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The strength

The causal
between living


Willem E. Saris
University of Amsterdam

This paper attempts to explicate the subjective variable “satisfaction with life in
general” by means of the objective variable “income”. The reason for this study
is that so far the objective living conditions have been found to have little effect on
the subjective feelings of people. Several different approaches have been used to
estimate the strength of this relationship. First of all, correction for measurement
errors was tried, then an alternative formulation of the relationship was tested
using difference scores instead of the original variables. Next nonlinear
relationships between these variables were introduced. None of these methods led
to any substantial strengthening of the relationship. Finally, a model was tested
controlling for lagged variables and correcting for measurement errors in a panel
design. The combination of these changes led to a considerable effect of the
objective variable on satisfaction all these tests have been conducted on the basis
of a Russian panel study where it was possible to use lagged variables as
suppresser variables and to correct for measurement errors in the different
variables. This paper shows how biased estimates of relationships can be. Only a
specific combination of approaches led to a fundamentally different result.

There are three quite contradictory theories in social indicator research concerning
the relationship between living conditions and satisfaction. The livability theory
suggests that there is a strong relationship between the living conditions of people
and their satisfaction level. The evidence for this theory is found at aggregate
level. The relationship between the prosperity of a country and the average life
satisfaction has been found many times (Veenhoven 1984, 1994a, 1996).

The comparison theory (Campbell, Converse and Rodgers,1976) and the multiple
discrepancy theory (Michalos, 1985) do not predict a strong relationship between
the living conditions and satisfaction levels at the individual level because people
make their judgments not on the basis of the absolute levels of their living
conditions but by comparison with other people and other situations.

Finally, psychologists like Costa and McCrae (1980) also predict no strong
relationship between living conditions and satisfaction because they suggest that
satisfaction is more a personality trait which is only minimally affected by the
circumstance in which a person lives.

There is much evidence to support the hypothesis that the relationships between
variables characterizing the living conditions of people have very weak
relationships with satisfaction at the individual level. Campbell et al.(1976),
Ingelhart and Rabier (1986) and Mastekaasa & Moum (1984) report such
relationships for the income domain; Campbell et all (1976) and Herzog & Rogers
(1981) for age and Clemente & Sauer (1976), Robinson & Shiver (1973), Guin et
al (1960), Campbell et al (1976) Veenhoven (1984) and Mastekaasa (1984,1995)
for marital status. Recently the International Research group for Methodology and
Comparative Survey research (IRMCS) confirmed these results by a study in 13
different language areas. In all 13 areas a random sample was drawn from the
population. All respondents were asked exactly the same questions concerning
their income (I), age (A), education (E), satisfaction with their life in general (S1),
satisfaction with their house (S2), satisfaction with their financial situation(S3) and
satisfaction with their social contacts(S4) while the gender(G) of the respondent
was reported by the interviewer. In the analysis the same linear regression was
used in all 13 regions with the same variables and the same categories for each
variable. For each satisfaction variable the model was as presented in equation

Si = a + b1G + b2A + b3E + b4I + u for i=1-4 (1)

The results explaining satisfaction in different domains by background variables is

presented in Table 1.

The table shows clearly how little the different variables representing aspects of
the living conditions explain satisfaction with respect to life in general,
satisfaction with their house, satisfaction with the finances and the satisfaction
with social contacts. Only in one case is an explained variance of 20% obtained,
viz. for satisfaction with income in Germany. In all other cases the explained
variance is most of the time considerably lower.
Although there is a very large amount of evidence supporting the hypothesis that
the satisfaction of the individuals is not very strongly affected by the living
conditions, we will nevertheless try once more to proof the opposite.

Table 1 the explained variance obtained for different satisfaction variables using
gender, age, education and income as explanatory variables, in 13 different
language areas (Veenhoven and Saris 1996).
Population Life in general House Finances Contact

Flanders .02 .04 .06 04

Walonia .03 .03 .06 .03
Brussels .03 .08 .13 .03

Netherlands .01 .03 .10 .00

Germany .09 .05 .20 .15

Norway .05 .03 .10 .03

Sweden .01 .01 .06 .03

Italy .08 .03 .13 .03

Spain .05 .06 .04 .00

Tartars .01 .06 .09 .01

Russia .02 .09 .13 .01

Slovenia .02 .03 .04 .02

Hungary .12 .12 .09 .05

Possible reasons for finding a weak relationship could include (Saris and
Stronkhorst (1984) :

1. Measurement errors. It is possible that the variables contain so much error that
the estimates of the strength of the relationships are considerably attenuated.
2. Misspecification of the form of the relationships. We are thinking of two
possibilities. The first is that the relationships are nonlinear rather than linear,
as assumed in equation (1). The second possibility is that a difference equation
should be used instead of the equation with the variables in equation 1.
3. Omitted suppresser variables. The last possibility is that variables are omitted
in the equation which suppresses the relationship. The idea is that the strength
of the relationship should increase if such suppresser variables are included
into the model.

