The Economics of
Happiness
Some Labour Market Applications
Dr Mike Dockery
Director, Centre for Labour Market
Research
Associate Professor, School of Economics &
Finance, Curtin University
Presentation outline
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Happiness and the economic problem
Meaning and measurement of happiness
Income and happiness
Policy implications
Some labour market applications:
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Is unemployment voluntary or involuntary?
The labour supply curve
Education and happiness - a paradox
The objective of economic policy?
It would generally be agreed that the ultimate objective of economics
is to increase the general level of happiness or well-being of the
population. However:
“In a survey done by Diener (1984) of well over 200 studies on
the measurement and determinants of subjective well-being only
two references appear to articles in economics journals.”
(Easterlin 1995: 44)
What do we mean by Happiness?
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Alternative terms: happiness, life satisfaction,
subjective wellbeing.
‘Cognitive’ measure arrived at following some process
of evaluation as opposed go an ‘affective measure’
relating to current mood or emotions.
“The degree to which an individual judges the overall
quality of their life-as-a-whole favourably”
(Veenhoven 1991)
Happiness and the Economic Problem
Good A
U0
Good B
Happiness and the Economic Problem
Good A
U2
U1
U0
Good B
Happiness and the Economic Problem
Good A
Y=$100
U0
Good B
Happiness and the Economic Problem
Good A
UMAX
U0
Good B
Happiness and the Economic Problem
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We never observe or attempt to measure utility
directly.
What we observe is ‘revealed preference’. If
you are observed to choose A over B then you
are happier with A than with B.
Expanding the budget curve increases the
choice set available to the consumer and
therefore must increase their utility.
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From foundations of microeconomics, we can prove
axiomatically than money buys you happiness.
The (dubious) macroeconomic extension of this
analysis is that increased economic growth and
increased happiness are synonymous.
Measuring happiness
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Typically through survey instruments involving
self-assessment of happiness or life-satisfaction
on some scale (ie. subjective).
Some examples are:
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HILDA Survey: “All things considered, how satisfied
are you with your life?” - scale from 0 (totally
unsatisfied) to 10 (totally satisfied).
Longitudinal Surveys of Australian Youth: “How
happy are you with your life as a whole?” – choose
from very unhappy, fairly unhappy, fairly happy or
very happy
Summary of major factors associated
with “wellbeing”
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economically prosperous country that respects freedom and
democracy;
political stability;
being part of a majority rather than a minority;
being toward the top of the social ladder;
being married and having good relationships with family and
friends;
being mentally and physically healthy;
being active and open minded;
Being an extrovert;
feeling in control of one’s life;
having aspirations in social and moral matters rather than
money-making;
being politically conservative.
(Veenhoven 1991 – review of 245 studies in 32 countries)
Validity of happiness measures
There are a number of challenges to the validity
of research based on such subjective measures
of wellbeing:
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Are some people just simply happier (fixed effects) or
do circumstances change life satisfaction?
How transitory is the effect of various events?
Absolute circumstance versus relativities?
Very limited distribution of measurement variable and
general validity of survey instruments.
Some validation of survey constructs from
physiological data.
Challenges to Economics
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Importance of income;
Paradox: positive relationship between income and
happiness in cross-sectional data, but when you look at
time-series data no such relationship seems to exist.
Cross-country comparisons suggest positive relationship
between GDP/capita and happiness exists up to a level
of about $15,000 per person per annum, after which the
relationship breaks down.
Why?
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Adaption/habituation
Aspirations
Rivalry (the effect of relative income dominates the effect of
absolute income)
(Source: Frey & Stutzer 2002, p. 413)
(Source: Frey and Stutzer 2002, p. 417)
Source: “Polls, wealth and happiness: Where money seems to talk”, The Economist, July 12, 2007
(Source: Frey and Stutzer 2002, p. 415)
Karl Marx
(Wage, labour and Capital, 1847)
“A house may be large or small; as long
as the neighbouring houses are likewise
small, it satisfies all social requirements
for a residence. But let there arise next
to the little house a palace, and the
little house shrinks to a hut.”
Policy Implications
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In the scramble for economic growth, we may have
actually sacrificed many of the things that make us
happy, such as a sense of community, economic
security, quality of leisure time, relationships with
family and friends.
If rivalry effects dominate then policy is completely
ineffective!
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Justification for taxation
The ‘misery index’ – should we put so much focus on
controlling inflation rather than unemployment?
