Absolute Income, Relative Income, and Happiness

Soc Indic Res (2008) 88:497–529
DOI 10.1007/s11205-007-9217-0
Absolute Income, Relative Income, and Happiness
Richard Ball Æ Kateryna Chernova
Accepted: 5 November 2007 / Published online: 27 November 2007

Springer Science+Business Media B.V. 2007
Abstract This paper uses data from the World Values Survey to investigate how an
individual’s self-reported happiness is related to (i) the level of her income in absolute
terms, and (ii) the level of her income relative to other people in her country. The main
findings are that (i) both absolute and relative income are positively and significantly
correlated with happiness, (ii) quantitatively, changes in relative income have much larger
effects on happiness than do changes in absolute income, and (iii) the effects on happiness
of both absolute and relative income are small when compared to the effects several non-
pecuniary factors.
Keywords Subjective well-being Happiness Relative income
1 Introduction
This paper examines empirical evidence on the relationship between income and happi-
ness. The specific objective is to compare the importance of absolute income and relative
income in determining happiness: how much does a person’s happiness depend on her
income in absolute terms, and how much does her happiness depend on her income relative
to the incomes of others? We also ask, to the extent that happiness does depend on absolute
and/or relative income, how large is the effect of income on happiness compared to the
effects of non-pecuniary factors such as personal relationships, employment and health?
Although the relationship between money and happiness has been of perennial interest
to social scientists and philosophers, contemporary research on this issue was stimulated
Kateryna Chernova completed work on this paper while an undergraduate student at Bryn Mawr College.
R. Ball (&)
Department of Economics, Haverford College, 370 Lancaster Avenue, Haverford, PA 19041, USA
e-mail: rball@haverford.edu
K. Chernova
Exelon Corporation, 300 Exelon Way, Kennett Square, PA 19348, USA
e-mail: kchernov@pwrteam.com
123
498 R. Ball, K. Chernova
largely by Easterlin’s (1974) seminal paper. A prominent hypothesis presented in that

paper was that people care exclusively or almost exclusively about their incomes relative to
the national distributions of income in the countries in which they live, and that, given their
relative income levels, they care little or not at all about their absolute income levels.
Although a substantial body of subsequent literature has refuted the most extreme form of
this hypothesis, Easterlin’s paper has led to the production of an important line of research
on income and happiness.
In addition to being an intrinsically interesting area of academic research, questions
about income and happiness have important policy implications. As Easterlin pointed out,
if people care only about their relative incomes, then a distribution-neutral shift in a
country’s GDP per capita will not make anyone happier. If this is true, policy-makers,
donors of foreign aid, and anyone else hoping to improve the lives of people around the
world should look for strategies other than simply promoting growth. In addition, a number
of studies have shown how preferences over absolute versus relative income affect their
behavior, and how optimal public policy will therefore depend on the weight people place
on each of these measures of income. For example, Frank (1984), Frank and Hutchens
(1993), Neumark and Postlewaite (1996), and Landers et al. (1996) show how concerns
about relative status affect labor supply and wage profiles; Duesenberry (1949) and Kosicki
(1987) study the effect of positional concerns on saving; and a number of studies have
analyzed public finance and optimal tax policy when people care about their relative
incomes (Boskin and Sheshinski 1978; Layard 1980; Oswald 1983; Ng 1987; Bagwell and
Bernheim 1996; Ireland 1998; Frank 1985, 1996, 1997).
As one might expect, we find that there are statistically significant, positive relationships
between absolute income and happiness and between relative income and happiness. By
several quantitative measures, however, the effect of relative income is much larger than
the effect of absolute income; and the effects on happiness of both absolute and relative
income are dwarfed by the effects of the non-pecuniary factors we consider. In other
words, money does buy at least some happiness, but having more than others around you
matters more to happiness than simply having more. These results, however, come with an
important caveat: the happiness that money (whether absolute or relative) can buy is small
compared to the happiness provided by some things that money cannot usually or easily
buy, like a spouse or domestic partner, a job, or good health.1 Although these results reject
the strict version of Easterlin’s hypothesis—that, given their places in the income distri-
bution, people don’t care at all about their absolute incomes—they do support the general
proposition that relative concerns are very important.
2 Previous Literature
2.1 Measuring Happiness
In this paper, as in the literature upon which it builds, measures of individual happiness are
based on responses to surveys that ask people to report how happy or satisfied they are with
their lives, usually on some integer scale (e.g., 1 through 10) or by choosing a descriptive
category (e.g., very happy, somewhat happy, somewhat unhappy, very unhappy). Because
answers to these questions are based on respondents’ self-assessments, rather than on some
1
Although there are cases in which spouses or jobs can in some sense be purchased, and to some extent
good health can be ‘‘bought’’ through expenditures on health care.
123
Absolute Income, Relative Income, and Happiness 499
objective measure (based, for instance, on neural activity in the brain or on observations of
individual consumption bundles), they are known as measures of subjective well-being.
Data is available from many surveys that have included questions about subjective well-
being; prominent among these are the World Values Survey,2 the Eurobarometer,3 the
General Social Survey,4 the British Household Panel Survey,5 and the Gallup International
Millenium Survey.6 Numerous surveys of well-being in smaller populations have been
conducted as well.
Though decreasingly so, survey measures of subjective well-being are still somewhat
novel to economists. They have, however, long been a staple source of data for psychol-
ogists and sociologists, and there is a growing body of evidence for the validity and the
interpersonal and intercultural comparability of these data. A number of studies have
shown high correlations between self-reports of subjective well-being and other measures
of well-being or happiness, such as reports of acquaintances, how often people smile,
respondents’ recollections of good and bad events in their lives, and physiological mea-
sures such as neural activity, heart rate and hormone levels.7 Several studies have failed to
find evidence of biases created by translation of survey questions about well-being into
different languages, or by differences across societies in cultural traits such as ‘‘humility.’’8
Several surveys of methodological issues associated with self-reports of subjective well-
being come to generally positive conclusions about the validity of this kind of data,9 and
Ng (1997) gives a general argument in favor of using cardinal measures of happiness in
economic and policy analysis.
2.2 Non-monetary Determinants of Happiness
Many studies have examined the correlations between happiness and a host of potential
explanatory variables, including age and sex,10 marital status and personal relationships,11
inflation and unemployment,12 political institutions and liberty,13 and income distribution.14
Recent surveys of this literature include Diener et al. (1995), Argyle (1999), Easterlin
(2003) and Diener and Seligman (2004). Frey and Stutzer (2002) provide a book-length
2
See http://www.worldvaluessurvey.org. This survey is the main source of data for this paper.
3
Conducted by the Public Opinion Analysis sector of the European Commission. See http://europa.eu.int/
comm/public_opinion/description_en.htm.
4
Conducted by the National Opinion Research Center at the University of Chicago. See
http://www.norc.uchicago.edu.
5
Conducted by the Institute for Social and Economic Research at the University of Essex. See
http://www.iser.essex.ac.uk/bhps/index.php.
6
See http://www.gallup-international.com/surveys1.htm.
7
See Diener (1984), Eckman et al. (1990), Pavot et al. (1991), Shedler et al. (1993), Sandvik et al. (1993),
Balatsky and Diener (1993), Sutton and Davidson (1997), and Siedlitz et al. (1997).
8
See Ouweneel and Veenhoven (1991), and Diener et al. (1995).
9
See Veenhoven (1993, 1996), Diener et al. (1999), Diener and Suh (2000), and Frey and Stutzer (2002).
10
See Horley and Lavery (1995), Diener and Suh (1997), Nolen-Hoeksema and Rustig (1999), and Lucas
and Gohm (2000).
11
See Lee et al. (1991) and Myers (1999).
12
See Clark and Oswald (1994), and Di Tella et al. (2001).
13
See Frey and Stutzer (2000) and Veenhoven (2000).
14
See Alesina et al. (2001) and Graham and Felton (2004).
123
review of happiness and economics, and Veenhoven’s (2003) on-line World Database of
Happiness contains comprehensive information on research related to subjective well-
being.15 We discuss some of the major findings of this literature below in relation to the new
results that we present.
2.3 Money and Happiness
On the relationship between income and subjective well-being, Easterlin’s paper was
seminal. Easterlin (1974, p. 90) posed the broad question of whether there is ‘‘evidence that
economic growth is positively associated with social welfare, i.e., human happiness.’’ In
particular, he investigated whether (i) there is any evidence of a relationship between
income and happiness within countries, and (ii) whether there is any evidence of a rela-
tionship between average levels of happiness and average incomes across countries.
Easterlin based his arguments on data from a variety of surveys; most relevant to the
present paper is his analysis of data collected by Cantril (1965) in 14 countries during the
late 1950s and early 1960s. Along with a wide variety of demographic, social and eco-
nomic questions, Cantril’s survey included an item in which respondents were asked to rate
their happiness on a scale from 0 to 10.16
To assess the relationship between income and happiness within individual countries,
Easterlin used Cantril’s data along with 27 other surveys conducted in a total of 20
countries. The categories used to define socioeconomic status differed among the surveys,
but all of them used between two and five designations, based primarily on income, to
categorize respondents. For each country, Easterlin compared the average happiness rating
among members of the lowest socioeconomic group to the average happiness rating among
members of the highest socioeconomic group. He found (p. 100) that ‘‘the results are clear
and unequivocal. In every single survey, those in the highest status group were happier, on
the average, than those in the lowest status group.’’
To assess the relationship across countries between the average level of happiness and
average income, Easterlin (p. 106) presented a scatterplot of the average happiness rating
in each of the fourteen countries surveyed by Cantril against the natural log of income per
capita. That scatterplot is reproduced here in Fig. 1, and the underlying data are presented
in Table 1. Casual inspection of the scatterplot suggests that there is something of a
positive relationship between happiness and income, and indeed an OLS line fitted to this
data has a positive slope that is at least marginally statistically significant.17 Easterlin
argued (p. 105), however, that when two influential cases and two countries with ‘‘unusual
political circumstances’’ are deleted from the sample, any apparent positive association
vanishes. And in fact, the slope of an OLS line through the remaining 10 points is not
significantly different from zero.18 Particularly striking in the scatterplot is the lack of
variation in average happiness levels across countries, especially when the four special
15
See http://www.eur.nl/fsw/research/happiness/.
16
In eliciting these ratings of subjective well-being, Cantril used a survey methodology that was somewhat
more subtle than simply asking people to choose a number. Details on Cantril’s ‘‘self-anchoring’’ meth-
odology can be found in Easterlin (1974) and in the original study (Cantril 1965).
17
The estimated slope is 0.6486, with a p-value of 0.086. The r-squared for the regression is 0.2257.
18
The influential cases are the US and India; the countries with ‘‘unusual political circumstances’’ are Cuba
and the Dominican Republic. With these four cases deleted, an OLS line has a slope of 0.1014, with a p-
value of 0.535. The r-squared is 0.0498.
123
7 US
Cuba
6
Egypt
Mean Happiness Rating
Japan Israel West Germany