In the next sections we will explore each of these possibilities for the
relationship between income and satisfaction with life in general1. These two
variables have been chosen because it seems rather obvious that a relationship
should exist between them if living conditions do indeed affect the satisfaction of
the people.

The different possibilities will be explored on the basis of a panel study

conducted in Russia. The data have been collected by the Russian research
company CESSI from a multistage probability sample of the Russian population.
The study was begun in 1993 with 4000 households. The second wave was in
1994 and the third in 1995. The panel study still continues but we shall use the
data from the first three waves. Due to wave no response, partial no response and
attrition, only 1371 households provided data for all relevant questions for this
study. We will use these 1371 households to estimate the models discussed in this
paper. With respect to the background variables the 1371 households for which
complete data are available do not deviate greatly from the population. The means,
standard deviations and correlation matrices on which the analyses are based are
presented in appendix 1.

1. Correction for measurement error

It is well known that measurement error can considerably attenuate the
relationships between variables (Andrews 1984, Bollen 1989, Saris and Münnich
1995). Therefore the IRMCS group has conducted a study in several European
countries to determine the size of the random and systematic measurement error in
responses to satisfaction questions and to see whether the relationships between
satisfaction and living conditions would be stronger if measurement error were
corrected for. There are two different approaches to correct for measurement error.

In fact the same analyses could have been performed for satisfaction with finances. We have done
these analyses and the results were comparable with those reported in this paper.

The first is to use a model with a latent variable for satisfaction and at least two
observed variables for this latent variable. The second approach is to use existing
estimates of the measurement error variance to correct for these errors in the

In the first approach two observations of the variable of interest are needed to
estimate the model. The third wave in the Russian panel study fulfilled this
requirement. Therefore we will illustrate this approach using the data of the third

In this case the first equation remains the same as indicated above but we assume
that the dependent variable is not directly observed. There are, however, two
observed variables which can be seen as indicators for the satisfaction variable of
interest. The relationships between these variables are specified in equation 1a and

si1 = qi1Si + ei1 (1a)

si2 = qi2Si + ei2 (1b)

Where sij is the jth indicator for the ith satisfaction variable and
eij is the error variable jth indicator for the ith satisfaction variable and
qij is the a measure of the quality of the indicator sij for the variable Si .
In these models the errors are assumed to be mutually uncorrelated and also
uncorrelated with any explanatory variables in the model. If these assumptions are
realistic, an estimate of the effects, corrected for measurement error, of the
independent variables in (1) on the dependent variable Si can be obtained using
programs for structural equation modeling.
On the basis of the Russian data in appendix 1, the procedure was used for the
variable satisfaction with life in general. The result of the analysis was that the
variance explained by the three variables used increase to 4% where previously it
was 2% without correction for measurement error. Although in this case the
correction led to minimal improvement of the explained variance, this is not
necessarily so. It depends on the quality of the indicators (qij) and, of course, on
the size of the original correlation as well. If the quality is very good the correction
will be very small; if the effect is very small the quality of the measure must be
very bad to have an effect. In this case the quality was .85 which is rather good
and the relationship was rather weak. Therefore the correction was only very
Using the second approach, the correction is very simple because it has been
shown (Saris and Scherpenzeel, 1995) that the R2 could be corrected for random
measurement error (e) as follows:

Corrected R2 = R2/ qij2 (2)

The quality of the measure (qij) can be obtained from a separate

methodological study using the Multitrait multimethod approach. For details of
this approach we refer to Saris and Münnich (1995). Table 2 presents the
estimates of the reliability and validity for the same regions mentioned above. The
quality of the measure (qij) can be obtained from this table if one has information
about the exact question , the position of the questions in the questionnaire and the
way the data have been collected. In the Russian panel study, the following
procedure has been used for the satisfaction with life in general: A 5 points scale
was used in face to face research. The position in the questionnaire was between
the 6th and the 45th
question. The interval between the two measures was more than 5 minutes and
than 20 minutes. Using this information the reliability and validity of the measure
can be estimated in the following way:
validity reliability
Mean .940 .911
domain: life in general -.006 -.038
response scale: 5 points -.022 -.026
data collection; face to face +.011 +.012
position: 6-45 +.017 -.001
time between:5-20 +.017 +.063
order: first -.015 -.025
country: Russians +.043 +.004

