money isn’t the most important thing in the world… And yet we continue to see the pursuit of wealth being prioritised just about anywhere in our society  Say you have to decide between two new jobs. The jobs are exactly the same in almost every way, but have different work hours and pay different amounts. Option 1: A job paying £60,000 per year. The hours for this job are reasonable, and you would be able to get about 7.5 hours of sleep on the average work night Option 2: A job paying £90,000 per year. However, this job requires you to go to work at unusual hours, and you would only be able to sleep around 6 hours on the average work night.  POLL OPEN Between these two options, taking all things together, which do you think would give you a happier life as a whole? 1 Option 1: Sleep more but earn less (definitely happier) 0% 2 Option 1: Sleep more but earn less (probably happier) 0% 3 Option 1: Sleep more but earn less (possibly happier) 0% 4 Option 2: Sleep less but earn more (possibly happier) 0% 5 Option 2: Sleep less but earn more (probably happier) 0% 6 Option 2: Sleep less but earn more (definitely happier) 0%  POLL OPEN If you were limited to these two options, which do you think you would choose? 1 Option 1: Sleep more but earn less (definitely choose) 0% 2 Option 1: Sleep more but earn less (probably choose) 0% 3 Option 1: Sleep more but earn less (possibly choose) 0% 4 Option 2: Sleep less but earn more (possibly choose) 0% 5 Option 2: Sleep less but earn more (probably choose) 0% 6 Option 2: Sleep less but earn more (definitely choose) 0%  For most people, the pursuit of a Denver Cornell happier and more satisfied life is the main reason behind their choices E.g. 87% of patients at a doctor’s waiting room in Denver; 92% in the Cornell National Social Survey (CNSS); and 75% of students in Cornell University Benjamin, D.J., Heffetz, O., Kimball, M.S., Rees-Jones, A., 2012. What do you think would make you happier? What do you think you would choose?. American economic review, 102(5), pp.2083-2110 Denver Cornell Interestingly, 12% of Denver, 7% of CNSS, and 8% of Cornell said Option 1 (more sleep, less income) will make them happier, but would still opt for Option 2 (less sleep, more income) if they have to make a choice Benjamin, D.J., Heffetz, O., Kimball, M.S., Rees-Jones, A., 2012. What do you think would make you happier? What do you think you would choose?. American economic review, 102(5), pp.2083-2110 II. Can Money Buy Happiness?  Let’s begin with the relationship between income and a measure of cognitive wellbeing (e.g. life satisfaction or happiness with life) across countries at any given point in time i.e. cross-country pattern Source: World Values Survey Source: Stevenson, B. and Wolfers, J., 2013. Subjective well-being and income: Is there any evidence of satiation?. American Economic Review, 103(3), pp.598-604.  Within the same country, the rich are also happier with life than the poor See, e.g., American General Social Survey American General Social Survey, 2006 Log income scale fits the income-happiness relationship better than the linear income scale I.e. A $100 increase in income tends to increase happiness more for the poor than for the rich It is the proportionate increase that matters! (e.g. % increase) Stevenson, B. and Wolfers, J., 2008. Economic growth and subjective well-being: reassessing the Easterlin paradox (No. w14282). National Bureau of Economic Research.  But what about the relationship between income and affective wellbeing (e.g. day-to-day emotional experiences)? E.g., frequency of smiling, feeling blue, anxious, etc. Unlike the relationship between income and life satisfaction, there is a satiation point – at approximately $75,000 p.a. - in the relationship between income and measures of daily emotional wellbeing (e.g., positive affect, not blue, stress free) in the USA Kahneman, D. and Deaton, A., 2010. High income improves evaluation of life but not emotional well-being. Proceedings of the national academy of sciences, 107(38), pp.16489-16493. A more recent study by Matt Killingsworth has shown no plateau in the relationship between income and moment-to-moment happiness Killingsworth, M. A. (2021). Experienced well-being rises with income, even above $75,000 per year. Proceedings of the National Academy of Sciences, 118(4). This discrepancy in the findings is scientifically unattractive…  Killingsworth, M. A., Kahneman, D., & Mellers, B. (2023). Income and emotional well-being: A conflict resolved. Proceedings of the National Academy of Sciences, 120(10), e2208661120.  