You mention the Easterlin paradox a few times in these comments and in you draft paper. I briefly looked into the literature a while ago and I place less weight on the Easterlin paradox than you. Hereâs a quick summary of what I found.
Easterlin claimed (p.113-118) that average satisfaction in a country doesnât increase as a country grows wealthier. Since then there has been a back and forth in the literature but there is now a growing body of correlational evidence that strongly conflicts with Easterlinâs initial claim (for instance, p.3, p.4, p.10, p.12). It seems that the literature now suggests that the relationship between income and life satisfaction is one of diminishing returns but that an increase in income is correlated with an increase in life satisfaction. A nice heuristic to use is that a doubling in income increases subjective well-being by 0.34 standard deviations (p.7).
There has been only limited research into the effect of income on emotional well-being or the affective aspect of subjective well-being. The research there has been suggests that particularly at low levels of income an increase in income correlates with an increase in emotional well-being (p.3, p.8, p.8). A meta analysis on subjective well-being noted that there is a weaker association between income and emotional well-being than income and cognitive well-being (p.3).
I donât discuss the Easterlin Paradox in any depth in the paper because it was largely tangential to the point I was making. Itâs really interesting and something Iâve thought about a lot.
Whether you think the Easterlin Paradox is correct or not somewhat depends on what you think it shows in the first place. There are different formulations of this. My reconstruction is that the Easterlin Paradox makes three claims:
Richer people within a country more satisfied than poorer people.
Richer countries more satisfied than poorer countries
As countries have got richer, life satisfaction has remained broadly flat.
What makes the Easterlin Paradox interesting is that the lack of evidence for 3 seems weird given the truth of 1 and 2. Thatâs the paradoxical part: if being richer than other people at particular moments makes us more satisfied, why donât countries get more satisfied if they get richer? Isnât more money always better?
Now, I should point out that no one doubts the truth of 1 or 2. To my eyes, the battle ground is about the 3rd point: does growth increase life satisfaction? Thereâs some dispute over whether it does, but at best economists only find there is a tiny difference e.g see Stevenson and Wolfers. Perspectives can disagree, but I take that a victory for the Easterlin side: if growth does matter, it seems pretty trivial, so lets focus on increasing satisfaction by other means.
(You can also get into a tedious quagmire of how to best assess 3 given the data available. Stevenson and Wolfers look at growth, but itâs not really a surprise that growing/âshrinking GDP increase/âdecrease satisfaction. What you really want is long-run growth, which Beja 2015 looks at and concludes that, if long run growth increased by 1%[per year], then life satisfaction would rise from 3 to 3.0027âł (life satisfaction was measured on a 1-4 scale) which I mention in reply to Ben Todd below)
So Iâm not doubting
It seems that the literature now suggests that the relationship between income and life satisfaction is one of diminishing returns but that an increase in income is correlated with an increase in life satisfaction.
But that refers to point 1, not point 3. What seems to be going on is that income has a large relative effect and a small absolute effect on life satisfaction. The fact that richer people are more satisfied than poorer people doesnât allow you to infer than making those poor people richer would increase their happiness. Analogously, if I change who wins a 100m sprint so yesterdayâs loser becomes todayâs winner then itâs not obvious (but still possible) Iâve increase overall satisfaction with the result.
Anyway, this is all analysis in terms of cognitive, not affective well-being. I think the latter is what really matters. The Kahneman and Deaton 2010 paper is really interesting because it shows life satisfaction (cognitive well-being) goes up with income but âhappinessâ (affective well-being) plateaus at $40,000ish for household (not individual) income. Given thatâs a survey conducted in America we might suppose this figure would be far lower elsewhere. It seems unlikely to be the case that $40,000/âyear/âhousehold is the figure beyond which incomes stop affecting happiness for all times and all places. If you conceptualise the relevant figure as âthe ability to shameless participate in societyâ then youâd expect that to change.
As a result, I think more work is required to find out what the level of absolute income is that people require. As the Give Directly study shows, it may be incredibly low and so low that cash transfers do surprisingly little.