Total .985 .900

Table 2.
Meta-analysis of life satisfaction data across countries.
Validity Coefficient Reliability Coefficient
Mean = .940 Mean = .911
───────────────── ─────────────────
N Multivariate Multivariate
measures Deviations Deviations
Life in general 54 -.006 -.038
House 54 .005 .029
Finances 54 .003 .020
Social contacts 54 . -.001 -.011

100 p. number scale 64 -.021 -.027
10 p. number scale 72 .011 .051
5/4 p. category cale 72 -.022 -.026
graphical line scale 8 .058 -.007

Face-to-face interview 96 .011 .012
Telephone interview 52 .002 -.051
Mail questionnaire 40 -.014 -.011
Tele-interview 28 -.022 .067

1-5 48 .011 .026
6 - 45 68 .017 -.001
50+ 100 -.017 -.012


alone in interview 32 .010 -.071
first/last 5-20 minutes 64 .017 .063
first/last 30- 60 minutes 80 -.021 -.023
middle, 5-20 minutes 16 .043 .028
middle, 30-60 minutes 24 -.017 -.016

first measurement 60 -.015 -.025
repetition 156 .006 .010

Slovenia 12 .020 -.013
Germany 16 .007 .028
Catalonia (Spain) 12 -.039 -.022
Italy 12 .013 .043
Flanders (Belg)+ Netherlands 64 -.028 -.039
Wallonia (Belgium) 12 -.026 -.028
Brussels (Belgium) 12 .006 .000
Sweden 12 .023 .099
Hungary 12 .050 .046
Norway 16 -.018 .031
Russians (Russia) 12 .043 .004
Tatarians (Russia) 12 .033 .003
Other nationalities in Russia 12 .039 .000

On the basis of this observation one can calculate as estimated value for the
validity of .985 and for the reliability of .90 for the measure used in this study. The
quality indicator can be shown to be identical to the product of these two
coefficients (Saris and Andrews 1981). Using this approach, we derive that qij =
.886 which is somewhat higher than the estimate given before. If this estimate is
used to correct for measurement error using equation (2) approximately the same
result will be found as given before.
If such a table as Table 2 is available, the estimates of effects and of explained
variances can be corrected for measurement error. Table 3 presents the explained
variance with and without correction for measurement error using this approach.

Table 3. Explained variance in individual satisfaction by Age, Sex, Education and Income.
Uncorrected- and corrected for measurement error.
Population Life in general House Finances Contact
uncorr corr uncorr corr uncorr corr uncorr corr
Flanders .02 .03 .04 .06 .06 .09 .04 .04
Walonia .03 .05 .03 .04 .06 .09 .03 .03
Brussels .03 .04 .08 .09 .13 .17 .03 .03

Netherlands .01 .02 .03 .05 .10 .14 .00 .00

Germany .09 .10 .05 .05 .20 .21 .15 .15

Norway .05 .07 .03 .04 .10 .13 .03 .04

Sweden .01 .02 .01 .02 .06 .07 .03 .05

Italy .08 .10 .03 .04 .13 .14 .03 .04

Spain .05 .08 .06 .07 .04 .06 .00 .00

Tartars .01 .01 .06 .07 .09 .11 .01 .01

Russia .02 .02 .09 .10 .13 .14 .01 .01

Slovenia .02 .03 .03 .06 .04 .06 .02 .05

Hungary .12 .19 .12 .16 .09 .13 .05 .08

Table 3 shows that for the other regions too the results were not changed greatly
by correcting for measurement error due to the extremely weak relationships and
the relative good quality of the measures of satisfaction with life in general. .
This suggests that measurement error alone cannot be the reason for the weak
relationship. Therefore we have looked for other approaches to strengthen the
relationship between these variables.

2. Correction for misspecification of the model
As mentioned earlier we have considered two possibilities. The first possibility
was the specification of nonlinear relationships rather than the linear relationship
in equation (1).

2.1. Nonlinear relationships

There is considerable evidence to suggest that the income satisfaction model (1)
assuming linear and additive effects are too simple. First of all, it has been
suggested by several studies that the satisfaction level depends not only on the
income of the person but rather on deviation of income from people‟s income
aspirations (Michalos, 1985). This point has been made most recently by Saris
(1996) who tried to explain why strong relationships between these variables have
been found at the aggregate level and very weak relationships at the micro level.
Secondly, the effect of an increase of income cannot be expected to be the same
for all values of income. The effect of an identical rise in income might be
expected to diminish with higher levels of income is higher (Hamblin 1971). We
suggest therefore that the relationship between income and satisfaction is
nonlinear and not additive. If this relationship is indeed nonlinear, this may be
one of the reasons why the relationship normally found between these two
variables is much weaker than one would otherwise expect.
Therefore we propose that the satisfaction is greater if the ratio between real
income and aspiration level is greater than 1 and less if the ratio is smaller than 1.
In order again to understand how the effect can become smaller for larger values
of the ratio we adopt the psychophysical model of a power function. We can then
formulate the following relationship:

S = a2(I/As)g 3a

where As is the aspiration level of a person while a2 and g are parameters of the
Further we propose for income that

I = a.Eg11.Ag12 3b

This relationship suggests that income varies as a multiplicative power function of

education and age. This form of a relationship has been found for several topics
(Hamblin, 1971). This means that the increase in income due to age is greater
depending on one‟s education level. The coefficients g11 and g12 have been added
in order to allow for unequal effects for different values of the causal variables.