A reanalysis of Killingsworth’s experienced sampling data confirmed the flattening pattern only for the least happy people. Happiness increases steadily with log(income) among happier people and even accelerates in the happiest group. Kahneman and Deaton’s original conclusion would have been correct if they had described their results in terms of unhappiness rather than happiness Their measures (feeling not blue) could not discriminate among degrees of happiness because of the ceiling effect Each of their original findings  It looks as if higher incomes alter the distribution of happiness for happy and less happy individuals Higher incomes do not seem to increase with happiness for those in the bottom of the happiness distribution  Methodological Difference Kahneman and Deaton’s paper uses a binary measure of well-being For example, “Not blue” takes the value of 1, and 0 otherwise Killingsworth’s paper uses a scale from 0 to 100 for happiness Ceiling effect In Kahneman and Deaton’s paper, most people with higher incomes may report “1” on the happiness scale. Their questions were likely more effective at detecting levels of unhappiness rather than different degrees of happiness because most respondents tended to report high levels of happiness, making it hard to differentiate among them. But their evidence is ultimately “cross- sectional”, i.e., comparing between individuals What about within- person?  Within-person Evidence At the cross-section, the rich are more satisfied with life than the poor Although they do not necessarily experience more positive affects than the poor But what if we look at within-person evidence, i.e., does an increase in income from year to year buy more satisfaction for individuals? To answer this question, we must refer to longitudinal (or panel) data i.e., data that track the same individuals over time British Household Panel Survey is a good example of such dataset (https://www.iser.essex.ac.uk/bhps)  Life satisfaction is standardized to have a Correlation between log household income mean of 0 and a standard deviation of 1 and standardised life satisfaction, BHPS 0.12 Household income is in logarithmic unit How to interpret the numbers: 0.1 With no control (i.e. a bivariate relationship), a 1% increase in 0.08 Standard Deviation household income is associated with a 0.11 standard deviation increase in 0.06 life satisfaction With control (i.e. holding other 0.04 observable characteristics such as gender, age, marital status, 0.02 employment status, etc., constant), a 1% increase in household income is 0 associated with a 0.05 standard No controls With controls + individual fixed effects deviation increase in life satisfaction  The process of adding individual fixed effects allows us to estimate the correlation between within-person Correlation between log household income changes in income and life satisfaction and standardised life satisfaction, BHPS 0.12 So, instead of comparing between different people (who may be different in 0.1 many unobservable ways in the data), we are comparing within the same individual over time 0.08 Standard Deviation Here, we can see that a 1% increase in 0.06 household income is associated with a 0.02 standard deviation increase in life 0.04 satisfaction In conclusion, an increase in income is 0.02 statistically significantly associated with an increase in life satisfaction on 0 average, but the relationship is smaller No control With control + individual fixed effects within-person than between-person, i.e. richer people vs. poor people So, at the individual level, people become more satisfied with life as they grow richer Although the size of the correlation is often not as big as many would have thought…  But what about a country as a whole? Can economic growth improve the average happiness for the people in a country? This is an empirical question "Does Economic Growth Improve the Human Lot?" Richard Easterlin in Paul A. David and Melvin W. Reder, eds., Nations and Households in Economic Growth: Essays in Honor of Moses Abramovitz, New York: Academic Press, Inc., 1974. The relationship between income and well-being in Japan over 25 years Happiness and GDP per capita in the USA, 1972-2002 Source: Easterlin, R.A. and Angelescu, L., 2012. Modern economic growth and quality of life: Cross-sectional and time series evidence. In Handbook of social indicators and quality of life research (pp. 113-136). Springer Netherlands. Life-satisfaction country averages, European