Income makes happy after all

Do higher incomes make you happier? Are countries with higher incomes on average happier? Richard Easterlin made a career trying to document and answer these questions. His answers are known as the Easterlin paradox: within a country, people are happier with higher incomes, but across countries no such relation exists. This has very important implications: it means people only care about their relative standing within a country, but not their absolute income. Consequently, it is useless to implement growth enhancing policies.

Betsy Stevenson and Justin Wolfers revisit the aggregate evidence with new panel data that encompasses more countries, in particular developing economies, and find that the Easterlin paradox does not hold: richer countries are indeed happier on average. While one has always to be weary of survey data, especially when people are asked about subjective measures of their happiness, the results here are robust to all sort of variations in specifications and data sets.

Whew, we can focus on growth promotion again.