Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles

The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This pape...

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Bibliographic Details
Published in:Journal of economic literature 2008-03, Vol.46 (1), p.95-144
Main Authors: Clark, Andrew E., Frijters, Paul, Shields, Michael A.
Format: Article
Language:English
Subjects:
Aggregate income
Consumer economics
Economic models
Economics and Finance
Happiness
Humanities and Social Sciences
Income estimates
Labor supply
Marginal utility
Paradoxes
Utility functions
Wellbeing
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Summary:The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with the presence of relative income terms in the utility function. Income may be evaluated relative to others (social comparison) or to oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility, and discuss some nonhappiness research (behavioral, experimental, neurological) related to income comparisons. We last consider how relative income in the utility function can affect economic models of behavior in the domains of consumption, investment, economic growth, savings, taxation, labor supply, wages, and migration.
ISSN:0022-0515
DOI:10.1257/jel.46.1.95