Further, we expect a person‟s level of aspiration to be determined by age and
education in the same way as the income variable itself, thus:

As= a Eg11.Ag12 3c

Substituting of this equation (3c) in (3a) gives

S = a2(I/ (a. Eg11.Ag12))g 3d

All these equations are nonlinear and no additive. However, if we take the log of
both sides of the equations 3b and 3d we get:

y1 = 1+ 11x1+ 12x2+ 1 4a
y2 = 2+ 21y1 - 21x1 - 22x2 + 2 4b

where y1= ln(I); y2 = ln(S); x1 = ln(E) ; x2 = ln(A)

in 4a/b 1 =ln(a1), 11 = g11, 12 = g 2 = ln(a2) 21= g 21=g.g11 22= g.g12

The model specified in 4a and 4b can be estimated using standard estimation

procedures (regression or structural equation modeling). We have used LISREL8
to estimate the parameters of the model. The results are presented in table 4

Table 4 the estimated values of the parameters using model

Ln(A) Ln(E) Ln(I) R2

Ln (I) -.22 .29 - .18

Ln(S) -.12 -.03 .15 .04

The 4% explained variance is indeed greater than the explained variance in

the case of a linear additive model which explains only 2% of the variance in life
satisfaction. However the improvement is still very small.
There is one rather obvious possible reason for this weak relationship, viz.
measurement error in the measurement of satisfaction. As we have mentioned
above, in the Russian study, satisfaction is asked twice - once at the beginning of
the interview and once at the end. Therefore a model can be specified with a latent
variable and two observed variables. This has been done in this case and the

parameters of this model which corrects for measurement error are presented in
table 5. The parameters have been estimated with the LISREL procedure2.

Table 5 The parameter estimates for the model specified in equations 4a and 4b,
taking into account correction for measurement error.
Ln(A) Ln(E) Ln(I) Ln(S) R2

y1= Ln (I) -.22 .29 - - .18

y2= Ln(S) -.12 -.02 .20 - .07
y3= Ln(S1) - - - .85
y4= Ln(S2) - - - .85

This result shows that the correction of measurement error enhances the effect of
income on satisfaction as expected. Without correction the effect was .15 whereas
after correction for measurement error the coefficient is .20. The explained
variance is also increased from 4% to 7%. Nevertheless, the change is again not a
dramatic one because the measurement error is relatively small for this satisfaction
variable. This has also been found in previous research (Saris et al. 1996)

2.2.The use of a difference equation

Let us now look at another possibility. In most survey research the hypothesis
is made that a change in one variable will cause a change in another variable. But
in the testing phase this hypothesis is transformed into a hypothesis, where change
in the cause variables is substituted by difference between units on the causal
variable and the change in the dependent variable is substituted by differences
between units on the dependent variable. In the analysis of satisfaction data within
a country, differences in income between individuals substitute for the increase of
income, and differences in satisfaction substitute for changes in satisfaction. It
should be clear that these differences are not the same as the changes in which one
is really interested. For this reason, there is the possibility of reaching a wrong
conclusion about the relationship between income and satisfaction at the
individual level for this reason. Normally change data are not available, but the
Russian panel study provides the opportunity to study the effects of change. The

In this analysis the correlations of the second table in appendix 1 have been used. The ML
estimator has been used for estimation. The model has 2 degrees of freedom and a chi 2 value of .9.
The model thus fits very well. With 21=0 chi2 with df=3 is 228 which means that 21 is really
needed to get an acceptable fit of the model

next test is then whether the causal relationship between income and satisfaction
is stronger when difference scores are used. This means that we now use the

S=a+b I+u (5)

Where S = St - St-1 and I = It - It-1

For simplicity, we have omitted the variables age and education because these
variables have hardly any effect anyway. If the scores for the two variables in
equation (5) are determined on the basis of the Russian panel data in the way
indicated above, we can estimate the effect of the change in income on the change
in satisfaction. It then turns out that the relationship is very weak. The explained
variance is .04. This means only 4% of the variance in the change in satisfaction
can be explained by the change in income.
One of the reasons why this relationship is so weak is again measurement error. In
this case there are good reasons to consider this possibility because the
measurement error of a difference variable is equal to the sum of the error
variance of the original variables. The error variance will therefore normally
increase by a factor 2. However, even taking this fact into account we cannot
expect a strong increase in the strength of the relationship because the relationship
itself is so weak. Therefore we shall not discuss this possibility further.

