Is connection between income and level of happiness an illusion?

Introduction

There are plenty of economic problems, which have an increasing attention every day: hunger, illiteracy, corruption, the ones that are clear how to measure and clearer how to fight, as there are policy strategies and implications developed for this. Recently, one more question has been asked: whether it’s possible to measure happiness and how that knowledge can be applied? Scientists also show interest in whether happiness is connected to income, as it gives an opportunity for policy-makers to adjust their policy-making decisions accordingly.

Measurement and Understanding of Happiness in social context

First of all, it is necessary to define happiness; put differently it can be called “Subjective Well-Being”. According to Guidelines on Measuring Of Subjective Well-Being (2013, p.10), it is “Good mental states, including all of the various valuations, positive and negative, that people make of their lives and the affective reactions of people to their experience.”

Problems of Happiness Measurement

Veenhoven (1991) argues that basic concept of happiness is relative in its very beginning. First of all, it is stated that happiness is easily affected while comparison, that is, an individual may perfectly live his/her life with full satisfaction, and however after finding out that there is different/higher/better stages of economic development and spending in neighbor areas, the level of happiness will fall. Moreover, the standards themselves seem to adjust quickly to the changes in income, when income raises, standards improve and vice versa.

However, in a really extreme situation like starvation or natural disaster, it won’t make much sense to rely on comparisons, as there is no way that in a framework of chronic hunger or danger people life happy lives taking into account that their neighbours are worse off.

The main determinant of change in a level of happiness – is it income?

The first thought that comes to minds that it might be the level of income an individual receives that changes the level of happiness. However, there are many studies that prove this statement either partially or completely wrong. It’s confirmed that needs of society increase in the same proportion as a level of income does, so it might be problematic to connect those two factors. (R.A. Easterlin, 1994)

China’ Example

It is hard to find a better country for conducting research on that matter than China, as during last two decades it experienced a drastic growth in GDP per capita > 8%. One more remarkable change that happened in this country is a transition from socialism to capitalism. That is, there are two major factors that may (or may not) influence the level of SWB in the country. The reseach was conducted by Richard A. Easterlin in 2012 using self-reported measurements of life satisfaction. Respondents had to answer a question concerning their happiness level using a card for an answer: 1 (dissatisfied) 2 3 4 5 6 7 8 9 10 (satisfied). Surprisingly results weren’t linear increasing function.

According to the outcome, there is U-shaped form over researched period of time. From 1990 there was a fall in happiness level, and the situation turned to a positive side at the begging of 2000, however still not being able to reach the level it was at 1990. Despite all the increase in real per capita consumption and gross domestic product people were feeling less satisfies than they did before. The following question raises: what factor was the reason for such outcome?

Before the turning point in China’s economy, people always had steady income and job opportunities, so-called «Iron Rice Bowl», (in English – «job for life»). People knew that in any case, no matter how bad the economic development of a country in general is, they will have a job place and stable income. However, the transmission to a free-market economy demolished this system, a great number of people lost their jobs and consequently confidence in future. There were a growing number of people who moved from rural areas to a city, they found some workplaces there, but they didn’t receive any benefits in term of job security. Even, at the beginning of 21st century, when the situation on a job market improved people’s fear didn’t fade away, although the rate of happiness started to increase.

Overall, the same trend was noted in most Central and East Europe countries in regard to unemployment. However, there aren’t too many similarities, so these two regions can’t be compared. Life satisfaction in Europe declined sharply before reunification, as in China it started falling as GDP growth tend to increase.

There is no conclusion to be made in concern to an economic regime that is better for the country, but one thing is clear, that turning to capitalism brought some uncertainty and fear to lose a job, what didn’t exist in times of socialism. So, taken all together, it’s possible to state that namely confidence in stable (even not great, but surely regular) income is the determinant of happiness. When an individual doesn’t have to worry about the possibility of being unemployed, the level of income isn’t the determinant of happiness, but rather its stability. (A.E. Clark, 1994)

References

OECD (2013), OECD Guidelines on Measuring Subjective Well-being, OECD Publishing,

Available at: http://dx.doi.org/10.1787/9789264191655-en

Paul Dolan, Richard Layayd and Robert Metcalfe, 2011, «Measuring Subjective Well-being for Public Policy: Recommendations on Measures», Special Paper No. 23, London School of Economists and Political Science, UK

Richard A. Easterlin, 1994, «Will raising the incomes of all increase the happiness of all?», University of South California, USA

Andrew Clark, Andrew J. Oswald, 1994, «Unhappiness and Unemployment», The Economic Journal, pp. 648-659

Richard A. Easterlin, 2012, «When Growth Outpaces Happiness», Today’s Paper, pp. A35, The New York Times

Richard A. Easterlin, Robson Morgan, Malgorzata Switek, Fei Wang, 2012, «China’s Life Satisfaction», Proceedings of the National Academy of Sciences of the United States of America, vol. 109, No25, pp. 9775-9780

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