(Scale of 0 to 10)
Yugoslavia
5
Nigeria Phil. Panama

Brazil
Poland
4
India
3
2
Domincan Republic
5 6 7 8
Natural log of GNP per capita
(1961 US dollars)
Fig. 1 Easterlin/Cantril plot of average happiness on GNP per capita
cases are omitted. Easterlin acknowledged (p. 105) that such ‘‘picking and choosing among
points is a dubious practice,’’ but concluded (pp. 105–106) that ‘‘[t]he happiness difference
that one might expect on the basis of the within-country differences by economic status are
not borne out by the international data.’’ He went on to cite several other surveys that
similarly fail to provide strong evidence of a positive association between country averages
of income and happiness.
There is a paradox in these results: higher individual incomes are associated with higher
levels of individual happiness in every country, yet higher average incomes are not
associated with greater average happiness across countries. Easterlin’s principal explana-
tion for this paradox, drawing on Duesenberry’s (1949) relative income hypothesis, was
that people care not about what their incomes are in absolute terms, but about what their
incomes are compared to other people in the same country. This hypothesis is consistent
with the positive association Easterlin observed between absolute income and happiness
within countries: given any national distribution of income, the higher is an individual’s
income in absolute terms, the higher it is relative to the incomes of others in the country,
and therefore the happier the individual is. The relative income hypothesis is also con-
sistent with Easterlin’s failure to find a strong association between income and happiness
across countries: if absolute incomes were identically distributed around their means in all
countries, the distribution of relative incomes would be identical across countries. The
distributions, and hence the means, of individual happiness ratings would therefore be
identical across countries, despite the country differences in average absolute income.19
Easterlin took care not to draw conclusions that his data did not support. In particular,
he did not claim to have demonstrated that people care only about their relative incomes
19
Even if absolute incomes were not distributed identically around their means across countries, this would
be true as long as there was no systematic relationship between mean income and income distribution.
123
Table 1 Easterlin/Cantril data on average happiness and GNP per capita

Country GNP per capita Natural log of GNP Average happiness
(1961 US dollars) per capita rating (scale of 0–10)
Brazil 375 5.93 4.6

Cuba 516 6.25 6.4
Domincan Rep 313 5.75 1.6
Egypt 225 5.42 5.5
India 140 4.94 3.7
Israel 1,027 6.93 5.3
Japan 613 6.42 5.2
Nigeria 134 4.90 4.8
Panama 371 5.92 4.8
Philippines 282 5.64 4.9
Poland 702 6.55 4.4
United States 2,790 7.93 6.6
West Germany 1,860 7.53 5.3
Yugoslavia 489 6.19 5
and not at all about their absolute incomes. His general assessment (p. 116) of the evidence
was that ‘‘[i]t would be premature to assert that ‘everything is relative,’ but it is hard to
resist the inference that relative considerations play an important part in explaining the
evidence presented here.’’ He was also cautious not to overstate conclusions about the
relationship (or lack thereof) between economic growth and human welfare, but argued
(p. 112) that if the relative income hypothesis does in fact explain the patterns he observed
in the data, then it would follow that ‘‘[a]n increase in the income of any one individual
would increase his happiness, but increasing the income of everyone would leave happi-
ness unchanged.’’
Easterlin’s paper, and particularly the suggestion that people may care only about their
relative incomes, has been followed by many studies of the relationship between money
and happiness, and in particular on the extent to which people care about absolute and/or
relative income.20 One of the main findings has been that, contrary to the results presented
in Easterlin (1974), there does appear to be a positive correlation between average self-
reports of happiness and income per capita across countries (Veenhoven 1989; Diener
et al. 1995). In time-series studies, however, there is little or no evidence of a positive
relationship between averages in income and happiness (Easterlin 1995; Blanchflower and
Oswald 2000; Easterlin 2001, 2005). Many studies have shown evidence that people are
concerned with their relative status on a number of dimensions, including income (Clark
and Oswald 1996; Zizzo and Oswald 2001). In a study of the effects of income inequality
on happiness, Graham and Felton (2004) find evidence suggesting ‘‘that [relative differ-
ences] may be as if not more important than [absolute] income-based differences.’’
Veenhoven (1991), on the other hand, has challenged the validity of claims for the
importance of relative position.
In the present paper, we analyze both within- and across-country data to gather further
evidence on the relationship between income—both relative and absolute—and happiness.
20
Surveys that focus on the relationship between money and happiness can be found in Argyle (1999),
Diener and Oishi (2000), Frey and Stutzer (2000), and Easterlin (2001).
123
3 Data Sources and Variable Definitions
The individual-level data used in this paper are taken from the World Values Survey
(WVS) (Inglehart et al. 2003). This survey has been administered in face-to-face inter-
views with nationally representative samples of respondents in over 70 countries. It
consists of over 200 questions concerning personal values and attitudes toward a wide
range of social issues such as religion, family, work, and democracy. This paper uses data
from the third ‘‘wave’’ of the WVS, which was conducted between 1995 and 1998. In this
section we give brief descriptions of the variables we use in our analysis; details on their
definitions and construction are presented in the data appendix.
Our measure of an individual’s happiness is her response to item 65 on the WVS, which
asked people to give an integer rating from 1 (least satisfied) to 10 (most satisfied) in
response to the question, ‘‘All things considered, how satisfied are you with your life as a
whole these days?’’ We call this variable happy.
Our measures of absolute income and relative income are both derived from item 227 of
the WVS. In this item, each respondent is presented with 10 income brackets, and asked to
indicate the bracket in which her family income falls. The income brackets used in each
country are expressed in local currency; the boundaries of the income brackets differ across
countries, both in terms of their purchasing power parity equivalents and in terms of the
percentiles of the country income distributions at which they fall.
To approximate each individual’s family income in absolute, internationally compa-
rable units, we first take the midpoint of each individual’s income bracket as an
approximation of her family income in local currency.21 We then use conversion factors
constructed by the World Bank (2004) to convert this approximated local currency income
to purchasing power parity dollars ($PPP). The variable abs, which we use to represent an
individual’s absolute income, consists of these $PPP family income estimates.22
We construct two measures of an individual’s relative income, both of which are based
on a comparison of the individual’s absolute income to the absolute incomes of other
people in her country.23 The first measure, rel_pct, represents the percentile in the national
income distribution at which the individual’s absolute income falls. The second, rel_med,
is the ratio of an individual’s absolute income to her country’s median absolute income.
We use a number of additional variables from the WVS to control for factors other than
income that previous studies have shown to affect happiness.
Marital status Three dummy variables indicate marital status: partner equals one for
respondents who are married or living with a domestic partner (and equals zero otherwise);
split equals one for respondents who are divorced or separated; and widow equals one for
respondents who are widowed. The omitted category for marital status is ‘‘single.’’
Sex A dummy called female equals one if the respondent is female and zero if the
respondent is male.
21
For individuals in the highest income category (for which no upper limit is specified), we use a figure
equal to 120% of the lower bound of the category as an approximation of family income in local currency.
22
Ideally, we might also adjust family income for the number of people in the respondent’s family, but the
WVS contains no explicit question on household or family size, nor does it contain other questions from
which family size could be inferred with any reasonable confidence.
23
We are therefore implicitly assuming, as did Easterlin (1974), that the reference group to which a person
compares herself is the population of the country in which she lives. An interesting area for further research
would be to investigate the extent to which people’s happiness depends on their status relative to comparison
groups defined by other criteria, such as ethnicity, religion or occupation. Praag and Ferrer-i-Carbonell
(2004, Chap. 8) discuss recent research along these lines.
123
Employment Employment status is indicated by six additional zero/one dummies:

part_time, self_employed, retired, housewife,24 student, and unemployed. The omitted
category is ‘‘employed.’’
Children The dummies kid1 and kid2plus indicate respectively whether the respon-
dent had exactly one child or at least two children; the omitted category is ‘‘no
children.’’
Age The variable age represents the respondent’s age in years. Since previous studies
(e.g., Oswald 1997; Blanchflower and Oswald 2000) have found a quadratic relationship
between age and happiness, we also use age2, which equals the square age.
Health Respondents’ ratings of their physical health on an integer scale of 1 (least
healthy) to 5 (most healthy) are recorded in the variable health.
Religion Respondents’ ratings of the importance of God in their lives on an integer scale
of 1 (least important) to 10 (most important) are recorded in religion.
4 Replicating Easterlin (1974)
4.1 Within Countries
Using data from the WVS, we first attempt to replicate Easterlin’s finding that, within
countries, income and happiness are positively related. Following Easterlin, we compare
the average value of happy for a high economic status group to the average value of
happy for a low economic status group. We define the high status group to include
respondents who reported family incomes in brackets 7 through 10 (on the 1 through 10
scale of WVS item v227); we define the low status group as those respondents who
reported family incomes in brackets 1 through 3. Wave three of the WVS contains
adequate data on both family income and happiness for the 42 countries listed in
Table 2. In all but one of these countries, the average value of happy is greater for the
high status group than for the low status group, and the difference is statistically
significant at a confidence level exceeding 98%. The single exception is Brazil, for
which the difference between the means of happy for the high and low status groups is
not statistically significant (and in fact the sample mean is higher for the low status
group than it is for the high status group). Despite this one exception, we interpret these
results as a validation of Easterlin’s finding that on average people at the top of a
country’s economic ladder are happier than people at the bottom. We state this as our
first result:
Result 1 The positive within-country association between individual income and
individual happiness that Easterlin found in Cantril’s data is also present in the WVS
data.
4.2 Across Countries
To replicate Easterlin’s cross-country analysis, we plot the country means of happy (which
we call MEAN_HAPPY) against the natural log of GDP per capita in purchasing power
24
The term ‘‘housewife’’ is one of the employment categories listed in the WVS codebook. There is no
category for men who work full time on domestic tasks.
123
Table 2 Average happiness among low and high status groups

