Life Satisfaction and Relative Income Perceptions and

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Life Satisfaction and Relative Income,Perceptions and Evidence. Guy Mayraz,CEP London School of Economics,Gert G Wagner. SOEP DIW Berlin, Max Planck Institute for Human Development and IZA. J rgen Schupp,SOEP DIW Berlin,Free University of Berlin and IZA. Discussion Paper No 4390,September 2009,P O Box 7240.
53072 Bonn,Phone 49 228 3894 0,Fax 49 228 3894 180. E mail iza iza org, Any opinions expressed here are those of the author s and not those of IZA Research published in. this series may include views on policy but the institute itself takes no institutional policy positions. The Institute for the Study of Labor IZA in Bonn is a local and virtual international research center. and a place of communication between science politics and business IZA is an independent nonprofit. organization supported by Deutsche Post Foundation The center is associated with the University of. Bonn and offers a stimulating research environment through its international network workshops and. conferences data service project support research visits and doctoral program IZA engages in i. original and internationally competitive research in all fields of labor economics ii development of. policy concepts and iii dissemination of research results and concepts to the interested public. IZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character A revised version may be. available directly from the author,IZA Discussion Paper No 4390. September 2009,Life Satisfaction and Relative Income. Perceptions and Evidence, Using a unique dataset we study both the actual and self perceived relationship between.
subjective well being and income comparisons against a wide range of potential comparison. groups enabling us to investigate a broader range of questions than in previous studies In. questions inserted into a 2008 module of the German Socio Economic Panel Study we ask. subjects to report a how their income compares to various groups such a co workers. friends and neighbours and b how important these income comparisons are to them We. find substantial gender differences with income comparisons being much better predictors of. subjective well being in men than in women Generic same gender comparisons are the. most important followed by within profession comparisons Once generic and within. profession comparisons are controlled for income relative to neighbours has a negative. coefficient implying that living in a high income neighbourhood increases happiness The. perceived importance of income comparisons is found to be uncorrelated with its actual. relationship to subjective well being suggesting that people are unconscious of its real. impact Subjects who judge comparisons to be important are however significantly less. happy than subjects who see income comparisons as unimportant Finally the marginal. effect of relative income on subjective well being does not depend on whether a subject is. below or above the reference group income,JEL Classification D31 D62 D63 I3 I31 Z13. Keywords income comparisons relative income life satisfaction. German Socio Economic Panel Study SOEP,Corresponding author. Guy Mayraz,Centre for Economic Performance,London School of Economics. London WC2A 2AE,United Kingdom,E mail g mayraz lse ac uk. 1 Introduction, Surveys of life satisfaction are increasingly used to study the relation.
ship between subjective well being and income The essential question. is to what extent is it the case that higher income or material well. being translates into higher subjective well being. Early on it became apparent that di erent answers can be had. depending on how one asks the question On the one hand within. a given country at a given point in time the rich report higher life. satisfaction than the poor Frey and Stutzer 2002 Moreover as far. as we can judge the subjective value of an extra dollar does decrease. with income but never reaches zero In fact the value of a given. percentage increase in income remains roughly the same whatever the. income level Layard et al 2008 On the other hand Easterlin 1974. looked at the macro subjective well being data and found no time. series correlation between subjective well being and GDP. Easterlin s ndings known as the Easterlin Paradox raise the pos. sibility that at least in developed countries much of the subjective. value of higher income is due to relative comparisons That is the. rich are happier because they have more rather than simply because. they have a lot Easterlin s conclusions have been recently challenged. by Stevenson and Wolfers 2008 This challenge only makes it more. important that we collect good evidence as to the e ect relative com. parisons have on subjective well being, Focusing on income we want to understand what ceteris paribus. e ect does a change in relative income have on a person s subjective. well being Consider the following regression model. where is the life satisfaction reported by subject is relative. income absolute income and represent other controls In prin. ciple the ceteris paribus e ect of relative income can be estimated by. the regression coe cient on, In practice however we are faced with the problem that we do. not observe To overcome this problem the rst thing researchers. do is to replace by the reference income that is the object of. comparison This step requires that the researcher commit to the pre. cise functional relationship between and More substantial. assumptions then have to be made as to what exactly is There. are many candidates individuals may plausibly compare their income. to that of their friends to that of co workers to other people in their. profession to their neighbours or perhaps to other people of their age. group or some other still more general comparison group We thus. have 1 2 3 etc, Moreover even if we decide to commit to one of these possibilities. further choices present themselves Suppose we consider comparisons. with neighbours Is it immediate neighbours the whole street the. neighbourhood the town the entire region Similarly suppose we. assume people compare their income to that of their co workers This. still leaves the question open whether they compare themselves with. everyone in their o ce or perhaps with people doing a similar job only. or perhaps other workers who have similar experience or were hired at. a similar time Then having committed to a functional form and a. particular well de ned sub species of a reference group we are faced. with a nal challenge how to estimate the of our choice This last. challenge can also be signi cant For example in surveys generally. used for subjective well being research we have no information on the. earnings of friends or colleagues and so cannot use the relevant in. a regression, In spite of all these challenges researchers have forged ahead fo. cusing on choices for that could be estimated from available data1. Clark et al 2008 includes a detailed survey By and large published. results tend to show a negative estimated coe cient on typically. comparable to that on and thus consistent with a pure relative in. come e ect i e no e ect for a change in absolute income that keeps. relative income constant Nevertheless results are often highly sensi. tive to speci cation and in some cases the estimated coe cient is close. to zero or even has the opposite sign Interestingly results may have. to do with the geographic scale of neighbourhood For example in. a recent work that looked at neighbourhoods at the local street block. level Dittmann and Goebel 2009 nd that life satisfaction increases. when a person has neighbours of a high socioeconomic status This. study is particularly relevant to our paper since subjects reporting. their income relative to that of their neighbours presumably have a. similarly local concept of neighbourhood in mind, In this paper we propose to complement this literature by taking a.