Countries Italy Ireland 3.8 Germany Netherlands 3.6 3.4 3.2 3 2.8 2.6 2.4 1974 1982 1990 1998 2006 Easterlin, R. A., & O’Connor, K. J. (2022). The easterlin paradox. In Handbook of labor, human resources and population economics (pp. 1-25). Cham: Springer International Publishing. The road to nowhere? While the richer are happier than the poor, economic growth does not seem to be correlated with growth in the average happiness and life satisfaction This is the “Easterlin paradox” The Man Behind the Easterlin Paradox  But the Easterlin Paradox has been under attacked recently... Notably by two economists (who are also happened to be married to each other) Justin Wolfers and Betsy Stevenson Within-country life satisfaction gradient, which indicates the relationship between an annual change in per capita income and an annual change in the average life satisfaction, is positive in many countries in the World Values Survey (WVS) Source: Stevenson, B. and Wolfers, J., 2008. Economic growth and subjective well-being: reassessing the Easterlin paradox (No. w14282). National Bureau of Economic Research.  Is there really a paradox? What explains the difference in these results? One explanation is that Richard Easterlin uses a long-run data, spanning over 10 years, and finds zero relationship between a long-run change in the average happiness and a long-run change in per capita GDP By contrast, Stevenson and Wolfers (2008) find a positive relationship between a short-run change in the average happiness and a short-run change (i.e. yearly change) in per capita GDP and a short-run change in per capita GDP Question: Should we focus more on the short-run or the long-run relationship between economic growth and average life satisfaction?  Another key difficulty is that we know unemployment movements – omitted from most regression equations in Stevenson and Wolfers’ study -- affect life satisfaction Low growth = high unemployment, so the positive relationship between economic growth and average life satisfaction may have been driven primarily by high unemployment in low growth countries Source: Di Tella R, MacCulloch RJ, Oswald AJ. Preferences over inflation and unemployment: Evidence from surveys of happiness. The American economic review. 2001 Mar 1;91(1):335-41. Moreover, Stevenson and Wolfers agree that Americans have if anything become less happy over the last 30 years. traffic Blanchflower, D. G., & Oswald, A. J. (2020). Trends in extreme distress in the United States, 1993–2019. American Journal of Public Health, 110(10), 1538-1544. “Now thinking about your mental health, which includes stress, depression, and problems with emotions, for how many days during the past 30 days was your mental health not good?” We define extreme mental distress as those who say all 30 days out of 30. Distress Over Time in the USA: % of working-aged Americans experiencing at least moderate distress (Defined as scoring ≥ 5 on the Kessler-6 Distress Scale) Michael Daly, American Journal of Public Health, 2022. Might this have something to do with work getting more stressful? [Yes] Work by Francis Green, Keith Whitfield, et al.  Proportion of High-Strain Jobs 30 25 20 % 15 10 5 0 1992 1997 2001 2006 Males Females Green (2008) Work Effort and Worker Well-Being in the Age of Affluence Source: Skills Survey series What of well-being among the young? Helen Sweeting et al “GHQ increases among Scottish 15 year olds 1987–2006” Social Psychiatry & Psychiatric Epidemiology (2008). Her team assesses whether life is getting more stressful for young people. Mental strain in young Scots in 1987 50 40 % 'cases' 30 males females 20 10 0 1987 1999 2006 Mental strain in young Scots in 1999 50 40 % 'cases' 30 males females 20 10 0 1987 1999 2006 Mental strain in young Scots by 2006 50 40 % 'cases' 30 males females 20 10 0 1987 1999 2006 Equivalent results have been found for adults in the Netherlands, UK and Belgium. Worsening mental health levels through time Verhaak, P.F.M., Hoeymans, N. and Westert, G.P. (2005). “Mental health in the Dutch population and in general practice: 1987-2001”, British Journal of General Practice. Wauterickx, N. and P. Bracke (2005), “Unipolar depression in the Belgian population - Trends and sex differences in an eight-wave sample”, Social Psychiatry and Psychiatric Epidemiology. Sacker, A. and Wiggins, R.D. (2002). “Age-period-cohort effects on inequalities in psychological distress”. Psychological Medicine. So there is much evidence that all this extra money we have today is not doing a lot for us. Therefore, I would say that currently the balance of the evidence favours Easterlin rather than Stephenson-Wolfers [though it is bad science for us ever to close our minds, so we must watch for new evidence as it accumulates] What explains the Easterlin Paradox? One possible explanation is that people care about relative income…  POLL OPEN Which world do you prefer? 