Country Year Low status High status p-value
group mean group mean
happiness happiness
(scale of 1–10) (scale of 1–10)
Argentina 1995 6.59 7.05 0.0099

Armenia 1995 3.79 4.49 0.0187
Australia 1995 7.35 7.81 \0.0001
Azerbaijan 1996 4.77 6.09 \0.0001
Bangladesh 1996 6.21 6.87 \0.0001
Belarus 1996 3.75 4.86 \0.0001
Bosnia 1997 4.90 6.56 \0.0001
Brazil 1996 7.18 6.99 0.7358
Bulgaria 1998 3.53 5.49 \0.0001
Chile 1996 6.36 7.40 \0.0001
China 1995 5.47 7.94 \0.0001
Colombia 1997 8.36 8.60 0.001
Croatia 1995 5.33 6.92 \0.0001
Dominican Republic 1996 6.89 7.98 0.0001
Estonia 1996 4.32 6.40 \0.0001
Finland 1996 7.51 8.05 0.0002
Georgia 1996 4.23 5.70 \0.0001
Germany 1997 6.89 7.54 0.0009
India 1996 5.92 7.51 \0.0001
Japan 1995 6.07 7.05 \0.0001
Latvia 1996 4.27 5.53 \0.0001
Lithuania 1996 3.78 5.53 \0.0001
Macedonia 1997 5.26 5.79 0.0045
Mexico 1996 7.29 8.58 \0.0001
Moldova 1996 3.39 4.46 0.0001
Montenegro 1996 5.70 6.82 0.0009
Nigeria 1995 6.08 7.39 \0.0001
Norway 1995 7.17 7.95 \0.0001
Peru 1996 6.12 6.85 0.015
Poland 1996 5.52 7.88 \0.0001
Russia 1995 3.71 5.25 \0.0001
South Africa 1995 5.53 7.78 \0.0001
Serbia 1996 5.12 6.01 \0.0001
Spain 1996 6.34 7.01 0.0023
Sweden 1996 7.16 8.02 \0.0001
Switzerland 1996 7.56 8.31 \0.0001
Taiwan 1995 6.29 7.24 \0.0001
Turkey 1996 5.82 6.71 \0.0001
Ukraine 1996 3.63 4.88 \0.0001
Uruguay 1996 6.62 7.59 \0.0001
123
Table 2 continued
Country Year Low status High status p-value
group mean group mean
happiness happiness
(scale of 1–10) (scale of 1–10)
United States 1995 7.11 7.95 \0.0001

Venezuela 1996 6.59 7.53 0.013
Notes: Year indicates the year in which the third wave of the WVS was conducted in the country. The p-value
reported for each country is for a test of the null hypothesis that the mean happiness level of people in the low
status group is equal to the mean happiness level of people in the high statusgroup, against the alternative that
the mean happiness in the low status group is less than the meanhappiness in the high status group
CO
FI SD SZ
8
GH
AU NO
ME
UK US
BZ UR GR
DR
CN PH CL AG
NI
(Scale of 1 to 10)
VE
IN SP JA
BA PO SL
PE
TU CR
SA
6
MA
AZ BO
LI
5
ES
LA
GA BU
RU
AM BE
4
UA
MO
7 8 9 10
Natural log of GDP per capita
(Constant 1995 PPP dollars, survey year)
Fig. 2 Plot average happiness on GNP per capita using WVS data
parity dollars (GDP_PC).25 The scatterplot, shown in Fig. 2, consists of 43 observations;26

the underlying data are presented in Table 3. Notice that mean happiness in the WVS
sample varies substantially across countries, from a minimum of 3.73 to a maximum of
8.42; these mean happiness ratings have a mean of 6.35 and a standard deviation of 1.24.
This dispersion contrasts sharply with the lack of variation in mean happiness that Easterlin
observed in the Cantril sample. This greater dispersion in the data, as well as the larger
25
Data on purchasing power parity GDP per capita are taken from World Bank (2004). Wave 3 of the WVS
was conducted in different years in different countries; for each country, we use the value of PPP GDP per
capita corresponding to the year in which wave 3 of the WVS was conducted there (see Tables 2 and 3).
26
These 43 countries are the same as those listed in Table 2, except that (i) Montengro, Serbia and Taiwan
are dropped because World Bank (2004) does not have GDP data for them, and (ii) Ghana, the Philippines,
Slovenia and the UK, which were excluded from Table 2 because of missing data on family income in the
WVS, are added.
123
Table 3 WVS data on average happiness and GDP per capita

Country Year GDP per capita Natural log of Average happiness
(constant 1995 $PPP) GDP per capita rating (scale of 1–10)
Argentina (AG) 1995 10,346.29 9.24 6.93

Armenia (AM) 1995 1,664.83 7.42 4.32
Australia (AU) 1995 21,334.23 9.97 7.58
Azerbaijan (AZ) 1996 1,695.47 7.44 5.39
Bangladesh (BA) 1996 1,249.66 7.13 6.41
Belarus (BE) 1996 3,284.18 8.10 4.35
Bosnia (BO) 1997 4,427.01 8.40 5.46
Bulgaria (BU) 1998 5,228.10 8.56 4.66
Brazil (BZ) 1996 6,463.10 8.77 7.15
Chile (CL) 1996 7,766.94 8.96 6.92
China (CN) 1995 2,508.53 7.83 6.83
Colombia (CO) 1997 5,962.79 8.69 8.42
Croatia (CR) 1995 6,618.14 8.80 6.18
Dominican Rep. (DR) 1996 4,495.33 8.41 7.13
Estonia (ES) 1996 7,148.69 8.87 5.00
Finland (FI) 1996 19,441.03 9.88 7.78
Georgia (GA) 1996 1,515.47 7.32 4.65
Ghana (GH) 1995 1,601.60 7.38 7.93
Germany (GR) 1997 22,391.16 10.02 7.22
India (IN) 1996 1,938.52 7.57 6.53
Japan (JA) 1995 22,596.90 10.03 6.61
Latvia (LA) 1996 5,308.18 8.58 4.90
Lithuania (LI) 1996 6,475.10 8.78 4.99
Macedonia (MA) 1997 5,432.00 8.60 5.70
Mexico (ME) 1996 7,112.51 8.87 7.69
Moldova (MO) 1996 1,269.23 7.15 3.73
Nigeria (NI) 1995 780.57 6.66 6.82
Norway (NO) 1995 27,904.94 10.24 7.66
Peru (PE) 1996 4,217.66 8.35 6.36
Philippines (PH) 1996 3,512.58 8.16 6.84
Poland (PO) 1996 7,319.47 8.90 6.42
Russia (RU) 1995 5,932.60 8.69 4.45
South Africa (SA) 1995 8,542.25 9.05 6.08
Slovenia (SL) 1995 12,216.81 9.41 6.46
Spain (SP) 1996 15,935.59 9.68 6.61
Sweden (SD) 1996 19,855.22 9.90 7.77
Switzerland (SZ) 1996 25,219.17 10.14 8.02
Turkey (TU) 1996 5,387.40 8.59 6.18
Ukraine (UA) 1996 3,567.02 8.18 3.95
United Kingdom (UK) 1998 21,459.75 9.97 7.46
Uruguay (UR) 1996 7,922.16 8.98 7.13
United States (US) 1995 27,819.88 10.23 7.67
Venezuela (VE) 1996 5,506.10 8.61 6.72
Note: Year indicates the year in which the third wave of the WVS was conducted in the country
123
L
R
8
O RR
R R
L
R R
L L L R
O O L L
O
(Scale of 1 to 10)
L
O R R
O L E E
O E O
6
E
E E
E
E
5
E
E E
E
E E
4
E
E
7 8 9 10
Natural log of GDP per capita
(Constant 1995 PPP dollars, survey year)
Fig. 3 Replica of Fig. 2 with region labels
number of observations, increases the chance of detecting a relationship (if one exists)
between average income and average happiness.
And indeed, casual inspection of the scatterplot in Fig. 2 suggests that there is some-
thing of a positive relationship between average happiness and per capita income; the
relationship apparent in the WVS data is certainly stronger than in the Easterlin/Cantril
sample (reproduced in Fig. 1 of this paper). This impression is confirmed by a simple OLS
regression of MEAN_HAPPY on ln(GDP_PC), which yields an estimated slope of 0.6458,
at a significance level of 99.9% (r-squared = 0.2453).
The striking features of Fig. 2, however, have to do not just with the patterns observed in
the entire sample, but with the way several groups of countries cluster together. Figure 3 is
identical to Fig. 2, except that all points are labeled either eastern Europe (E), Latin America
(L), rich industrial (R), and other (O). With the exception of two countries in the ‘‘other’’
category (South Africa and Turkey), the countries in each category fall into distinct (i.e.,
convex and disjoint) regions on the graph. The eastern European countries fall in the lower
range of happiness and the middle to lower range in income; the rich industrial countries are
high in both happiness and income; the Latin American countries are high in happiness and in
the middle of the income range; and the others are high in happiness and low in income.
Because of this clustering, the conclusion one draws about whether or how strongly per
capita income and average happiness are associated depends heavily on which countries
are included in the sample. If the eastern European countries are excluded, for instance, the
dispersion in mean happiness is greatly reduced and the evidence of a positive relation is
much weaker.27 On the other hand, if we consider only eastern Europe and the rich
industrial nations, then the countries in the sample are mostly either poor and unhappy or
rich and happy; the positive association between income and happiness is consequently
27
An OLS line through the non-eastern European data still has a positive slope, but the significance level
falls to 94.9%, the estimated slope is just 0.2260, and the r-squared falls to 0.1440.
123
very strong.28 Finally, if we look at each of the four groups of countries individually, it is
only for eastern Europe that the slope of an OLS line is statistically significant at a
confidence level above 90%.29
Easterlin’s comment about the dubiousness of picking and choosing among points
applies with force to these observations, and we conclude only that Fig. 2 presents mixed
evidence on the nature of the cross-country association between income and happiness.
Result 2 is based on our failure to find strong evidence either for or against the existence of
a positive association between income per capita and average happiness:
Result 2 To the extent that Easterlin’s scatterplot of countries’ average happiness
levels against their per capita incomes suggested the absence of an association
between these two variables, that suggestion is neither confirmed nor refuted by the
analogous scatterplot constructed with the WVS data.
The following sections of the paper present a more detailed analysis using individual-
level data from the WVS and controlling for a number of non-monetary factors. This
analysis allows us to draw firmer conclusions about the effects of absolute and relative
income on happiness.
5 Dissaggregated Analysis: Model Specification
5.1 The Sample and Descriptive Statistics
When we include the absolute and relative incomes of individual respondents in the
analysis, limitations in the documentation of the WVS reduce the number of countries that
can be included to just 18.30 Despite this reduction in the number of countries, the sample
for which adequate data are available still consists of 20,771 observations. The countries
represented, and the number of observations from each country, are listed in Table 4.
Table 5 shows basic descriptive statistics for each of the three income-related variables,
abs, rel_med and rel_pct, and Fig. 4 presents their histograms. Because the distributions of
abs and rel_med are highly skewed to the right, we will use logarithmic transformations of
these variables in our regressions; since the distribution of rel_pct is reasonably symmetric,
this variable will enter linearly in the regressions.
5.2 Method
Since individuals’ self-ratings of their overall happiness are measured by an ordered

