The strength Of The causal relationship between living conditions And satisfaction

By 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 (1) 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 Flanders Walonia Brussels Netherlands Germany Norway Sweden Italy Spain Tartars Russia Slovenia Hungary

Life in general .02 .03 .03 .01 .09 .05 .01 .08 .05 .01 .02 .02 .12

House .04 .03 .08 .03 .05 .03 .01 .03 .06 .06 .09 .03 .12

Finances .06 .06 .13 .10 .20 .10 .06 .13 .04 .09 .13 .04 .09

Contact 04 .03 .03 .00 .15 .03 .03 .03 .00 .01 .01 .02 .05



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


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 study. 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 wave. 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 1b: si1 = qi1Si + ei1 si2 = qi2Si + ei2 (1a) (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 small. 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


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 less than 20 minutes. Using this information the reliability and validity of the measure can be estimated in the following way:
Mean domain: life in general response scale: 5 points data collection; face to face position: 6-45 time between:5-20 order: first country: Russians Total validity .940 -.006 -.022 +.011 +.017 +.017 -.015 +.043 .985 reliability .911 -.038 -.026 +.012 -.001 +.063 -.025 +.004 .900


Table 2. Meta-analysis of life satisfaction data across countries. ────────────────────────────────────────────────────────────
Validity Coefficient Mean = .940 ───────────────── Multivariate Deviations
-.006 .005 .003 -.001

SATISFACTION DOMAIN Life in general House Finances Social contacts RESPONSE SCALE 100 p. number scale 10 p. number scale 5/4 p. category cale graphical line scale DATACOLLECTION Face-to-face interview Telephone interview Mail questionnaire Tele-interview POSITION 1-5 6 - 45 68 50+ TIME BETWEEN REPETITIONS alone in interview first/last 5-20 minutes first/last 30- 60 minutes middle, 5-20 minutes middle, 30-60 minutes ORDER OF PRESENTATION first measurement repetition COUNTRY Slovenia Germany Catalonia (Spain) Italy Flanders (Belg)+ Netherlands Wallonia (Belgium) Brussels (Belgium) Sweden Hungary Norway Russians (Russia) Tatarians (Russia) Other nationalities in Russia 54 54 54 54

N measures

Reliability Coefficient Mean = .911 ───────────────── Multivariate Deviations
-.038 .029 .020 -.011


64 72 72 8

-.021 .011 -.022 .058

-.027 .051 -.026 -.007

96 52 40 28

.011 .002 -.014 -.022

.012 -.051 -.011 .067

48 .017 100

.011 -.001 -.017

.026 -.012

32 64 80 16 24

.010 .017 -.021 .043 -.017

-.071 .063 -.023 .028 -.016

60 156

-.015 .006

-.025 .010

12 16 12 12 64 12 12 12 12 16 12 12 12

.020 .007 -.039 .013 -.028 -.026 .006 .023 .050 -.018 .043 .033 .039

-.013 .028 -.022 .043 -.039 -.028 .000 .099 .046 .031 .004 .003 .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 Flanders Walonia Brussels Netherlands Germany Norway Sweden Italy Spain Tartars Russia Slovenia Hungary

Life in general uncorr corr .02 .03 .03 .01 .09 .05 .01 .08 .05 .01 .02 .02 .12 .03 .05 .04 .02 .10 .07 .02 .10 .08 .01 .02 .03 .19

House uncorr corr .04 .03 .08 .03 .05 .03 .01 .03 .06 .06 .09 .03 .12 .06 .04 .09 .05 .05 .04 .02 .04 .07 .07 .10 .06 .16

Finances uncorr corr .06 .06 .13 .10 .20 .10 .06 .13 .04 .09 .13 .04 .09 .09 .09 .17 .14 .21 .13 .07 .14 .06 .11 .14 .06 .13

Contact uncorr corr .04 .03 .03 .00 .15 .03 .03 .03 .00 .01 .01 .02 .05 .04 .03 .03 .00 .15 .04 .05 .04 .00 .01 .01 .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 model.. 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 Substituting of this equation (3c) in (3a) gives S = a2(I/ (a. Eg11.Ag12))g 3d 3c

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 = y2 = + 2+
1 11x1

+ 21y1 -

+ 21x1 -


1 22x2



4a 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)






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) y2= Ln(S) y3= Ln(S1) y4= Ln(S2) -.22 -.12 .29 -.02 .20 .85 .85 .18 .07

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 equation:

S=a+b I+u


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 +



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) + and consequently satt = bsssatt-1 + bsi It - bsi It-1 +
st st



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 +


Where A stands for Age and E for Education and income variable at time t.

is the disturbance in the

This very simple theory is represented by the path diagram 1





I1 + i2 + -







S1 +

S2 +


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 one. 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 again. 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 it = qitIt + eIt (9c) (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 nonnormal 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 2. 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 1.0 .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 ________________________________________________________________ I1 I2


-. 21 -.09 -.03 .21

.13 -.03

(.88) .82 (.19) .57 -.57

.93 (.13) .57 -.57



(.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:
effects 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:
effects 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 at time 2 Satisfaction 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. Conclusions 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 relationships. 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 t1 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 3727 3618 2774 2261 3208 1948

EDUCW1 3.55 T4W1M1 5.02 T4W3M1 5.10 T4W2M1 5.14 T4W3M2 5.20 AGEW1 45.31 FAMINCW1 77883.26 FAMINCW2 43704.87 FAMINCW3 577520.02

1.68 0 8 2.51 1 10 2.35 1 10 2253 2.33 1 10 2 .27 1 10 16.27 18 93 3727 87839.79 0 1700000 224535.95 0 3500000 2398 516676.18 0 6000000

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

2. Descriptive statistics of the log transformed data Variable LNEDUC LNS1 LNS3 LNS2 LNS32 LNAGE LNFI1 LNFI2 LNFI3 Mean Std Dev Min 1.12 1.43 1.49 1.49 1.52 3.75 10.88 12.08 12.99 .60 .00 .67 .00 .59 .00 .60 .00 .55 .00 .38 2.89 .88 6.86 .84 9.08 .75 10.24 Max 2.08 2.30 2.30 2.30 2.30 4.53 14.35 15.07 15.61 N 3722 3618 2253 2774 2261 3727 3193 2384 1940

Correlation matrix



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


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