3. Omitted suppresser variables

There remains only one last possibility for improving the relationship; that is, the
detection of some suppresser variables. Such variables suppress the existing
relationship in the bivariate relationship. This is, for example, the case if the direct
effect between two variables is positive while the suppresser variable causes a
negative spurious relationship between the same variables. In the context of the
relationship between income and satisfaction one can think of suppresser effects
of lagged variables. In this section we shall explore this possibility. Headey and
Wearing (1991) suggested the following equation as the basic model of their
dynamic equilibrium model:

satt = bssM(sat<t-1) +bseEventst-t-1 (6)

Where satt is the satisfaction at time t , M(sat<t-1) stands for the mean satisfaction
over a period before time t and Eventst-t-1represents a summary variable for the

events that occur between time t-1 and time t. The model suggests that the
satisfaction level of a person is determined by his /her “stock” of normal
satisfaction and the flow of recent, new events with which the person is
confronted. Applying this idea in the income domain, we suggest the following
model for the satisfaction with life in general:

St = bssSt-1 + bsi It + st (7)

Where It is, as before, the change in income from t-1 to t or It - It-1 and
st is the disturbance term for the variable S at time t..
The idea of this formulation is that satisfaction is strongly determined by
satisfaction at the previous point in time as a result of earlier events and also by
the most important new event of the last year with respect to income, i.e. a change
in income.
Note that this model is equivalent to the previous model (5) using the difference
equation if bss were 1. In that case bringing St-1 to the other side would give
equation (5). In this section we try to avoid the difference score because of the
large measurement errors. This can be done by rewriting equation (7) as follows:

satt = bsssatt-1 + bsi (It - It-1) + st (8)

and consequently

satt = bsssatt-1 + bsi It - bsi It-1 + st (9a)

With respect to income we expect an effect of age and education and also of
income at the previous point in time besides disturbances which can be
considerable in Russia due to the changing political and economic situation. These
ideas lead to equation (9b):

It =bii It-1 + gia A + gie E + It (9b)

Where A stands for Age and E for Education and it is the disturbance in the
income variable at time t.

This very simple theory is represented by the path diagram 1


i1 I1 I2 I3
+ i2 i3

+ - + - +

s1 S1 S2 S3
+ +
s2 s3

Path diagram 1. A simple model for the effect of income on satisfaction in a panel
study for a three wave panel. A „+‟ indicates a positive effect and a „-„ a negative

This diagram shows that I1 produces a spurious relationship between income at

time 2 and satisfaction at time 2. A direct, spurious effect is negative and an
indirect (through S1) spurious effect is positive. This suggests the possibility that
the effect of I2 on S2 could be much larger than the observed correlation which is
normally rather low when the negative spurious relationship is stronger than the
positive relationship. This means that the size of the effect of It on St will depends
on the size of the different coefficients. It is this possibility which will be explored
on the basis of the Russian panel study.
This model can be estimated using standard procedures, but we know already that
the estimates will be attenuated if we are not correcting for measurement error3.
Therefore we would like to introduce this correction immediately into the model.
There are two ways to make these corrections. The first approach is to use the
estimates of data quality obtained above for the measure of satisfaction which was
approximately .85. Using this approach to correct for measurement error only a
minimal improvement in the explained variance is obtained. Furthermore, the
model did not fit the data and several other effects had to be introduced. Because
this did not seem an attractive option a second approach has been used.

In this case the estimation of the model without correction for measurement error led to a very
bad fit as well, requiring the introduction of many more parameters which are not necessary if the
data are corrected for measurement error.

3.1 Correction for measurement error in income and satisfaction

In the second approach, a distinction is made between the latent income variables
and observed answers to questions concerning this variable. The difference
between the latent variables and the observed variables is measurement error
With respect to satisfaction there are actually two reasons to expect differences
between the variable of interest and the observed variable. One is again
measurement error and the other is the varying moods of the respondents. When
respondents answer the questions they can be in different moods which may be
short-lived and therefore have no permanent effect on the respondent‟s
satisfaction. This is not the case for specific event such as a marriage, a school
degree etc.
Given these arguments the I and S variables mentioned in the model will be
treated as latent variables while the responses to the questions are used as
observed indicators of these variables. This is done by adding the equations (9c)
and (9d):

st = qstSt + est (9c)

it = qitIt + eIt (9d)