categorical variable, our estimation is based on the ordered probit model.31 The assumption
28
With an estimated coefficient of 1.2549, significant at above the 99.9% confidence level, and an r-squared
of 0.7944.
29
An OLS line through just the eastern European data has an estimated slope of 0.7977, significant at the
99.2% confidence level, with an r-squared of 0.4009.
30
The limitation in the WVS documentation is that for many countries no information is available on what
local currency values were used to define the boundaries of the family income brackets used in item 227.
Without that information, it is not possible to approximate respondents’ family incomes, which, as described
in Sect. 3, is necessary for the construction of abs, rel_pct, and rel_med.
31
For a detailed exposition of the ordered probit regression model, see Long (1997) and Long and Freese
(2001).
123
Table 4 Countries in the

Country Number of observations
disaggregated sample
Bangladesh 1,161
Bulgaria 810
Colombia 2,983
Croatia 1,109
Estonia 936
Finland 882
Georgia 490
Japan 737
Latvia 1,042
Macedonia 574
Russia 1,816
Sweden 869
Spain 863
Switzerland 894
Turkey 1,211
Ukraine 1,995
United States 1,295
Venezuela 1,104
Total 20,771
underlying the model is that, although respondents to the WVS report their happiness
levels on the prescribed 1 through 10 integer scale, happiness can be measured by an
unobserved (or ‘‘latent’’) variable that can take on any real value. This latent happiness
measure is assumed to be a linear function of a set of explanatory variables (or non-linear
transformations of the explanatory variables), plus a random error. Indexing individuals by
the subscript i, we write this model as
X
K X
J
Hi ¼ bA aðabsi Þ þ bR qðreli Þ þ bX aðabsi Þqðreli Þ þ ck cki þ kj dji þ ei ð1Þ
k¼1 j¼1
j6¼j
where Hi is individual i’s latent happiness level; a(abs) represents the variable abs defined
above or some transformation thereof, and bA is the associated linear coefficient; rel
represents either rel_pct or rel_med, q(rel) represents either the specified variable or a
transformation thereof, and bR is the associated linear coefficient; the product a(abs) q(rel),
with coefficient bX, is included to capture any interaction effects that exist between
absolute and relative income; c1 through cK represent K individual characteristics, cki
represents individual i’s value for characteristic ck, and the ck’s are the associated coef-
ficients; d1 through dJ represent J dummies representing individual countries (or groups of
countries), dji equals 1 if individual i is from country (or country group) j and 0 otherwise,
the kj’s are the associated coefficients, and j is the index of the omitted country (or country
group); and the ei’s are mutually independent standard normal random variables.
We do not observe the values if Hi for the individuals in our sample; our data on
happiness consists only of the categorical ratings reported by survey respondents. Nev-
ertheless, ordered probit regressions yield maximum likelihood estimates of the parameters
123
Table 5 Descriptive statistics for absolute and relative income variables
Variable No. Obs. Mean Std. Dev. Min. Max. Percentiles
10th 25th 50th 75th 90th

Absolute Income, Relative Income, and Happiness
abs 20,771 12,895.01 15,830.36 64.27 165,199.64 1,181.13 2,807.90 7,611.57 17,400.41 32,695.76
rel_pct 20,771 54.3 26.86 0.09 100 17.73 31.71 59.54 74.21 88.38
rel_med 20,771 1.34 1.23 1.07 21.80 0.27 0.64 1.00 1.57 2.50
Notes: abs is measured in constant 1995 $PPP. rel_pct represents a respondent’s percentile in her national income distribution. rel_med represents a respondent’s absolute
income as a proportion of her country’s median absolute income
511
123
4.0e-04
.02 .04 .06 .08
2.0e-04
Density
Density
0
0
0 50 100 150 200 0 2000 4000 6000 8000 10000
Absolute Income (abs) Relative Income (rel_pct)
(Thousands of Constant 1995 $ PPP) (Percentile in National Income Distribution)
.8
.6
Density
.4
.2
0
50 10 15 20
Relative Income (rel_med)
(Absolute Income as Fraction of National Median)
Fig. 4 Histograms of absolute and relative income variables
of the latent happiness function given in equation 1. Using Hb to indicate the estimated
latent happiness function, we can write
X
K X
J
Hb ¼ bA
^ qðrelÞ þ b
^ aðabsÞ þ b
R
^ aðabsÞqðrelÞ þ
X ^ck ck þ ^
kj dj ð2Þ
k¼1 j¼1
j6¼j
where ‘‘hats’’ over parameters indicate the estimates produced by the regression.
5.3 Specification
We estimate two versions of Eq. 1. In both regressions, the sixteen individual character-
istics defined in Sect. 3 are included as controls. Because of the skew noted in the
distribution of abs, we use the natural log of this variable in both regressions (i.e., we set
a(abs_inc) = ln(abs_inc)).
The two regressions differ in which of the two measures of relative income we use. In
regression 1, we use rel_pct as our measure of relative income. Because of its relatively
symmetric distribution it enters linearly (i.e., q(rel_pct) = rel_pct). We also include
country dummies for 17 of the 18 countries represented in our sample. (The omitted
country is Bangladesh.)
In regression 2, we use rel_med as our measure of relative income. Because of the skew
in the distribution of this variable, we use this variable in log form (i.e., q(rel_med) =
ln(rel_med)). When both ln(abs) and ln(rel_med) are included as independent variables,
123
however, a collinearity problem makes it impossible to include a complete set of country

dummies as well (even when, as usual, the dummy variable for one country is excluded).32
To control for at least part of the country effects that would have been captured by the
dummies, we include country-level variables of two types.
First, we include the log of GDP per capita (GDP_PC) and the percentage change in
real per capita GDP in the previous five years (GROWTH).33 We use these variables as
partial substitutes for the country dummies for the general reason that the level and rate
of growth of per capita income are important broad indicators of economic conditions in
a country. There are also several specific reasons for which we would expect these
variables to affect individual happiness. Even holding an individual’s absolute and rel-
ative income fixed, an increase in her country’s income per capita could increase her
happiness if increases in GDP per capita were associated with (i) improved infrastructure,
social services and public goods, (ii) greater availability of and choice among consumer
goods, or (iii) greater opportunities to pursue ‘‘post-materialist’’ values.34 The hypothesis
that the growth rate of a country’s per capita income might affect happiness levels is
related to the concept of habituation.35 Even if a person derives happiness from an
increase in her income, this increase in happiness may vanish over time as she becomes
accustomed to or starts to take for granted her improved material circumstances. In this
case, happiness would be sensitive to recent increases in income, and we would therefore
expect that on average people living in countries that had experienced greater economic
growth in recent years would be happier than those in countries whose growth rates had
been lower.
Second, we include two dummy variables reflecting a three-way categorization of the
countries in our sample. The first category consists of the countries for which, in regression
1, the coefficients on the dummy variables were positive and significant at the 99%
confidence level, namely Colombia, Finland, Sweden and Switzerland. The second cate-
gory consists of the countries for which the coefficients on the dummy variables in
regression 1 were negative and significant at the 99% confidence level, namely Bulgaria,
Estonia, Georgia, Latvia, Russia and Ukraine. The third category consists of the remaining
countries in our sample. The variable POS_DUM is defined to equal one for countries in
the first category and zero for all other countries, and NEG_DUM is the analogous indi-
cator for countries in the second category.
The results of regressions 1 and 2 are shown in Table 6.
32
To see the collinearity problem formally, let med(j) represent the median absolute income of country j;
the median absolute income of the country whose dummy variable is excluded from the regression is then
denoted medðjÞ. The following J + 2 vectors then add up to a vector of all zeros: a vector of constants, each
equal to lnðmedðjÞÞ; one vector for each of the J - 1 countries whose dummies are included, each vector of
the form ln(med (j))dj; the vector of observed values of ln(abs); and negative one times the vector of
observed values of ln(rel_med). Intuitively, the source of the collinearity is that, because rel_med is defined
as the ratio of abs to med(j), the difference between ln(abs) and ln(rel_med) is constant within countries.
(For all individuals in any country j, that difference is equal to ln(med (j))).
33
Data for both of these variables is from World Bank (2004).
34
As described in Inglehart (1997).
35
See Easterlin (1995, 2001, 2003).
123
Table 6 Regression results

