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What Really Makes People Happier Within Countries Over Time?

Nov 10 2022 • 3 min read

Imagine that you’ve been offered a job from two different companies. Company A pays £35,000 per year, while others at the same level within the company earn £38,000. Company B pays £33,000 per year, while others at the same level earn £30,000. Where do you think you would be happier?

When researchers asked subjects this question in 1991, 62% believed they would be happier with the lower absolute salary (but higher relative position) at Company B. Many studies conducted since then have shown that they were probably correct – for there is now much evidence that our relative income matters more for our wellbeing than our absolute income.

This is one reason why increasing economic growth within a country does not make its people much happier. Because if everyone’s absolute income increases, everyone’s relative position stays the same.

One of the first economists to notice this was Richard Easterlin in 1974. His observation, which later became known as the Easterlin Paradox, has been documented in many countries – even those that have experienced periods of rapid economic growth such as China, India, and Japan. While income per capita increased sixfold in Japan between 1958 and 1991, for example, average life satisfaction stayed exactly the same.

Image source: Frey & Stutzer, 2002. What Can Economists Learn from Happiness Research?

So if economic growth itself does not necessarily explain changes in happiness within a country over time, what does? A recent paper by Easterlin and his colleague Kelsey O’Connor provides a new and perhaps unexpected answer.

These authors assessed the impact of three alternatives: 1) social capital, measured by levels of trust in others; 2) quality of the environment, measured by air pollution levels; and 3) welfare policies, measured by government generosity and spending in relation to social welfare programmes such as unemployment insurance, pensions, and sickness insurance.

Which of these do you think had the greatest impact on the happiness of a population?

Looking at long-term data in a handful of European countries, Easterlin and O’Connor found that the last factor is the only one that made a statistically significant difference to happiness levels within a country over time. In places where the generosity of social welfare programmes increased (such as Spain, Italy, and France) so too did the level of happiness. And in places where these programmes had been pulled back (such as Sweden and Denmark) happiness had also declined.

One apparently important reason for this is that such programmes boost everyone’s happiness, regardless of whether or not they directly benefit from them. For example, the existence of generous unemployment insurance makes employed people happier, too – without it, their relative position has further to fall in the event of being laid off.

Easterlin and O’Connor conclude that “generous welfare programmes are the apparent key to happiness”, perhaps on account of this equalising effect. Which suggests that next time you are choosing between Company A and Company B, you might want to take both relative income and employee welfare policies into account.

With thanks to Richard Easterlin for his helpful comments.

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