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The Easterlin Paradox: Empirics on the Income-Happiness Relationship sans Hedonic Adaptation

Explore the long-term relationship between income and happiness, challenging the Easterlin Paradox. Analyzing data from various methodologies, including dynamic and multilevel models, to determine the impact of economic growth on happiness levels. Results suggest a positive income-happiness correlation, though economic significance is debatable. The statistical findings indicate a potential refutation of the Easterlin Paradox, emphasizing the need for further economic interpretation.

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The Easterlin Paradox: Empirics on the Income-Happiness Relationship sans Hedonic Adaptation

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  1. The Easterlin Paradox: Empirics on the Income-Happiness Relationship sans Hedonic Adaptation Dr. Edsel L. Beja Jr. ATENEO DE MANILA UNIVERSITY

  2. Easterlin Paradox

  3. long run relationship betweenincomeand happiness is nil Easterlin

  4. long run relationship betweenincomeand happinessispositive (andstat.significant) Stevenson-Wolfers

  5. Methodology: Intro • hi = b0 + b1 gi + errori, where: hi = ΔH, and H is ave happiness of country gi = ΔY, and Y is log income of country • using h as dependent variable implies no happiness adaptation

  6. Methodology: Intro • H = f(Y – AY) where AY is adaptation level • ΔH = f(ΔY – ΔAY) • Define AY = aY-1 + (1 – a)AY-1 … where a represents the rate of adaptation • Rearranging, ΔAY = a(Y-1 – AY-1)… • Substituting… ΔH = ΔY – a(Y-1 – AY-1) • ΔH = f(ΔY – aH-1) • Or, H = ΔY + (1 – a)H-1

  7. Methodology: Intro • ΔH = f(ΔY) • hi = b0 + b1 gi + errori, where: hi = ΔH, and H is ave happiness of country gi = ΔY, and Y is log income of country

  8. Methodology: Dynamic • hit = a0 + Σbj gi,t-j + Σdk-1 hi,t-k + errorit • where: j = 0…p lags k = 1…q lags • autoregressive distributed lag model with p lags on economic growth and q lags on happiness on the assumption that current and past information on both economic growth and happiness are relevant.

  9. Methodology: Multilevel • hit = a0 + Σbj gi,t-j + Σdk-1 hi,t-k + errorit a0 = φ00 + u0t • where: φ00 is b/w country-averages across time u0t is the b/w country-averages variation • hit = φ00 + Σbj gi,t-j + Σdk-1 hi,t-k + (u0t + errorit)

  10. Results • Sum (dynamic) = 0.005, p < 0.01  0.0038 LR • Sum (multilevel) = 0.004, p < 0.05 0.0032LR

  11. Analysis • A unit of (LR) economic growth has 0.003 impact on happiness • If ave. long-run growth rate is 1.95, then 0.003 x 1.95 = 0.00585 • Suppose ave. happiness is 3.0 in a 4 unit scale. • To raise ave. happiness to 3.1, then 0.1 / 0.00585 = 17.09 years.

  12. Conclusion • Reject the Easterlin Paradox based on the statistical significanceof results(i.e.that is, there is indeed positive income-happiness relationship) • Accept the Easterlin Paradox based on the economic non-significance of results. The estimates can be taken as a refutation of the Easterlin Paradox if they have econo-mic meaning.

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