Does relative income matter?
Great writers and thinkers have long debated the definition of happiness and how to achieve it. According to Jean Jacques Rousseau, happiness is 'a good bank account, a good cook and a good digestion', while Marcus Aurelius declared that 'very little is needed to make a happy life; it is all within yourself in your way of thinking'.
Over the past 60 years, people in the US and Britain have experienced vast increases in income, yet there has been no corresponding increase in life satisfaction. We are richer, healthier, have better homes, cars, food and holidays but are no happier for it. This situation has compelled Professor Lord Richard Layard to question the role of economic growth in improving our happiness.
He says: 'When I realised that pursuing national income per head wasn't necessarily a panacea, it was like a bolt of lightning. It made me question what economics is about. It made me ask, what is progress, if not rising GDP?
'If rises in income aren't it, then you have to ask what is progress? That is where happiness comes in. Aristotle said that happiness was the only thing that man wanted for which he could give no reason. Anything else – income, sex or whatever – was always for something else, be it to buy things or for the future of the species. But happiness was, for Aristotle, a self-evident goal. And he's right: men and women want to be happy.'
Professor Layard, otherwise known as the government's 'happiness czar', was the founder director of the Centre for Economic Performance at LSE and now runs its Well-Being Project. He has identified seven of the most influential factors on our wellbeing: family relationships, financial situation, work, community and friends, health, personal freedom and personal values. His ideas have influenced government policy.
In a CEP discussion paper Does Relative Income Matter? Are the Critics Right? Professor Layard and his colleagues, Guy Mayraz and Stephen Nickell, challenge critics Angus Deaton of Princeton, and Betsey Stevenson and Justin Wolfers of Pennsylvania University, who have argued in two recent papers that only absolute income matters to happiness.
Professor Layard's paper identifies flaws in his critics' arguments and presents compelling evidence which shows that in many advanced countries individual happiness depends on relative income rather than absolute income.
His team analysed data from the General Social Survey in the USA over the years since 1972. One of the key questions asked was how people perceived their position in the income distribution which, when analysed along with other data, proved highly significant in proving that individual happiness really does depend on relative income as people experience it.
There is also a finding by Gallup, which for many years asked respondents 'What is the smallest amount of money a family of four needs to get along in this community?' The answers moved clearly in line with average real incomes in the community. This supports the idea that people have a mental concept of income norm, which rises with general levels of living.
In West Germany, the researchers looked at surveys beginning in 1984 and found that average life satisfaction did not rise despite a sharp rise in real income.
Another piece of evidence comes from a hypothetical question put to Harvard graduates in 1998 when they were asked to choose between two imaginary worlds:
A. You get 50 thousand dollars a year while others get 25 thousand.
B. You get 100 thousand dollars while others get 200 thousand.
A majority of respondents opted for the first world. This only makes sense if relative income is more important to them than absolute income, the researchers concluded.
Professor Layard points out that the main weight of evidence in the critics' argument in favour of absolute income comes from countries poorer than those in North America and Western Europe.
He concludes: "The two recent papers which dispute the role of relative income in affecting happiness cover the whole range of countries from poor to rich while our argument is about rich countries only. For rich countries these recent papers provide no reason to question the importance of relative income as an influence on life-satisfaction."
Does Relative Income Matter? Are the Critics Right? by Richard Layard, Guy Mayraz and Stepen Nickell was published as a discussion paper by the CEP in March 2009.
For full details of Professor Layard's research and publications, see his profile in Experts Directory: Professor Emeritus Lord Layard
Centre for Economic Performance (CEP)