The Economics of Happiness, Part 2: Are Rich Countries Happier than Poor Countries?

Following yesterday’s post, I promised to describe the new evidence that rich countries are happier than poor countries.

The simplest way to make this point is with a chart, using data from the Gallup World Poll. This amazing new dataset contains detailed data on subjective well-being for 132 countries in 2006. (Amazingly, Gallup plans to continue to field this poll every year.)

The key question asks:

“Please imagine a ladder/mountain with steps numbered from 0 at the bottom to 10 at the top. Suppose we say that the top of the ladder/mountain represents the best possible life for you and the bottom of the ladder/mountain represents the worst possible life for you. If the top step is 10 and the bottom step is 0, on which step of the ladder/mountain do you feel you personally stand at the present time?”

The following chart simply takes the average levels of satisfaction on this 0-10 scale, and plots it against G.D.P. per capita (note the log scale):

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There is an incredibly high correlation between average levels of happiness and average incomes — greater than 0.8. Angus Deaton actually beat us to this finding, and his analysis of these data is worth a close reading, (here).

There’s another striking finding in this graph: the relationship between happiness and log income appears nearly linear.

Thus, a 10 percent rise in income in the United States appears to increase happiness by about as much as a 10 perecent rise in income in Burundi.

Let me add two further comments here:

1. This is an interesting finding, because many had argued that there is a “satiation point” beyond which you just don’t benefit from greater income. Indeed, Richard Layard has argued that “there is no evidence that richer countries are happier than poorer ones — so long as we confine ourselves to countries with incomes over $15,000 per head.”

In fact, the slope appears to get steeper above $15,000!

2. Even so, it is worth noting that a 10 percent rise in income in Burundi requires one-sixtieth as much income as a 10 percent rise in income in the U.S. Thus, even if the slope is three times as steep for rich countries as poor countries (as we estimate), this still means than an extra $100 has about a twenty-times-greater effect on happiness in Burundi than it would in the United States.

Comparisons like this make you think that foreign aid may not be such a bad idea.

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  1. D says:

    Interesting, but this assumes that people are truthful in reporting their happiness. Especially, if you are rich, you are expected to be happy.

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  2. Craig says:

    I wouldn’t mind the concept of foreign aid so much if the money actually benefitted the people. Instead it usually lines the pockets of the countries’ so called leaders.

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  3. G. Owen Schaefer says:

    I understand happiness is notoriously difficult to measure, but the Gallup poll question seems a particularly bad rubric.

    It specifically asks what life you think best on a ranked scale. It is bad to assume this is the same thing as life satisfaction, though. Consider: a very contented person might say, even if he is a 5 on the scale, that he is quite satisfied with his life; while an uncontented person reporting 8 might be much less satisfied…he just has to keep feeding the beast (indeed, perhaps his natural lack of satisfaction got him ahigher place on the ladder).

    Moreover, I find it natural that people assume more money/resources is better, and the poll suggests people accurately guage how well-off, materially, they are in a relative sense. But the point of the Easterlin paradox is that our common assumptions about what’s “best” is crucially misguided.

    Many think they would be better off with more resources, worse off with fewer resources, and people appear to respond to the Gallup with that theory in mind. But, as the saying goes, money can’t buy happiness.

    Similar arguments could probably be applied to various “happiness surveys” which justify the Easterlin paradox itself, but at least those surveys ask people how *happy* they are, rather than where they are on the *best possible life* scale.

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  4. Dave Younskevicius says:

    Of course you’ll see this trend because this chart has a log scale. But people don’t always see money that way. A 10 percent increase is a lot more money for someone who already has a lot. Yet the increase in happiness is linear.

    So it looks like more money (in absolute terms) doesn’t bring that much more happiness. Unless you always get increases in income as percentages in the form of raises and the like, you would think that there are better ways to be happy than making more money.

    Sometimes I think I must be the only one who always wants to see data on a linear scale. In this case, you’d see a much flatter increase in happiness as income goes up. That seems more intuitive to me.

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  5. dchero says:

    Great topic. I agree that there can be many many explanations for the correlation (better quality of life in nations with high GDP irrespective of income, flaws in polling, etc.), but it is interesting nonetheless.

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  6. Laura B says:

    I feel like that question doesn’t really get at happiness in such a fundamental way. The way it is phrased, “best possible life for you”, and the analogy of having to climb up a mountain or a ladder (the economic ladder?) almost seems to be getting at where we stand in relation to the dreams we set up for ourselves. As I read it I interpreted it more as “how close are you to attaining your dreams?” than as “how happy are you?”, an important difference I think. Our dreams or goals tend to have a more economic base, “In perfect life I wouldn’t have to worry about money at all” or, “In a perfect life I would have more free time” as opposed to, “In a perfect life I would feel loved”. Both are important to happiness, but typically we don’t set such distinct goals for love, and certainly don’t perceive ourselves as climbing up some sort of love ladder. I would imagine that people living in wealthier countries would on average perceive themselves to be closer to thoeir economic goals than people in poorer countries, but I don’t think that necessarily means that they’re happier.

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  7. Psycho(metrician) says:

    The question is actually more complicated than such analyses suggest. When comparing levels of a psychological construct (here: life satisfaction) across groups (here: nations), one needs to be concerned about what is called “measurement (in)equivalence” (also known as “differential item/test functioning”). At the risk of dramatically oversimplifying, the point is that, prior to comparing mean levels of life satisfaction across nations, it is important to ensure that people in different nations interpret the questions (and the response options) similarly. Otherwise, one is left comparing apples and oranges. Another issue is that, prior to comparing levels of life satisfaction across nations, it is necessary to demonstrate that a statistically significant proportion of the variance in life satisfaction exists between, as opposed to within, nations (to be fair, Wolfers may have tested for this).

    At any rate, the overall point is that, from a psychometric standpoint, such comparisons–although of obvious sensational value–are fraught with interpretational difficulties.

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  8. misterb says:

    Psycho(metrician)
    It seems to me, as a non-academic, that Gallup has done a creditable job of creating a culturally neutral happiness measure. Since this study shows a reasonable correlation between wealth and happiness, I see that as much a validation of the polling technique as a refutation of the Easterlin paradox. Certainly, if people are even partly rational, then they will use their *excess* funds in a way that would make them happier. If there were a way to calculate how much discretionary money exists in an economy, that graph might shown an even higher correlation to happiness.

    I would also point Freakonomics readers who would be interested in another point of view to Dan Ariely http://www.predictablyirrational.com/ who has a poignant post on what this means to him personally.

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