where s and i are the observed variables , est and eIt represent the measurement
errors and qjt are parameters indicating the strength of the relationship between the
latent and the observed variables. The assumption is made that the error terms are
not correlated with each other. This assumption seems reasonable because there is
more than a year between the waves of the panel.
Using the ML estimator of LISREL (Jöreskog and Sörbom, 1989), the
correlations between these variables could be corrected for measurement error
which generally leads to higher estimates of the correlations ( Bollen 1989, Saris
et al 1996). This correction for measurement error can be carried out separately
from the estimation of the model using the quasi simplex model (Heise, 1971,
Wiley and Wiley 1971) but it is most often done simultaneously with the
estimation of the parameters of the structural model. The estimates of the quality
of the measures were respectively qit=.8 for the income variables and qst=.64 for
the life satisfaction variables. In the estimation it was assumed that the
measurement error variances were the same over time.
This result indicates that there is a considerable difference in the strength of the
relationship between the latent and observed life satisfaction variables estimated at
any single point in time (.85) and estimated using panel data over time (.64). The
difference between the two is that, in the latter, the effect of fluctuation of moods

through time is also included in the error variance, weakening the the relationship
between the latent and the observed variable, whereas in the former case the mood
variables are included in the latent variable. This difference is in itself already
sufficient to produce considerable differences in the substantive results. But in this
case it is also assumed that the income variable contains errors. So far, we have
assumed that these variables are without errors. The combination of these two
changes in the approach has a considerable effect on the correlations between the
variables if we compare the uncorrected and corrected correlations between these
variables. These differences are shown in table 6.
This table shows clearly that all correlations are considerably enhanced by
correction for measurement error in the variables income and satisfaction. Now
the correlation between income and satisfaction at time 1 is .36 while it was .19 at
time 2 it is .32 where it was .18 and at time 3 it is .25 in stead of .12. This
means that the direct effect could be approximately double what it would be
without correcting for errors.

The estimation of the parameters has not been performed in two steps,
estimating first a disattenuated correlation matrix like the one in table 6, and after
that the model of pathdiagram 1. The model was extended with measurement
equation 9c and 9d and estimated in one step using the ML estimator available in
LISREL. We use LISREL for this purpose because we want to take into account
the fact that the income data as well as the satisfaction data contain measurement
error and that the ML estimator has been shown to be robust in the case of non-
normal data (Anderson and Amemiya 1988 Satorra 1990)

In the estimation, we assume that all effects of the income variables on the
satisfaction variables are the same except for the sign, as assumed in equation 9a
but we also assume that these effects are the same at different points in time.
Furthermore, more we have assumed that the error variances for the income
variables are the same through time and the same is assumed for the satisfaction
variables. In this way a model with 20 parameters has to be estimated which is
identified. This model fits the data quite well. The chi2 statistic is 14.1 with 13
degrees of freedom. The results of the estimation ar summarized in path diagram
In this model, all coefficients are significant at the .05 level except for the effects
of Age and Education on Income at the third point in time.

The most important result is that the direct effect of income on satisfaction at any
point in time is .57. This is a much stronger effect than has ever been reported for
the effect of a living condition variable on a satisfaction variable. This

standardized effect is also much greater than the correlation between the two
variables, which was around.18.

Table 6 The correlations between the variables corrected (in bold) and uncorrected
for measurement error

I1 I2 I3 S1 S2 S3 A E
I1 1.0
I2 .57 1.0
.88 1.0
I3 .53 .60 1.0
.82 .93 1.0
S1 .19 .18 .14 1.0
.36 .33 .31 1.0
S2 .10 .18 .12 .31 1.0
.21 .32 .29 .75 1.0
S3 .08 .11 .12 .21 .29 1.0
.11 .19 .25 .52 .70 1.0
A -.24 -.32 -.29 -.10 -.10 -.13 1.0
-.30 -.39 -.38 -.17 -.18 -.12 1.0
E .24 ,32 .29 .10 .13 .06 -.39 1.0
.29 .41 .36 .17 .19 .11 -.39 1.0


-. 21 -.09 -.03 .21 .13 -.03

I1 I2 I3
(.88) .82 .93
(.19) (.13)
-.20 .57 -.57 .57 -.57 .57

S1 S2 S3
(.92) .77 .72

(.36) (.46)

Path diagram 2. The standardized coefficients of the model estimated on the basis
of the data in table 1.The measurement error variance for the income v
variables is .35 and for the satisfaction variables .58.