Independent variables Regression 1 Regression 2
Est. Coeff. Std. Error p-value Est. Coeff. Std. Error p-value
Income ln(abs) 0.1223 0.0313 \0.001 0.0430 0.0180 0.017

rel_pct 0.0125 0.0027 \0.001
ln(rel_med) 0.3051 0.0590 \0.001
Interaction -0.0009 0.0003 \0.001 -0.0157 0.0069 0.023
Marital status partner 0.1656 0.0239 \0.001 0.1297 0.0235 \0.001
split -0.0526 0.0363 0.147 -0.0526 0.0360 0.143
widow -0.0337 0.0363 0.353 -0.0380 0.0356 0.285
Sex female 0.0147 0.0162 0.366 0.0063 0.0161 0.696
Age age -0.0326 0.0031 \0.001 -0.0334 0.0031 \0.001
age2 0.0004 0.0000 \0.001 0.0004 0.0000 \0.001
Children kid1 -0.0107 0.0195 0.584 0.0080 0.0194 0.68
kid2plus 0.0639 0.0197 0.001 0.0940 0.0196 \0.001
Employment part_time 0.0211 0.0293 0.472 0.0221 0.0290 0.446
self_employed 0.0403 0.0290 0.164 0.0495 0.0287 0.085
retired -0.0177 0.0302 0.558 -0.0693 0.0299 0.021
housewife 0.1508 0.0276 \0.001 0.1388 0.0272 \0.001
unemployed -0.2165 0.0283 \0.001 -0.2358 0.0280 \0.001
student 0.0845 0.0368 0.022 0.0765 0.0367 0.037
Health health 0.3217 0.0094 \0.001 0.3179 0.0092 \0.001
Religion religion 0.0327 0.0028 \0.001 0.0426 0.0026 \0.001
Country Dummies Bulgaria -0.5781 0.1182 \0.001
Colombia 0.9003 0.1158 \0.001
Croatia -0.0141 0.1275 0.912
Estonia -0.3308 0.1096 0.003
Finland 0.6299 0.1353 \0.001
Georgia -0.7600 0.0652 \0.001
Japan 0.0981 0.1760 0.577
Latvia -0.4422 0.1215 \0.001
Macedonia -0.2418 0.1455 0.096
Russia -0.5186 0.1007 \0.001
Sweden 0.6186 0.1602 \0.001
Spain 0.0598 0.1548 0.699
Switzerland 0.6674 0.1635 \0.001
Turkey -0.2294 0.1249 0.066
Ukraine -0.6513 0.0904 \0.001
United States 0.3907 0.1685 0.020
Venezuela 0.1206 0.0887 0.174
Country Variables ln(GDP_PC) 0.1034 0.0262 \0.001
GROWTH 0.3359 0.0525 \0.001
NEG_DUM -0.3897 0.0307 \0.001
POS_DUM 0.6907 0.0192 \0.001
Number of 20,771 20,771
observations
Log likelihood -41073.706 -41299.544
of the regression
123
6 Dissaggregated Analysis: Results
6.1 Control Variables: Qualitative Results
Although this paper focuses on the effects on happiness of absolute and relative income, it
is interesting first to comment briefly on the effects of the individual- and country-level
variables included as controls. In this section, we simply note the signs and significance
levels of the coefficients estimated in the two regressions. In later sections of the paper, we
compare the magnitudes of the effects of some of these control variables to the magnitudes
of the effects of the income variables.
• On average, people who are married or living with domestic partners are happier than
single people. This result is consistent with many previous studies. Argyle (1999)
reviews the literature on marriage and happiness, and cites several studies to this effect.
• The negative signs of the coefficients on split and widow suggest that on average people
who are divorced or widowed are less happy than single people, but these results hold
only at low levels of significance.
• The positive, but statistically insignificant, coefficients on female are consistent with
the conclusion reached by Diener et al. (1999) on the basis of a review of a number of
studies on gender and happiness: ‘‘When differences [between the average happiness
levels of men and women] are found, women usually report higher SWB [subjective
well-being], but the differences often disappear when other demographic variables are
controlled.’’
• The negative and significant coefficients on age and the positive and significant
coefficients on age2 indicate that happiness initially decreases with age and then
increases. In both regressions, the point estimates of the coefficients imply that
minimum happiness occurs at about 41 or 42 years of age. These results are similar to
the findings of Oswald (1997) and Blanchflower and Oswald (2000).36
• The happiness level of people with exactly one child is not significantly different from
the happiness level of people with no children; on average, people with two or more
children are significantly happier than people with no children.
• On average, people who are unemployed are less happy than people who are employed
full time for pay. A large body of literature, reviewed by Argyle (1999), has found a
similar relationship between unhappiness and unemployment; Clark and Oswald (1994)
is among the papers that report such a finding.37
• Our findings about retirement are mixed, and somewhat at odds with previous research.
In regression 1, the coefficient on retired is negative, but not at all statistically
36
As Easterlin (2004) has pointed out, however, this U-shaped relationship between age and happiness
appears in analyses that hold constant factors such as health and whether one is widowed. Since people’s
health and probability of being widowed in fact do not remain constant over their life-spans, this U-shaped
relationship is not inconsistent with the possibility that people’s experienced happiness levels tend to fall in
the later periods of their lives.
37
Because the regressions estimate the effect of employment status on happiness with absolute and relative
income held constant, the increases in happiness attributed to finding a full-time job are the consequence of
factors other than changes in the individual’s income associated with finding a job. Our analysis does not tell
us exactly what those other factors are, but it seems reasonable to speculate that they have to do with
increased self-esteem and respect from others, and perhaps an increased feeling of purpose or productivity
(that may come from simply having a job, even if the purpose or product of the job are not inspiring to the
person holding it).
123
significant. In regression 2, the coefficient is negative and significant at a confidence

level of 97.9%. Previous studies (e.g., Campbell et al. 1976; Warr and Payne 1982),
however, have found a positive relationship between retirement and happiness.
• We find no statistically significant difference between the average happiness levels of
people who are employed part-time and people who are employed full-time. Self-
employed people are on average happier than people employed full-time for pay, but
the statistical significance of this difference is marginal.
• On average, students and people engaged full time in housework are happier than
people who are employed full-time for pay.
• The better is an individual’s health, the happier she is on average. The evidence
accumulated in support of this hypothesis is strong, at least when, as in this paper, the
measure of health is a self-report. Reviews can be found in Diener et al. (1999), and
Frey and Stutzer (2002).
• The greater is the importance of religion in a person’s life, the happier she is on
average. Again, see Diener et al. (1999), and Frey and Stutzer (2002) for a discussion
of numerous previous findings that are consistent with this result.
The results concerning the country dummies included in regression 1 reflect the geo-
graphical pattern observed in Fig. 3, particularly the below-average happiness levels in
eastern Europe. The estimated coefficients on all eight of the eastern European countries
are negative; six of them are strongly significant (with p-values less than 0.01), one is
marginally significant (Macedonia, with a p-value of 0.096), and only one does not differ
significantly from zero (Croatia, with a p-value of 0.912). Only one country outside of
eastern Europe has a negative coefficient (Turkey, with a p-value of 0.066). Of the six rich
industrial countries, four have positive and highly significant coefficients (with p-values of
0.02 or less), and two have positive but statistically insignificant coefficients (with p-values
above 0.5). Both Latin American countries have positive coefficients, one marginally
significant (Venezuela, with a p-value of 0.174) and one highly significant (Colombia, with
a p-value less than 0.001).
Finally, with respect to the country-level variables included in regression 2 in lieu of
country dummies, we find:
• On average, the higher is the per-capita income of a person’s country, the happier she
is. Since the regression controls for absolute and relative income, this result indicates
that, whatever an individual’s income might be and however it compares to the
incomes of others in the country, there are aspects of living in higher-income countries
that are conducive to happiness. As discussed above, we speculate that these include
better infrastructure and public services, greater choice of consumer goods, and greater
opportunities to pursue ‘‘post-materialist’’ values.
• On average, the faster a person’s country has been growing, the happier she is. Just as
people may evaluate their well-being in comparison to others, they may also evaluate
their well-being in comparison to themselves in previous periods.
6.2 Absolute and Relative Income: Qualitative Results
It is the effects of absolute income and relative income on happiness that are the major
focus of this paper. In this section we examine just the direction of change in an
123
individual’s happiness level when her absolute income increases or her relative income
increases; we consider the magnitude of these changes in following sections.
In general, our estimate of the change in an individual’s happiness induced by a mar-
ginal change in her absolute income is given by
o Hb h i oaðabsÞ
^ ^
¼ bA þ bX qðrelÞ ð3Þ
oabs oabs
Implicit in the computation of this derivative is the assumption that the change in
absolute income being considered is not associated with any change in the individual’s
relative income. This would be the case, for example, if the absolute incomes of all people
in a country were to change proportionally, so that any given individual would experience
a change in absolute income but no change in relative income.38 Alternatively, if we
consider changes in absolute income that do in fact lead to changes in relative income, Eq.
3 can be interpreted as the part of the total change in happiness that can be attributed solely
to the change in absolute income, excluding the effect of the associated change in relative
income.
Using the specifications and parameter estimates of regressions 1 and 2 respectively,
and using a superscript to identify the regression upon which each derivative is based, Eq.
3 takes on the particular forms:
!1
o Hb 1
¼ ð0:1223 0:0009rel pctÞ ð4:1Þ
oabs abs
!2
o Hb 1
¼ ½0:0430 0:0157 lnðrel med Þ ð4:2Þ
oabs abs
Since rel_pct can not be greater than 100, expression 4.1 will be positive for any value
of rel_pct between 0 and 100 (provided that abs is strictly greater than zero, which is the
case for all individuals in our data set). Regression 1 therefore implies that on average an
increase in an individual’s absolute income, while her relative income is held fixed, will
make her happier.
Provided again that abs [ 0, expression 4.2 is positive as long as rel_med \ 15.47, or in
other words as long as the individual’s absolute income does not exceed median absolute
income in her country by a factor of 15.47 or more; this condition is satisfied for all but two
of the 20,771 individuals in our data set. As in the case of regression 1, our general
conclusion is that an increase in an individual’s absolute income, with her relative income
fixed, increases her happiness; in the case of regression 2, however, we must add the caveat
that this result may not hold for individuals whose absolute incomes are many times larger
than the medians in their countries.
Result 3 summarizes the implications of both regressions about the qualitative effect of
changes in absolute income on happiness:
38
There are also less restrictive conditions under which a change in an individual’s absolute income would
not be accompanied by a change in her relative income. If we measure relative income by rel_pct (as in
regression 1), this would be the case as long as the change in the individual’s absolute income did not
change her rank in the national income distribution (perhaps because of simultaneous changes in the
absolute incomes of some or all of the other people in her country). If we measure relative income by
rel_med (as in regression 2), it would be the case as long as median income in the individual’s country
increased proportionately with her absolute income.
123
Result 3 With relative income held constant, an increase in an individual’s absolute