Hi Michael,
You mention the Easterlin paradox a few times in these comments and in you draft paper. I briefly looked into the literature a while ago and I place less weight on the Easterlin paradox than you. Hereâs a quick summary of what I found.
Easterlin claimed (p.113-118) that average satisfaction in a country doesnât increase as a country grows wealthier. Since then there has been a back and forth in the literature but there is now a growing body of correlational evidence that strongly conflicts with Easterlinâs initial claim (for instance, p.3, p.4, p.10, p.12). It seems that the literature now suggests that the relationship between income and life satisfaction is one of diminishing returns but that an increase in income is correlated with an increase in life satisfaction. A nice heuristic to use is that a doubling in income increases subjective well-being by 0.34 standard deviations (p.7).
There has been only limited research into the effect of income on emotional well-being or the affective aspect of subjective well-being. The research there has been suggests that particularly at low levels of income an increase in income correlates with an increase in emotional well-being (p.3, p.8, p.8). A meta analysis on subjective well-being noted that there is a weaker association between income and emotional well-being than income and cognitive well-being (p.3).
hello Keiran and thanks for your comment.
I donât discuss the Easterlin Paradox in any depth in the paper because it was largely tangential to the point I was making. Itâs really interesting and something Iâve thought about a lot.
Whether you think the Easterlin Paradox is correct or not somewhat depends on what you think it shows in the first place. There are different formulations of this. My reconstruction is that the Easterlin Paradox makes three claims:
Richer people within a country more satisfied than poorer people.
Richer countries more satisfied than poorer countries
As countries have got richer, life satisfaction has remained broadly flat.
What makes the Easterlin Paradox interesting is that the lack of evidence for 3 seems weird given the truth of 1 and 2. Thatâs the paradoxical part: if being richer than other people at particular moments makes us more satisfied, why donât countries get more satisfied if they get richer? Isnât more money always better?
Now, I should point out that no one doubts the truth of 1 or 2. To my eyes, the battle ground is about the 3rd point: does growth increase life satisfaction? Thereâs some dispute over whether it does, but at best economists only find there is a tiny difference e.g see Stevenson and Wolfers. Perspectives can disagree, but I take that a victory for the Easterlin side: if growth does matter, it seems pretty trivial, so lets focus on increasing satisfaction by other means.
(You can also get into a tedious quagmire of how to best assess 3 given the data available. Stevenson and Wolfers look at growth, but itâs not really a surprise that growing/âshrinking GDP increase/âdecrease satisfaction. What you really want is long-run growth, which Beja 2015 looks at and concludes that, if long run growth increased by 1%[per year], then life satisfaction would rise from 3 to 3.0027âł (life satisfaction was measured on a 1-4 scale) which I mention in reply to Ben Todd below)
So Iâm not doubting
But that refers to point 1, not point 3. What seems to be going on is that income has a large relative effect and a small absolute effect on life satisfaction. The fact that richer people are more satisfied than poorer people doesnât allow you to infer than making those poor people richer would increase their happiness. Analogously, if I change who wins a 100m sprint so yesterdayâs loser becomes todayâs winner then itâs not obvious (but still possible) Iâve increase overall satisfaction with the result.
Anyway, this is all analysis in terms of cognitive, not affective well-being. I think the latter is what really matters. The Kahneman and Deaton 2010 paper is really interesting because it shows life satisfaction (cognitive well-being) goes up with income but âhappinessâ (affective well-being) plateaus at $40,000ish for household (not individual) income. Given thatâs a survey conducted in America we might suppose this figure would be far lower elsewhere. It seems unlikely to be the case that $40,000/âyear/âhousehold is the figure beyond which incomes stop affecting happiness for all times and all places. If you conceptualise the relevant figure as âthe ability to shameless participate in societyâ then youâd expect that to change.
As a result, I think more work is required to find out what the level of absolute income is that people require. As the Give Directly study shows, it may be incredibly low and so low that cash transfers do surprisingly little.