Subjective Happiness and the Easterlin Paradox

In this revision video we look at the relationship between real incomes and subjective happiness.

This debate has become more prominent in recent years as the UK economy has struggled to achieve growth momentum a decade on from the Global Financial Crisis despite a period of historically low interest rates. Changes in measured wellbeing may also have been affected by the impact of nearly ten years of fiscal austerity involving real cuts in government spending and a series of tax increases.

There is now widespread agreement that living standards cannot be assessed purely with reference to changes in real disposable incomes per person. A wider range of measures are included in published wellbeing statistics including those that reflect on reported life satisfaction and happiness.

This chart shows real household disposable income per capita from 1995 through to 2018.

Per capita incomes grow quite strongly from 2000 through to 2007 but following the recession we can see that they have struggled to improve. From 2009 to 2018, per capita incomes adjusted for inflation increased by only 3.1%. And for millions of people, real incomes after direct taxes and welfare benefits will have fallen over this period.

This leads to a decline in household’s real purchasing power meaning that less can be spent on goods and services and that utility bills and other expenses such as mortgages and housing rents become more difficult to afford. This drop in real incomes may help to explain the rise in household debt as a share of GDP in recent years especially if households are borrowing to maintain their previous standard of life.

Over the last ten years, the annual average growth of real household spending has lagged the pre-downturn growth rate of 2% a year.

Measuring economic wellbeing

Economic wellbeing is a broader measure of our welfare than simply GDP or GNI per capita. The UK has joined a growing number of countries in looking at how traditional measures of progress such as GDP can be complemented by subjective measures to assess how people feel about their lives. Some of the notable wellbeing indicators are shown and they rely heavily on reported life satisfaction, anxiety and stress.

Wellbeing indicators include the following:

• Real disposable income per head
• Average ratings of life satisfaction and happiness
• Feeling that things done in life are worthwhile
• Feelings of anxiety
• Unemployment rate and job expectations
• Household debt to income ratio
• Income inequality (Gini coefficient)

What does the subjective happiness indicators suggest?

Personal well-being surveys ask people to evaluate, on a scale of 0 to 10, how satisfied they are with their life overall, whether they feel they have meaning and purpose in their life, and about their emotions (happiness and anxiety)

There has been a rise in reported high life satisfaction and happiness although that figure dipped in 2019. We should expect this is we think about a decade of relatively low inflation, cheaper mortgage servicing costs, unemployment falling to a 45-year low and record high employment rates.

However, many people are in vulnerable and relatively poorly-paid jobs and there has been an increase in working poverty,

This data is designed to come from a representative sample of society in the UK, but please bear in mind that wellbeing can vary for different groups in society

What is the Easterlin Paradox?

The Easterlin Paradox concerns whether we are happier and more contented as our real living standards improve

Within a society, richer people tend to be happier than poor people.

Richard Easterlin argued that life satisfaction does rise with average incomes but only up to a point.

Beyond that the marginal gain in happiness declines (there are diminishing returns)

One of his conclusions was that someone’s relative income can weigh heavily on people’s minds.

Several papers (including Wolfers, 2008) have contested the findings of the Easterlin Paradox

For example, in a 2008 research paper, Betsey Stevenson and Justin Wolfers proved that richer countries are happier and that wealthier people are in fact, on average happier. They concluded that there is no maximum wealth threshold after which happiness remains constant or even decreases.

Richard Easterlin has produced a more recent paper in which he argued that “New data for both the United States and countries worldwide, confirm that long-term trends in growth rates of happiness and real GDP per capita are not significantly positively related.”