Does Happiness Pay? An Exploration Based on Panel Data from Russia

Carol Graham
2002 Social Science Research Network  
This paper explores differences in the determinants of long term happiness levels versus those of short term fluctuations. It also departs from the usual analysis of the effects of income on happiness, and explores the effects of happiness on future income. We find, based on panel data for 6500 respondents in Russia for [1995][1996][1997][1998][1999][2000], that static variables such as gender, stable marital status, and education levels, are more likely to have effects on normal happiness
more » ... s, while changes in socioeconomic or marital status (particularly divorce) are more likely to cause fluctuations in happiness levels. We also find both happiness and positive expectations for the future in the initial period are positively correlated with higher levels of income in future periods. People with negative perceptions of their own past progress and/or with higher fear of unemployment, meanwhile, increase their incomes less, on average, over the period. The psychology literature attributes stability in happiness levels over time to positive cognitive bias, such as self esteem, control, and optimism. The same factors may be at play here, and enhance individuals' performance in the labor market. * We would like to thank The study of happiness, or subjective well-being, and its implications for economic behavior is a fairly new area for economists, although psychologists have been studying it for years. The findings of this research highlight the non-income determinants of economic behavior. For example, cross country studies of happiness consistently demonstrate that after certain minimum levels of per capita income, average happiness levels do not increase as countries grow wealthier. 1 Within societies, most studies find that wealthier individuals are on average happier than poor ones, but after a minimum level of income, more money does not make people much happier. 2 Because income plays such an important role in standard definitions and measures of well being, these findings have theoretical, empirical, and policy implications. Some of the earliest economists -such as Jeremy Bentham -were concerned with the pursuit of individual happiness. As the field became more rigorous and quantitative, however, much narrower definitions of individual welfare, or utility, became the norm, even though economics was still concerned with public welfare in the broader sense. In addition, economists have traditionally shied away from the use of survey data because of justifiable concerns that answers to surveys of individual preferences -and reported well being -are subject to bias from factors such as respondents' mood at the time of the survey and minor changes in the phrasing of survey questions, which can produce large skews in results. 3 Thus traditional economic analysis focuses on actual behavior, such as revealed preferences in consumption, savings, and labor market participation, under the assumption that individuals rationally process all the information at their disposal to maximize their utility. 4 More recently, behavioral economics has begun to have influence at the margin, as an increasing number of economists supplement the methods and research questions more common to economists with those more common to psychologists. In this same vein, the research on subjective well being relies heavily but not exclusively on surveys, and combines methods from both professions. Typically, the questions are very simple ones about how happy or satisfied respondents are with their lives, with responses ranging from 1 Easterlin (1974). 2 See, among others, Blanchflower and Oswald (1999); Diener (1984); Frey and Stutzer (2002) ; and Graham and Pettinato (2002). A contrasting view, in a study by psychologist Bob Cummins, starts from the assumption that subjective well being is held within a narrow range determined by personality, and that then is influenced by a number of environmental factors, including income. This study finds that there are significantly different levels of subjective well being for people who are rich, those who are of average Western incomes, and those who are poor. They also note that the effects of income are indirect, i.e. in terms of the other resources that income allows people to purchase, ranging from better health to nicer environments. See Cummins (2000) , "Personal Income and Subjective Well Being: A Review", Journal of Happiness Studies, Vol.1, For a critique of the use of survey data, see Bertrand and Mullainathan (2001). 4 Assumptions about how much information individuals have and how they process it have become much more sophisticated over time, including the concept of bounded rationality. With bounded rationality, individuals are assumed to have access to local or limited information, and to make decisions according to simple heuristic rules rather than complex optimization calculations. See Conlisk (1996) and Simon (1978).
doi:10.2139/ssrn.1028319 fatcat:uza2kpxg6zbfnpu2hqsmvzcqc4