This result has been obtained as a result of two departures from the commonly
used approaches. The first is that the variables have been corrected for
measurement error and the second is that lagged variables are introduced as

suppresser variables. They produce a negative, spurious relationship between
income and satisfaction at the same point in time.
The effect of the correction for measurement error was shown in table 5. We
will now show the effect of the negative spurious relationship. Path analysis
suggests that the correlation is equal to the sum of the direct effects, indirect
effects, spurious relationship and joint effects. For the correlation between I2 and
S2, ignoring the effect of the exogenous variables Age and education since these
have very small effects, we can write:
direct .57
indirect .00
spurious .82x.57x.77-.82x.57 =- .11
joint effect -.20x.82x.77 = -.12
___________________________________ +
correlation .33

This calculation gives a result which is very close to the estimated value of the
correlation between these two variables corrected for measurement error (.32)

For the correlation between the variables I3 and S3 in the same way we get:

direct .57
indirect .00
spurious .93x.57x.72-.93x.57=-.146
joint effects -.23x.93x.72 = -.154
__________________________________ +
correlation .26

This result also agrees closely with the result obtained after correcting for
measurement error, which was .25. These results show that the relatively low
correlation between the income and satisfaction is the sum of a relatively strong,
direct effect of income at the same time and a quite large negative, spurious
relationship of income at the previous point in time, and also the negative joint
effects of income and satisfaction at the previous point in time. This result shows
how strong in this case is the effect of the suppresser variables on the relationship
between income and satisfaction: without introducing this suppresser variable in
the model one cannot detect the strength of this effect.

Given the importance of the Income variable at the previous point in time as
suppresser variable, one might ask whether these variables are really necessary for
the fit of the model to the data. If they were, the obtained result would not be very
important. This is, however, not the case. Omitting I1 and I2 from the explanation
for S2 and S3 increases the chi2 fit statistic with more than 50 points, while one
does not gain any degree of freedom, because in the restricted model these

parameters were assumed to be equal to other parameters except for the sign. This
result clearly indicates that the model specified is much better than the model
without the lagged variables in the equations.

The last results to be presented are the total effects of the different variables on the
satisfaction variables. Table 7 summarizes these results. In this table only the
explanation of the satisfaction variables at time 2 and 3 is discussed because the
explanation at time 1 is not complete due to missing variables.
This table shows that satisfaction at a previous point in time has the greatest effect
on both variables. On the other hand, we also see that the effect of the income
variables is also considerable. The effect of the income variable at the same point
in time is equal to the direct effect (.57) while the income variable at a previous
point in time still has a total effect (direct +indirect effect) of approximately .30,
even though the direct effect is a considerable negative one (-.57). But the indirect
effects are positive and so large that the end result is still a quite strong, positive
total effect. The background variables have only minor effects compared with the
income variables.

Table 3 The total effects of the different variables on satisfaction at time 2

and time 3

Satisfaction Satisfaction
at time 2 at time 3
total effect of
age -.12 -.09
education .14 .07
income at time 1 .33 .20
income at time 2 .57 .36
income at time 3 - .57
satisfaction at time 1 .74 .55
satisfaction at time 2 - .72

All these results indicate that a living condition (income) has much more effect
than expected on the basis of the results reported so far.


In this paper, the strength of the relationship between variables characterizing the
living condition of people and their life satisfaction has been evaluated. Some
authors predict a strong relationship whereas others predict a weak or no
relationship at all.
We have used a Russian panel study as our basic data source and concentrated
mainly on the impact of income changes on satisfaction with life in general. In the

original data, the bivariate relationship between income and life satisfaction is just
as weak as in many other countries.
We have tried to improve the estimates of the relationship by:
1. correcting for measurement error;
2. introducing of a nonlinear formulation of the relationship;
3. using difference scores instead of the original values; and
4. the introduction suppresser variables into the equation

None of these approaches alone had a substantial effect on the estimates of the
strength of the relationship. However, the combination of lagged income variables
as suppressers and correction for measurement error in both variables using a
simplex design increased the estimates of the effects considerably. If these two
improvements are introduced in the analysis, the formulation of nonlinear
relationships no longer has any effect and has been omitted from the presentation
for that reason.
Normally, the standardized effect of income on satisfaction is at most .2 . In the
model with a suppresser variable and correction for errors in the simplex design,
the standardized effect is increased to .57 with additionally an effect of the lagged
income variable of .30 while the direct effect is -.57. This suggests that income
has much more effect on satisfaction than can be detected in the bivariate
Besides the introduction of suppresser variables, correction for measurement
error is very important. In the panel approach, corrections for measurement errors
have been made in both variables ; the income variables as well as the satisfaction
variables. Starting with the income variables, it is normally assumed that these
variables are measured without error. This is not necessarily the case. People do
not always have access to exact information. In our panel study, the strength of the
relationship between the latent and observed income variable turned out to be .8.
This is reasonably high but it still means that 36% of the variance of the observed
variable is measurement error. Correction for these errors had a considerable
effect on the correlations between the variables (see table 6) and therefore also on
the estimates of the strength of the relationship between income and satisfaction..
The difference in the estimation of the error variance at a single time point ,
using parallel measures and the error variance obtained in a simplex model, was
also very important. The last error variance is more than twice as much as the first
causing the relationship between the latent and the observed satisfaction variable
in the simplex model to be much weaker (.64) than in the measures at a single
time point (.85). The explanation for this phenomenon is the effect which
fluctuating variables like moods have on the satisfaction measures over time
(Ehrhardt, Saris and Veenhoven 1998). These fluctuating variables are included in
the error term in the panel design analysis whereas they are part of the latent