Equity vs. efficiency;
Valuing the environment/public goods.
Labour market policy
implications
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Long work hours:
“A wealthy man is a man who earns
$100 a year more than his wife's sister's
husband.”
HL Mencken, circa 1950s
Is unemployment voluntary or
involuntary? (Clark and Oswald 1994).
Neo-classical model of labour
supply and demand
Wage $
Supply
W1
W*
Demand
D1
S1
Persons
Happiness, work and unemployment
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Economics literature:
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unemployment = loss of income.
Happiness, work and unemployment
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Psychological literature:
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Spillover, compensatory or segmentation.
Jahoda’s Functional Theory: work=time structure to the day, social
interaction, self-identity and purpose
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These factors absent in unemployment.
Attribution theory (and variants) suggests the effect of unemployment
depends upon one’s view of why they are unemployed and their
personal ability to control or change their situation.
Warr (1987): Effect of unemployment is worse for middle-aged men
than for youth because of greater financial responsibilities, sense of role
as ‘bread-winner’, work is more important to sense of ‘self’.
Mediating factors include social support, financial resources, ability to
legitimise unemployment.
Clark and Oswald (1994) find negative impact of unemployment is
lower in areas of high unemployment.
Effect of unemployment very different for different individuals!
The transition from school to work:
current activity by survey year; LSAY.
1996a
1997
1998
1999
2000
2001
2002
(Year 10)
(Year 11)
(Year 12)
(Aged 18)
(Aged 19)
(Aged 20)
(Aged 21)
94.9
86.1
79.4
3.8
0.4
0.0
0.0
Working
1.8
9.3
14.7
43.6
46.6
56.9
63.5
Study
0.3
1.8
1.1
44.2
40.5
33.0
25.1
Work and studyb
0.0
0.2
0.1
1.4
5.8
2.5
2.3
Looking for work
0.7
2.0
3.6
4.9
4.4
4.3
4.6
Other
0.2
0.6
0.9
1.4
2.3
2.9
3.9
Missing
2.0
0.1
0.3
0.7
0.1
0.4
0.5
5.1
13.9
20.6
96.2
99.6
100.0
100.0
Total (%)
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Sample number
9837
10307
9738
8783
7889
6876
6095
Sample survival rate
72.3%
75.7%
71.5%
64.5%
58.0%
50.5%
44.8%
Still at school (%)
Has left school and main current activity
is (%):
Total Left School (%)
Modelling Approach
H it    X it  i   it
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Random-effects logit model fitted to estimate the probability
that an individual indicates that they are very happy with
their life as a whole.
Model takes account of repeat observations on individuals
and allows an individual component to the error structure
Estimation sample includes all observations from 1997 to
2002 on persons who have left school
30,406 observations for 8567 individuals, with mean of 3.5
observations per individual
Rich set of fixed background variables and time-varying
covariates (eg. marital & employment status)
Findings – youth and unemployment
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Fixed effects very important
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personality trait of extroversion
family background also matters.
Persistent, detrimental effects of being from a sole
parent household and having no working parent in
the household at age 16
Positive effect of marriage is confirmed
Positive effects of wealth and income
Happiness declines with duration of
unemployment
Findings – youth and unemployment
(continued)
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It is critical to take into account the
‘quality’ of employment:
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Low job satisfaction on key job attributes
has an even greater detrimental effect on
reported happiness than being in
unemployment.
Young people are markedly happier if they
have found a job which is the sort of job
they would like to pursue as a career.
The Labour Supply curve
Goods &
Services
B
A
U0
Leisure →
← Hours worked
The Labour Supply curve
Goods &
Services
B
E
A
Leisure →
U0
← Hours worked
Traditional analysis of labour
supply – some issues
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Why do people work such long hours?
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Many people report working more hours than they would like
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This has a significant negative effect on life satisfaction (even for
part-time workers!)
Real incomes have risen markedly, but people are working
longer!
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impact of increase in real wages on hours of labour supplied is
ambiguous
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substitution and income effects
In some countries (eg. Japan) real incomes have tripled since the
1950s, yet people are working more, not less!
Limitations of standard analyses of labour supply (and
its elasticity wrt wages):
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Assumes individuals freely choose the number of hours they
work
Do people accurately predict the number of hours to work
consistent with utility maximisation?
Why not directly estimate the
utility curve?
U  X   ln(L)   ln(Y )
U  X   ln(112 h)   ln(Yu  hw)
dU

w


dh (112  h) Y  hw
u
d 2U
dh2


w

(112  h) 2 (Yu  hw) 2
Utility is maximized when dU dh  0
(112w  Yu )
ie. when: h* 
w(   )
Estimates for single males
(HILDA data)
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U=X+0.70ln(L)+0.30ln(Y)
(0.026)
(0.017)
Evaluated at means (w=$25.76 per
hour, