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Wealth Influences Life Satisfaction More Than Income: A Supplement to The Easterlin Paradox

Part of the Social Indicators Research Series book series (SINS,volume 76)

Abstract

The standard view in Life Satisfaction research is that economic well-being has only modest effects on subjective well-being, at least in relatively well off Western countries. More pointedly, the Easterlin Paradox (Easterlin RA, ‘Does economic growth improve the human lot? Some empirical evidence’. In David PA, Reder MW (eds) Nations and households in economic growth: essays in honour of Moses Abramowitz. Academic, New York, pp 89–125, 1974, J Econ Behav Organ 27:35–47, 1995; Easterlin RA, Angelescu L, Happiness and growth the World over: time series evidence on the happiness-income paradox. IZA Discussion Paper No. 4060, Bonn, IZA, 2009) is the claim that ‘economic growth does not improve the human lot’. Using panel data from the Household Incomes and Labour Dynamics Survey Australia (HILDA), this paper investigates the combined effects of changes in wealth, income and consumption on changes in Life Satisfaction; most previous research has focussed solely on static income effects. Results provide strong confirmation of the Easterlin Paradox. The effect sizes of even multi-year measures wealth, income and consumption on Life Satisfaction are small, although statistically significant. In the later part of the paper, it is shown that substantial wealth losses incurred in the Global Financial Crisis (2007–2008) had only a short term effect on Life Satisfaction. As Easterlin would predict, the Life Satisfaction even of individuals whose wealth remained below GFC levels was back to ‘normal’ within 6 years.

Keywords

  • Economic well-being
  • Subjective well-being
  • Utility
  • Easterlin paradox

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Notes

  1. 1.

    2002 was the first year in which wealth data were collected, and 2014 is the last year of wealth data collected so far.

  2. 2.

    In practice, there was unmistakeable evidence of multicollinearity (unexpectedly negative coefficients etc) only in estimates of equations with Financial Satisfaction as the dependent variable.

  3. 3.

    However, the risk remains of biased estimates due to omitted variables that do change over time within-person.

  4. 4.

    Recall that wealth was measured only in 2002, 2006, 2010 and 2014.

  5. 5.

    Two consecutive negative quarters is the usual definition of an economic recession.

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Headey, B. (2019). Wealth Influences Life Satisfaction More Than Income: A Supplement to The Easterlin Paradox. In: Brulé, G., Suter, C. (eds) Wealth(s) and Subjective Well-Being. Social Indicators Research Series, vol 76. Springer, Cham. https://doi.org/10.1007/978-3-030-05535-6_8

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  • DOI: https://doi.org/10.1007/978-3-030-05535-6_8

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