very di erent approach Instead of choosing a functional form decid. ing on a particular reference group and subgroup and then on some. estimate of the chosen we ask subjects to report directly Specif. ically we asked subjects to report on a scale their income relative to. some of the most plausible reference groups including colleagues same. profession same gender same age friends and neighbours We thus. observe six candidates for and can estimate regression models such. as that in Equation 1 directly In particular 1 we have values for. The most common choices are the average income in the local area i e some special. case of the neighbours reference group or the average income in a cell de ned by some. combination of such variables as age gender and education as in D Ambrosio and Frick. in relation to such groups as colleagues and friends overcoming the. problem that the incomes of colleagues and friends are not observed. in the survey data and 2 these measures incorporate comparisons. against the particular colleagues friends neighbours etc that subjects. perceive as relevant comparisons This is important since even if we. had observed the income of all colleagues friends and neighbours it. would have required an additional di cult decision to identify the rel. evant individuals within those reference groups that should be used in. estimating the reference group income, In addition to asking subjects to report their relative income we. asked subjects to report how important they perceive each of these. comparisons to be allowing us to compare subjects own perception. of the importance of income comparisons to its actual importance as. estimate by subjective well being regressions The survey we used for. these questions is the German Socio Economic Panel Study SOEP 2. Our questions were inserted into the pretest module of the 2008 wave. which consisted of 1 066 randomly chosen respondents. Very little of the subjective well being literature on relative com. parisons uses a similar approach to the one we take in this paper Clark. and Senik n d report results using the third wave of the European. Social Survey which included a question on the perceived importance. of relative income comparisons but did not elicit so the actual. importance cannot be tested The results of Clark and Senik n d. for the perceived importance of income are consistent with the relevant. part of our results In a paper on rural migrants in China Knight et al. 2008 asked subjects which group they are most likely to compare their. income to and found the subject s own village was the most common. reference group for their subjects McBride 2001 analysed a question. in the U S General Social Survey asking subjects to compare their liv. ing standards to those enjoyed by their parents when they were of a. similar age and found that answers correlated strongly with reported. happiness Senik forthcoming studied post transition countries and. investigated generic comparisons I have done better in life with the. people a person used to know before transition started. The reminder of the paper is organised as follows Section 2 de. scribes the data In Section 3 we report what comparisons subjects. perceive to be important how important comparisons are perceived. to be and what is the relationship between subjective well being and. perceiving comparisons to be important In Section 4 we investigate. the actual importance of di erent relative income comparisons using. a regression model as in Equation 1 as the basic tool In Section 5. we compare perceived importance ratings with actual ratings and also. investigate whether the fact that a subject perceives comparisons to. See Wagner et al 2007 and http www diw de english soep soepoverview 27908 html. be important is a good predictor of the actual relationship between. that subject s subjective well being and his or her relative income In. Section 6 we consider the possibility that reports are biased by. the subject s subjective well being and o er a test that suggests this. is not the case In Section 7 we investigate whether as some authors. have argued the importance of relative comparisons is asymmetric. with the poor losing by relative comparisons more than the rich gain. In Section 8 we conclude,2 The data, The data for this paper is the 2008 pretest module of the German. Socio Economic Panel Study SOEP 3 SOEP is an annual household. panel that has been conducted in Germany starting in 1984 The novel. questions we developed were inserted into the pretest module of the. 2008 wave This sample for the pretest consisted of 1 066 randomly. chosen respondents, The rst novel question we introduced asks respondents to report. how important is it to them to compare their income against various. reference groups on a 1 7 scale ranging from completely unimpor. tant to extremely important The second question asks respondents. to report how their income compared with those groups on a 1 5 scale. ranging from much lower to much higher Figure 1 shows a trans. lation of the two questions Descriptive statistics are in Table 1 and. Table 2 respectively The subjective well being question we used is. a standard life satisfaction question that is included in the common. SOEP questionnaire The question asks How satis ed are you with. Life Satisfaction and Relative Income Perceptions and Evidence Using a unique dataset we study both the actual and self perceived relationship between subjective well being and income comparisons against a wide range of potential comparison groups enabling us to investigate a broader range of questions than in previous studies In

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