The next step is to use the panel data to decompose this effect of income into an effect of absolute income and an effect of income relative to the appropriate comparator group. For this purpose relative income is measured relative to other people of the same sex, age and education in the year in question. When this analysis is performed with suitable controls, there is no effect left for absolute income.9 Only relative income matters and this is clearly what explains the fact that in Figure 3.3 average life satisfaction has not risen despite rapid economic growth. A third result is also of interest. Many people, including some psychologists, use adaptation to explain why happiness is not permanently increased by higher income: “whatever your income, you get used to it.” This explanation clearly has problems since, if it were wholly true, we should not observe Fact No 1.10 And in the GSOEP data there is no strong effect on current life satisfaction of current income relative to income over the previous three years – no evidence, that is, of a role for adaptation.11 Figure 3.3
6
Mean reported life satisfaction 7 6.5
7.5
Reported life satisfaction in West Germany
1970
1980
1990 Year
Eurobarometer 1973-2007
2000
2010
GSOEP 1985-2006
Source: Eurobarometer and German Socio-Economic Panel. Mean life satisfaction reported on a 0-10 scale.
We can turn now to the dozens of cross-sectional studies which also indicate strong effects of income comparisons.12 All cross-section studies run the risk of exaggerating the effect of income on happiness by including the reverse effects of happiness on income.13 But many of them provide more useful detail, including explicit questions about whom people compare themselves with, and how they think their income compares with that of different groups. For example, in a representative sample of rural Chinese, people said they mainly compared themselves with others in the same village, and multiple regression results showed that among all possible factors the most important for happiness was perceived relative income within the village.14
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In advanced countries the comparators are different. The European Social Survey asked people “How important is it for you to compare your income with other people’s incomes?” and those who said income comparisons were more important were also on average less satisfied with their lives – a common finding.15 Respondents were also asked “Whose income would you be most likely to compare your own with?” The most important group mentioned was “colleagues,” and the same was found in a one-year-only set of questions in the GSOEP.16 In the GSOEP study people were then asked to rank their income compared with their colleagues, and also with their friends, neighbors, etc. In explaining life satisfaction it was confirmed that perceived relative income has a large effect on life satisfaction. Similar findings have been found in repeated cross-sections in the United States,17 which helps to explain the fact that happiness has not increased in the U.S. (see Figure 3.2).