income increases her level of happiness (except perhaps when the individual’s rel-
ative income is extremely large compared to the median income in her country).
To evaluate the effect of a change in relative income on happiness, we compute
o Hb h^ i
¼ bR þ b ^ aðabsÞ oqðrelÞ ð5Þ
X
orel orel
The implicit assumption in this case is that the change in relative income being con-
sidered occurs without any change in absolute income. Expression 5 therefore represents
the change in an individual’s happiness that occurs when the absolute incomes of some or
all of the other people in her country fall while her absolute income remains constant. As
before, if we allow for simultaneous changes in relative and absolute income, an alternative
interpretation of Eq. 5 is that it represents the change in happiness due solely to the change
in relative income.
Again using superscripts to denote the regression whose specification and parameter
estimates we are incorporating, expression 5 can be rewritten as:
!1
o Hb
¼ 0:0125 0:0009 lnðabsÞ ð6:1Þ
orel pct
!2
o Hb 1
¼ ½0:3051 0:0157 lnðabsÞ ð6:2Þ
orel med rel med
Expression 6.1 is positive for any possible value of abs below $PPP 1,076,137.60. This
critical value is more than six times as large as the maximum value of abs in our sample.
Provided that rel_med is positive (which is true if abs is positive), expression 6.2 is
positive as long as abs is less than $PPP 275,230,921.86. Both regressions therefore
support result 4:
Result 4 With absolute income held constant, an increase in an individual’s relative
income increases her level of happiness (except perhaps when the individual’s
absolute income is extremely large).
The last qualitative result we state is based simply on the observation that the coefficient
on the interaction term is negative and statistically significant in both regressions:
Result 5 The larger is an individual’s absolute income, the less her happiness is
increased by an increase in her relative income; the larger is an individual’s relative
income, the less her happiness is increased by an increase in her absolute income.
Result 5 implies that a person with a large absolute income would care less about changes
in her relative status induced by changes in other people’s absolute incomes than would a
person with a smaller absolute income; a person near the top of her country’s income
distribution would care less about changes in her absolute income than would a person at a
lower rung of the income distribution.
The finding that people are made happier both by increases in their absolute incomes
and by increases in their relative incomes is perhaps unsurprising. But it is important to
state, because previous research has sometimes asserted or implied that people must care
exclusively about one of these measures of income or the other. The qualitative evidence
123
from our regressions supports Frank’s (1985, p. 35) more moderate view: ‘‘the conclusion
that absolute income does not matter at all appears just as spurious as the notion that
absolute income is the only income concept that matters.’’ The question that naturally
follows is how large, compared to each other and to other explanatory variables, are the
effects of absolute and relative income on happiness?
6.3 Quantitative Results: Absolute and Relative Income
The first measure we use to compare the magnitude of the effects of absolute and relative
income is the ratio of two elasticities:

oHb rel
orel b
wðabs; relÞ H ð7Þ
oHb abs
oabs b
H
The numerator of this expression represents the elasticity of the latent happiness
measure with respect to relative income; the denominator represents the elasticity of latent
happiness with respect to absolute income. The value of w indicates the percentage change
in happiness induced by a one percent change in relative income as a proportion of the
percentage change in happiness induced by a 1% change in absolute income.
When we use the specifications and parameter estimates of regressions 1 and 2,
respectively, Eq. 7 takes on the special forms:
w1 ðabs; rel pctÞ ¼
h i
b^ þb ^ lnðabsÞ rel pct
R X :0125 0:0009 lnðabsÞ ð8:1Þ
1 h iHb ¼ ðrel pctÞ
^ ^ abs 0:1223 0:0009rel pct
abs bA þ bX rel pct b
H
w2 ðabs; rel med Þ ¼

h i
1
b^ þb ^ lnðabsÞ rel med
R X 0:3051 0:0157 lnðabsÞ ð8:2Þ
i Hb ¼
rel med
1 h 0:0430 0:0157 lnðrel med Þ
^ ^ abs
abs bA þ bX lnðrel med Þ b
H
We first evaluate these expressions for someone we call a ‘‘median individual,’’ by

which we mean a hypothetical person whose absolute income is equal to the median of abs
in our sample ($PPP 7,611.59), and whose relative income can be expressed either as
rel_pct = 50 or as rel_med = 1.0. (These values of the relative income variables imply that
median income in the median individual’s country would also be $PPP 7,611.59.) For this
median individual we calculate w1(7,611.59, 50) = 2.84 and w2(7,611.59, 1) = 3.84.
Hence we have result 6:
Result 6 For a median individual, we find that the effect of a marginal change in
relative income on happiness is several times larger than the effect of a marginal
change in absolute income: by regression 1 the effect of a change in relative income
is 2.84 times as large as the effect of a change in absolute income, and by regression
2 the effect of a change in relative income is 3.84 times as large as the effect of a
change in absolute income.
To compare the weights that people other than a median individual place on absolute and
relative income, we calculate w1 and w2 for all of the individuals in our sample—i.e., we
123
evaluate these expressions at each of the pairs of (abs, rel_pct) and (abs, rel_med) observed
in the data. Table 7 presents summary statistics and categorical frequency distributions for
the values of w1 and w2 thus obtained. The sample medians of both w1 and w2 are between
three and four: by either version of the measure, the effect of a change in relative income is
more than three times as large as the effect of a change in absolute income for at least half of
the people in the sample. The sample means of w1 and w2 are both above four. The most
notable difference in the two distributions is that although all the observed values of w2 are
greater than two—indicating that for all the individuals in the sample the effect of a change
Table 7 Sample distributions of w1 and w2

Descriptive statistics
Variable No. Obs. Mean Std. Dev. Percentiles
10th 25th Median 75th 90th
w1 20,771 4.08 3.10 0.89 1.51 3.34 5.83 8.74