variable in the analysis at a single time point. This means that the latent
satisfaction variable in the panel study is not the same as that in the study at a
single time point. In the latter the satisfaction variable includes the mood of a
person while this is not the case in the former. Because of this difference, the
errors also differ and the strength of the effect on income on latent satisfaction
variable can increase. The results show that income has much more effect on the
more stable satisfaction variable than on the satisfaction variable which also takes
into account the fluctuating moods.
Another interesting technical point is that the final model is essentially the
same as the model specifying the difference equation (5). The reason that the same
results were not found with that model is that in that formulation of the model the
errors in the variables ( being differences) are so large that the relationship is
underestimated. In the final model the errors are corrected efficiently and therefore
the strength of the disattenuated relationship could be estimated.

These results bring us to the interesting conclusion that there is more truth in the
idea of the liveability theory. The living conditions turned out to have more effect
on the satisfaction of the people than expected on the basis of the reported studies
on individual data previously quoted. Our analyses clearly show a strong effect of
the income variables on the satisfaction variables.
On the other hand, we have found that in the best fitting model the effects of
income at time t and t-1 are the same except for the sign. This means that the
model is in agreement with equation (5) which suggests that satisfaction at time t
is affected by satisfaction at time t-1 and the difference in income between time t-
1 and time t. The best interpretation of the income effect is thus that it is an effect
of the change in income rather than the level of the income. Such an interpretation
accords closely with the dynamic equilibrium model of Heady and Wearing who
suggest that a stock of satisfaction produced by past events cause stability in
satisfaction whereas new events (change in income) cause changes in the
satisfaction. This is indeed exactly the result we have found here.

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Appendix 1 The descriptive statistics form the Russian panel data on which the
analyses are based

1. Descriptive statistics of the original data

Variable Mean Std Dev Min Max N

EDUCW1 3.55 1.68 0 8 3727

T4W1M1 5.02 2.51 1 10 3618
T4W3M1 5.10 2.35 1 10 2253
T4W2M1 5.14 2.33 1 10 2774
T4W3M2 5.20 2 .27 1 10 2261
AGEW1 45.31 16.27 18 93 3727
FAMINCW1 77883.26 87839.79 0 1700000 3208
FAMINCW2 43704.87 224535.95 0 3500000 2398
FAMINCW3 577520.02 516676.18 0 6000000 1948


AGEW1 1.0000
EDUCW1 -.3959 1.0000
FAMINCW1 -.2355 .2354 1.0000
FAMINCW2 -.3124 .3202 .5686 1.0000
FAMINCW3 -.2875 .2882 .5302 .5986 1.0000
T4W1M1 -.1051 .1062 .1896 .1778 .1346 1.0000
T4W2M1 -.0965 .1323 .1014 .1750 .1221 .3111 1.000
T4W3M1 -.1302 .0597 .0739 .1069 .1169 .2116 .2903 1.000
T4W3M2 -.1248 .0841 .1172 .1278 .1696 .2393 .3126 .7488 1.000

2. Descriptive statistics of the log transformed data

Variable Mean Std Dev Min Max N

LNEDUC 1.12 .60 .00 2.08 3722

LNS1 1.43 .67 .00 2.30 3618
LNS3 1.49 .59 .00 2.30 2253
LNS2 1.49 .60 .00 2.30 2774
LNS32 1.52 .55 .00 2.30 2261
LNAGE 3.75 .38 2.89 4.53 3727
LNFI1 10.88 .88 6.86 14.35 3193
LNFI2 12.08 .84 9.08 15.07 2384
LNFI3 12.99 .75 10.24 15.61 1940

Correlation matrix

LNAGE 1.0000
LNEDUC -.4452 1.0000
LNFI1 -.3181 .3576 1.0000
LNFI2 -.3706 .4090 .6683 1.0000
LNFI3 -.3425 .3820 .5803 .6806 1.0000
LNS1 -.1256 .1231 .2900 .2375 .2109 1.0000
LNS2 -.1218 .1414 .1849 .2405 .1950 .3153 1.000
LNS3 -.1600 .0849 .1095 .1556 .1830 .2224 .2764 1.0000
LNS32 -.1402 .0981 .1532 .1664 .2146 .2552 .3074 .7208 1.0000