What Makes You Happy

Not exactly happiness, but a very      similar sensation

Making their respective economies grow is the primary goal of many a country’s government policy—and that of regions, companies and even households. Increased wealth, goes the rationale, leads to increased well-being and thus to more overall happiness. But research has hitherto failed to find an actual correlation between a country’s economic development and its aggregate happiness. This is what has come to be known as the Easterlin Paradox, after economist Richard Easterlin, who explored the issue in several papers. A thriving literature has sprouted on his findings.

What was found, however, was that for low-income countries there indeed was a correlation between income and happiness, but that it tended to disappear when countries had satisfied their basic needs. For the latter, in the words of other authors quoted in this study, “additional income buys little, if any, extra happiness”.

So where does happiness reside then? Well, robust evidence appears to indicate that within countries those with more income are happier. Thus, happiness seems to arise not from absolute but from relative well-being: that is, it does not matter what you have in absolute terms, but how much more you have compared to your peers. No wonder that keeping up with the Joneses is a national sport nearly everywhere. That feeling of happiness when the size of your flat-screen TV tops your neighbour’s by two inches is quite the thing, isn’t it. But is it really?

Not quite, according to CESifo researchers Betsey Stevenson and Justin Wolfers, both of Wharton, University of Pennsylvania. They argue that the lack of correlation between economic development and overall happiness stems from the fact that at the time the Easterlin paradox was first identified, few data were available to allow an assessment of subjective well-being across countries and through time, leading some to confound the absence of evidence of such a link with evidence of its absence.

But the ensuing years have seen an accumulation of cross-country data recording individual life satisfaction and happiness that allow comparisons across countries at all levels of development. The recent data, together with a re-analysis of earlier data, suggest that the case of a link between economic development and happiness is quite robust. The key to their findings, say the authors, is a resolute focus on the magnitude of the subjective well-being-income gradient estimated within and across countries at a point in time as well as over time.

Not only is this estimated gradient significant but also remarkably robust across countries, within countries, and over time. Their findings, therefore, put to rest the earlier claim that economic development does not raise subjective well-being and, at the same time, undermine the possible role played by relative income comparisons. In other words, wealthier societies do have greater subjective well-being than poorer societies and, to a similar degree, wealthier members of a society are happier than their poorer counterparts.

This prompts one question: do societies get happier through time as they become richer? Larger and richer datasets, such as the World Values Survey that has been running since 1981, have made it possible to shed some light on this. There appears to be a general tendency for economic growth to be accompanied by growth in subjective well-being, while economic decline, which is most visible in the former Eastern Bloc, has been accompanied by a decline in well-being. Not only that: the authors find in many cases that happiness rises more rapidly when economic growth is more rapid.

The United States stands out as a notable exception: Americans have experienced no discernible increase in happiness over the past thirty-five years (with happiness among women even declining). In contrast, Japan stands out as a remarkable success story, while Europe shows happiness trending upward, the trend being most evident in those countries in which economic growth has been most robust.

All of the above has far-reaching policy implications. If the Easterlin findings appeared to suggest that people and public policy are powerless to deliver lasting gains in happiness, the findings of the Stevenson-Wolfers study indicate that those enjoying materially better circumstances also enjoy greater subjective well-being, and that ongoing rises in living standards have delivered higher subjective well-being.

What this all will mean now in times of global economic uncertainty, however, remains to be seen.

Betsey Stevenson and Justin Wolfers, CESifo Working Paper No. 2394

• Other CESifo Working Papers dealing with happiness
• Other CESifo Working Papers by Betsey Stevenson
• CESifo MIT Press book "Happiness" by Bruno S. Frey
• CESifo Working Papers published in the past three months