1 The world where you earn £75k per year 0% 2 The world where you earn £100k per year 0% Assuming that everything else is the same between these two worlds, e.g., house and food prices, politics, life expectancy, etc.  POLL OPEN Which world do you prefer? 1 The world where you earn £75k per year and everybody else you know earns £50k per year 0% 2 The world where you earn £100k per year and everybody else you know earns £125k per year 0% Assuming that everything else is the same between these two worlds, e.g., house and food prices, politics, life expectancy, etc.  It has been found that Relative-income variables show up consistently in well-being equations. Blanchflower-Oswald, Journal of Public Economics 2004 Luttmer, Quarterly Journal of Economics 2005 GDA Brown et al, Industrial Relations 2008  Clark and Oswald (JPubEcon 1996). BHPS Data The positive effect on job on 5000 Employees satisfaction associated with a 1% increase in Log income (y) -0.02 0.11 -0.001 income is (0.039) (0.050) (0.04) completely Log comparison income (y*) --- -0.20 --- wiped out by a (0.062) 1% increase in Log NES comparison income (y**) --- --- -0.26 the comparison (0.073) income So, we are “Comparison Income” predicted from a Mincer Earnings equation (note: requires happier with a exclusion restrictions to avoid multicollinearity); pay rise until we “NES comparison income” matched in from another data set by hours of work, and realise that thus avoids identification problems (but assumes reference group defined by hours of work). everybody else got the same Clark, A.E. and Oswald, A.J., 1996. Satisfaction and comparison income. Journal of public economics, 61(3), pp.359-381. pay rise as well Against whom do we compare ourselves? Possibilities Peer group/people like me Others in the same household Spouse/partner Myself in the past Friends Neighbours Work colleagues “Expectations” Source: Clark, A.E. and Senik, C., 2010. Who compares to whom? The anatomy of income comparisons in Europe. The Economic Journal, 120(544), pp.573-594. Source: Clark, A.E. and Senik, C., 2010. Who compares to whom? The anatomy of income comparisons in Europe. The Economic Journal, 120(544), pp.573-594. Let’s also look at everyday empirical evidence. 5 dollars Blancpain 1735, Grande Complication 500000 dollars Blancpain 1735, Grande Complication  There are now results From fMRI scans From statistical work on well-being  This includes new empirical work: Armin Falk and colleagues on relative-income images in the brain (Science, Journal of Public Economics) Peter Kuhn and colleagues on car purchasing by neighbours of lottery winners (AER forthcoming) Ori Heffetz on visible goods (REStats forthcoming). David Card, Alexandre Mas, Enrico Moretti, Emmanuel Saez on peers and satisfaction.  Title: Social comparison affects reward-related brain activity in the human ventral striatum Author(s): Fliessbach K, Weber B, Trautner P, et al. Source: SCIENCE Volume: 318 Issue: 5854 Pages: 1305-1308 Published: NOV 23 2007  Title: Relative versus absolute income, joy of winning, and gender: Brain imaging evidence Author(s): Dohmen T, Falk A, Fliessbach K, et al. Source: JOURNAL OF PUBLIC ECONOMICS Volume: 95 Issue: 3-4 Special Issue: Sp. Iss. SI Pages: 279-285 Published: APR 2011 We are now able to look inside the brain.  Armin Falk et al While being scanned in adjacent MRI scanners, pairs of subjects had to perform a task with monetary rewards for correct answers. Variation in the comparison subject's payment affected blood oxygenation level-dependent (BOLD) responses in the ventral striatum. This brain region is engaged in the registration of primary rewards.  Blood-oxygenation equations Table: Activation and Income Dependent variable: ventral striatum activation (1) (2) (3) all conditions conditions 2-11 conditions 6-11 Own Income (in 100 Euro) 0.916*** 0.868*** 0.327*** [0.109] [0.102] [0.091] Other's income (in 100 Euro) -0.666*** -0.714*** -0.353*** [0.087] [0.086] [0.090] Constant -0.119 -0.061 0.068 [0.144] [0.145] [0.167] Observations 704 640 384 R-squared 0.059 0.063 0.011 OLS estimates; clustering on individuals, robust standard errors in brackets; *** p