w2 20,769 4.27 1.95 2.91 3.28 3.84 4.68 5.46
Frequency distributions
Distribution of w1 Distribution of w2
Interval Freq. Percent Cumul. Interval Freq. Percent Cumul.
0 \ w1 \0.25 212 1.02 1.02 2 \ w2 \ 3 2,585 12.45 12.45
0.25 w1 \ 0.5 796 3.83 4.85 3 w2 \ 4 9,636 46.40 58.84
0.50 w1 \ 0.75 717 3.45 8.30 4 w2 \ 5 4,955 23.86 82.70
0.75 w1 \ 1 808 3.89 12.19 5 w2 \ 6 1,994 9.60 92.30
1 w1 \ 2 4,068 19.58 31.78 6 w2 \ 7 286 1.38 93.68
2 w1 \ 3 3,214 15.47 47.25 7 w2 \ 8 689 3.32 97.00
3 w1 \ 4 1,424 6.86 54.11 8 w2 \ 9 95 0.46 97.45
4 w1 \ 5 3,091 14.88 68.99 9 w2 \ 10 258 1.24 98.70
1
5 w \6 1,568 7.55 76.54 10 w2 \ 15 169 0.81 99.51
6 w1 \ 7 1,509 7.26 83.80 15 w2 \ 20 47 0.23 99.74
1
7 w \8 715 3.44 87.25 20 w2 \ 25 14 0.07 99.80
8 w1 \ 9 1,529 7.36 94.61 25 w2 \ 30 36 0.17 99.98
9 w1 \ 10 303 1.46 96.07 30 w2 \ 35 2 0.01 99.99
10 w1 \ 11 249 1.20 97.27 w2 = 54.48 3 0.01 100.00
11 w1 \ 12 0 0.00 97.27
12 w1 \ 13 211 1.02 98.28
13 w1 \ 14 0 0.00 98.28
14 w1 \ 15 253 1.22 99.50
15 w1 \ 16 5 0.02 99.52
16 w1 \ 17 99 0.48 100.00
Total 20,771 100 20,769 100
1 2
Notes: w and w both measure the ratio of the elasticity of latent happiness with respect to relative income
to the elasticity of happiness with respect to absolute income. w1 is based on regression 1, in which relative
income is measured by the respondent’s percentile in her national income distribution; w2 is based on
regression 2, in which relative income is measured by the ratio of the respondent’sabsolute income to
median absolute income in her country. For two observations, the values of abs are large enough that the
latent happiness function estimated in regression 2 is decreasing in rel_med. (See discussion in text pre-
ceding result 3) These two observations, for which our definition of w2 would yield negative values, are
dropped from the distribution of w2 described in this table
123
in relative income would be more than twice as large as the effect of a change in absolute
income—the observed values of w1 are less than two for almost 32% of the sample. Even
using the distribution of w1, however, we find that a change in relative income has a larger
effect on happiness than a change in absolute income for almost 88% of the sample;
moreover, the effect of an absolute income change is twice or more as large as the effect of a
relative income change for less than 5% of the sample.
The preponderance of the evidence in Table 7 therefore supports the claim that changes
in relative income tend to have greater effects on how happy people are than do changes in
absolute income. Result 7 presents specific evidence for this general claim:
Result 7 For the joint distribution of absolute and relative income observed in our
sample, the effect on happiness of a change in relative income is typically larger, and
often much larger, than the effect of a change in absolute income. Relative income
changes have a greater effect than absolute income changes for either 87.81%
(regression 1) or 100% (regression 2) of the sample. The effect of a change in
relative income is at least twice as large as the effect of a change in absolute income
for either 68.22% (regression 1) or 100% (regression 2); at least three times as large
for 52.75% (regression 1) or 87.55% (regression 2); and at least four times as large
for 45.89% (regression 1) or 41.16% (regression 2).
We can also compare the effects on happiness of discrete changes in absolute and
relative income. For an individual with any levels of abs and rel, we let -(abs, rel, D)
represent the amount by which her relative income would have to be raised (with her
absolute income held constant) to increase her happiness by the same amount that it would
be increased if her absolute income were raised by $PPP D (with her relative income held
constant). Formally, - (abs, rel, D) is defined by the identity:39
Hb ðabs þ D; relÞ Hb ðabs; rel þ -ðabs; rel; DÞÞ ð9Þ

With the specifications and parameter estimates of regressions 1 and 2 respectively, Eq.
9 has the special forms:

b^ þb^ rel pct ln absþD
A X abs
-1 ðabs; rel pct; DÞ ¼ ð10:1Þ
^ þb
b ^ lnðabsÞ
R X
-2 ðabs; rel med; DÞ ¼ rel medþ

8 h i9
<b^ ln absþD þ lnðrel med Þ b^ þb
^ lnðabs þ DÞ =
A abs R X
exp
: ^ þb
bR
^ lnðabsÞ
X
;
-2 ðabs; rel med; DÞ ¼ rel med

( )
^ ½lnðabs þ DÞ lnðabsÞb
b ^ lnðrel med Þ þ b
^ lnðabs þ DÞ lnðrel med Þ
A R X
þ exp
^ þb
b ^ lnðabsÞ
R X
ð10:2Þ
39
We assume that, other than absolute and relative income, all of the variables upon which Hb depends are
held constant, and so write Hb as a function of just abs and rel.
123
Table 8 Changes in relative income equivalent to specified changes in absolute income

D($PPP) -1(7611.59,50,D) -2(7611.59,1.0,D)
2,000.00 4.10 0.0626

7,611.59 12.19 0.1978
15,223.17 19.31 0.3316
1
Notes: For an individual with any levels of abs and rel_pct, - (abs,rel_pct,D) represents the number of
points her percentile in the national income distribution would have to be raised to increase her happiness by
as much as in increase in her absolute income of $PPP D. For an individual with any levels of abs and
rel_med, -2 (abs,rel_med,D) represents the amount by which the ratio of her absolute income to her
country’s median absolute income would have to be increased to increase her happiness by as much as in
increase in her absolute income of $PPP D. The figures in this table represent a median individual, for whom
abs = 7611.59, rel_pct = 50, and rel_med = 1.0
Several illustrative calculations of -1 and -2, all for a median individual, are shown in
Table 8. These calculations, which indicate that modest increases in relative income
increase happiness as much as comparatively large increases in absolute income, are the
basis of results 8.1 and 8.2:
Result 8.1 On the basis of regression 1, we find that a median individual would be
indifferent between an increase in her absolute income from $PPP 7,611.59 to $PPP
9,611,59 and an increase in her position in the national income distribution from the
50th to the 54.10th percentile. A doubling of her absolute income would increase her
happiness as much as a move up to the 62.19th percentile, and a tripling of her
absolute income would be equivalent to a move up to the 69.31st percentile.
Result 8.2 On the basis of regression 2, we find that a median individual would be
indifferent between an increase in her absolute income from $PPP 7,611.59 to $PPP
9,611.59 and an increase in the ratio of her absolute income to her country’s median
absolute income from 1 to 1.0626. A doubling of her absolute income would increase
her happiness by as much as an increase in this ratio from 1 to 1.1978, and a tripling
of her absolute income would be equivalent to an increase in this ratio from 1 to
1.3316.
Because the measure of relative income we use in regression 2, rel_med, is defined as
the ratio of an individual’s absolute income to her country’s median income, the value of
-2 has a special interpretation that allows us to gain some further intuition about the trade-
offs people would be willing to make between absolute and relative income. Finding that
-2 (abs, rel_med, D) = h implies that an individual with the specified levels of abs and
rel_med would be indifferent between (i) having her absolute income and the absolute
incomes of all the other people in her country increased by $PPP D and (ii) having her
absolute income increased by h times her country’s median income while the incomes of
everyone else were held constant. The values of -2 reported in Table 8 therefore indicate
that a median individual would be as happy to have her absolute income increase by 6.26%
($PPP 476.49), provided that no one else’s absolute income went up, as she would be to
have her absolute income increase by $PPP 2,000.00 if everyone else’s absolute income
were to go up by the same amount. Similarly, she would be indifferent between having her
absolute income alone increase by 19.78% and having her absolute income and everyone
else’s doubled; and between having her absolute income alone increase by 33.16% and
having hers and everyone else’s tripled.
123
6.4 Quantitative Results: Non-monetary Factors
Although the focus of this paper has been on the importance of absolute and relative
income in determining happiness, it is also important to compare the importance of
these income measures to non-pecuniary factors. We make these comparisons on the
basis of discrete changes in the variables, using identities analogous to Eq. 9. The
results below illustrate the importance of absolute and relative income compared to
three important non-pecuniary factors included in the regressions: marital status,
employment status, and health. (In this section, we consider only the case of a median
individual.)
• For a median individual who is single, getting married or finding a domestic partner
would increase happiness as much as an increase in her absolute income of 767%
(regression 1) or 1,948% (regression 2).
• For a median individual who is single, getting married or finding a domestic partner
would increase happiness as much as an increase in her relative income from the 50th
to the 88th percentile (regression 1), or from 100% to 219% of her country’s median
income (regression 2).
• For a median individual who is unemployed, finding a full-time job for pay would
increase happiness as much as an increase in her absolute income of 1,583%
(regression 1) or 24,118% (regression 2).
• For a median individual who is unemployed, finding a full-time job for pay would
increase happiness as much as an increase in her relative income from the 50th to the
99.6th percentile (regression 1), or from 100% to 418% of her country’s median
income (regression 2).
• For a median individual who (on a 1–5 integer scale) gives her health a rating of 3 (the
25th percentile of our sample), an improvement in her health that increased her rating
to 4 (the median of our sample) would increase happiness by as much as an increase in
her absolute income of 6,531% (regression 1) or 163,650% (regression 2).
• For a median individual who (on a 1–5 integer scale) gives her health a rating of 3 (the
25th percentile of our sample), an improvement in her health that increased her rating
to 4 (the median of our sample) would increase happiness more than an increase in her
relative income from the 50th to the 100th percentile (regression 1), or as much as an
increase in her relative income from 100% to 687% of her country’s median income
(regression 2).
These findings present an important caveat to all the preceding analysis is this paper.
Although we have found strong evidence that, ceteris paribus, larger absolute incomes
and larger relative incomes both tend to make people happier, and that changes in
relative income tend to have a greater effect on happiness than do changes in absolute
income, the results presented in this section show that the effects on happiness of several
non-pecuniary factors are greater by many orders of magnitude than the effects of either
income measure.40 Money can buy some happiness, but compared to the happiness
people derive from personal relationships, employment and good health, it can not buy
much.
40
Blanchflower and Oswald (2000) present similar results showing that people value important non-
pecuniary qualities of life as much as very large amounts of money.
123
7 Conclusions
On the question of whether a person’s happiness is affected by her absolute income or by

her relative income, we have found that both matter. There is certainly no logical reason
that people could not like to have incomes that are high absolutely and relatively, and
empirically our results indicate that they do. We reject both a strict interpretation of
Easterlin’s (1974) hypothesis that only relative income matters and a narrowly ‘‘economic’’
model in which only absolute income enters the utility function.
The finding that people do care about their absolute incomes implies that a distribution-
neutral increase in average income will make everyone happier. In that sense, economic
growth can increase human welfare. But the finding that people also care about their
relative incomes adds a note of caution: if some people’s incomes grow more slowly than
others, the relative losers could end up feeling worse off, despite the increases in their
absolute incomes. And any individuals whose absolute incomes remain constant or fall
during a period of general economic growth lose unambiguously.
We have also found strong evidence that changes in relative income tend to have larger
effects on happiness than do comparable changes in absolute income. This result suggests
that, even in an episode of economic growth during which everyone’s absolute income
increases, the welfare losses of relative losers could be large. In terms of aggregate hap-
piness, any adverse distributional consequences of growth could swamp the material
benefits.
Although the question of how economic growth affects income distribution has been the
subject of a great deal of research—including the vast literature on the Kuznets curve, and
a recent spate of work following an influential report by Dollar and Kraay (2002)—no clear
consensus has emerged. The effects of economic growth on income distribution are surely
neither simple nor uniform across time and countries, but further research that sheds light
on this issue—if not generally, at least in particular contexts—will be an important step
toward a better understanding of how economic growth affects happiness.
The welfare benefits of economic growth are also called into question by our finding
that the effects of income (measured absolutely or relatively) on happiness are very small
compared to some non-monetary factors. It is important to note, however, that that we
have measured the effects of income on happiness holding many other factors constant.
But income growth might eventually lead to improvements in some of the factors that
have a big impact on happiness, such as health and employment. So to the extent that
growth in income leads to improvements in other, non-pecuniary, factors that people
value, it may have a large, albeit indirect, effect on happiness. Of course, as people’s
incomes increase they may, as a result of some form of group or even individual irra-
tionality, use their new resources in ways that do not make them happier.41 It is not
growth in income per se that matters, but what people do with the opportunities that
greater material prosperity creates.
Acknowledgements For helpful discussion and comments, we would like to thank Gabriela Catterberg,
Ellsworth Dägg, Picard Janné, Christopher Kilby, Vladimir Kontorovich, and Anne Preston; participants in
the Behavioral Research Council’s symposium on Behavioral Economics and Neoclassical Economics, July
2002, Great Barrington, MA; and participants in the 6th International Conference of the International
Society for Quality of Life Studies, November 2004, Philadelphia, PA.
41
Frank (1999) presents extensive evidence of this phenomenon.
123
Data Appendix
Self-reported Happiness, Absolute Income, and Relative Income
Variable name: happy

Source: WVS item V65
WVS item V65 asked respondents to choose a category on an integer scale from 1 (least
satisfied) to 10 (most satisfied) in answer to the question ‘‘All things considered, how
satisfied are you with your life as a whole these days?’’ Each individual’s value of happy
simply equals the category chosen by the individual in response to this question.
Variable name: MEAN_HAPPY
Source: Constructed from happy
This is the mean value of happy for all individuals from the same country as the respondent.
Variable name: abs
WVS item V227 asked respondents to indicate which of 10 income categories their family
incomes fell in. The boundaries of the categories were given in the currency of the respondent’s
country. For respondents reporting incomes in all but the highest category, abs is equal to the
midpoint of the category, converted from local currency to purchasing power parity dollars
($PPP), using ‘‘purchasing power parity conversion factors’’ obtained from World Bank
(2004). For respondents reporting incomes in the highest category, abs is equal to 120% of the
lower bound of the highest category, converted from local currency to $PPP as in all cases.
Variable name: rel_pct
Source: Constructed from abs
An individual’s value of rel_pct is equal to the percentage of respondents from her country
with values of abs less than or equal to hers.
Variable name: rel_med
Source: Constructed from abs
An individual’s value of rel_med is equal to the individual’s value of abs divided by the
median of abs for all respondents from her country.
Respondent’s Marital Status
Variable name: partner

This equals 1 if the respondent is married or ‘‘living as married,’’ and 0 otherwise.
Variable name: split
This equals 1 if the respondent is divorced or separated, and 0 otherwise.
Variable name: widow
This equals 1 if the respondent is widowed, and 0 otherwise.
Respondent’s Sex
Variable name: female

This equals 1 if the respondent is female, and 0 if the respondent is male.
123
Respondent’s Employment Status
Variable name: part_time

This equals 1 if the respondent is employed for pay and works less than 30 h per week, and
0 otherwise.
Variable name: self_employed
This equals 1 if the respondent is self-employed, and 0 otherwise.
Variable name: retired
This equals 1 if the respondent is retired, and 0 otherwise.
Variable name: housewife
This equals 1 if the respondent’s self-report of employment is ‘‘housewife not otherwise
employed,’’ and 0 otherwise.
Variable name: student
This equals 1 if the respondent is a student, and 0 otherwise.
Variable name: unemployed
This equals 1 if the respondent is unemployed, and 0 otherwise.
Respondent’s Number of Children
Variable name: kid1

This equals 1 if the respondent has exactly 1 child, and 0 otherwise.
Variable name: kid2plus
This equals 1 if the respondent is the respondent has 2 or more children, and 0 otherwise.
Respondent’s Age
Variable name: age

Respondent’s age in years.
Variable name: age2
Source: Constructed from age
The square of the respondent’s age in years.
Respondent’s Health
Variable name: health

WVS item V11 asks ‘‘All in all, how would you describe your state of health these days?
Would you say it is... ‘‘ Respondents are asked to choose among five categories: Very
123
good, Good, Fair, Poor and Very poor. We have coded these categories, respectively, as 5,
4, 3, 2 and 1. (This reverses the order of the coding in the WVS codebook, but is consistent
with the coding of other ordinal variables we use, for which larger numerical values
correspond to ‘‘better’’ states.)
Importance of Religion in Respondent’s Life
Variable name: religion

WVS item V190 asks ‘‘How important is God in your life?’’ Respondents are asked to
answer on an integer scale from 1 (‘‘not at all important’’) to 10 (‘‘very important’’). Each
individual’s value of religion simply equals the category chosen by the individual in
response to this question.
Level and Growth Rate of GDP per Capita in Respondent’s Country
Variable name: GDP_PC

Source: World Bank (2004)
GDP per capita, PPP (constant 1995 international $), for the year in which wave 3 of the
WVS was conducted in the respondent’s country.
Variable name: GROWTH
Source: Constructed from GDP_PC
Percentage growth in GDP_PC in the respondent’s country over the 5 years preceding
wave 3 of the WVS.
ðtÞGDP PCðt5Þ
For year t, GROWTH ðtÞ ¼ GDP PCGDP PCðt5Þ
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Absolute Income, Relative Income, and Happiness

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Absolute Income, Relative Income, and Happiness

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Soc Indic Res (2008) 88:497–529

Absolute Income, Relative Income, and Happiness

Richard Ball Æ Kateryna Chernova

Accepted: 5 November 2007 / Published online: 27 November 2007

Keywords Subjective well-being Happiness Relative income

largely by Easterlin’s (1974) seminal paper. A prominent hypothesis presented in that

2.1 Measuring Happiness

2.2 Non-monetary Determinants of Happiness

2.3 Money and Happiness

Japan Israel West Germany

Nigeria Phil. Panama

Fig. 1 Easterlin/Cantril plot of average happiness on GNP per capita

Table 1 Easterlin/Cantril data on average happiness and GNP per capita

Brazil 375 5.93 4.6

3 Data Sources and Variable Definitions

Employment Employment status is indicated by six additional zero/one dummies:

4 Replicating Easterlin (1974)

4.1 Within Countries

4.2 Across Countries

Table 2 Average happiness among low and high status groups

Argentina 1995 6.59 7.05 0.0099

United States 1995 7.11 7.95 \0.0001

parity dollars (GDP_PC).25 The scatterplot, shown in Fig. 2, consists of 43 observations;26

Table 3 WVS data on average happiness and GDP per capita

Argentina (AG) 1995 10,346.29 9.24 6.93

Fig. 3 Replica of Fig. 2 with region labels

5 Dissaggregated Analysis: Model Specification

5.1 The Sample and Descriptive Statistics

Since individuals’ self-ratings of their overall happiness are measured by an ordered

Table 4 Countries in the

10th 25th 50th 75th 90th

Fig. 4 Histograms of absolute and relative income variables

however, a collinearity problem makes it impossible to include a complete set of country

Table 6 Regression results

Income ln(abs) 0.1223 0.0313 \0.001 0.0430 0.0180 0.017

6 Dissaggregated Analysis: Results

6.1 Control Variables: Qualitative Results

significant. In regression 2, the coefficient is negative and significant at a confidence

6.2 Absolute and Relative Income: Qualitative Results

Result 3 With relative income held constant, an increase in an individual’s absolute

To evaluate the effect of a change in relative income on happiness, we compute

6.3 Quantitative Results: Absolute and Relative Income

w2 ðabs; rel med Þ ¼

We first evaluate these expressions for someone we call a ‘‘median individual,’’ by

Table 7 Sample distributions of w1 and w2

Variable No. Obs. Mean Std. Dev. Percentiles

10th 25th Median 75th 90th

w1 20,771 4.08 3.10 0.89 1.51 3.34 5.83 8.74

Hb ðabs þ D; relÞ Hb ðabs; rel þ -ðabs; rel; DÞÞ ð9Þ

-2 ðabs; rel med; DÞ ¼ rel medþ

-2 ðabs; rel med; DÞ ¼ rel med

Table 8 Changes in relative income equivalent to specified changes in absolute income

2,000.00 4.10 0.0626

6.4 Quantitative Results: Non-monetary Factors

On the question of whether a person’s happiness is affected by her absolute income or by

Self-reported Happiness, Absolute Income, and Relative Income

Variable name: happy

Respondent’s Marital Status

Variable name: partner

Variable name: female

Respondent’s Employment Status

Variable name: part_time

Respondent’s Number of Children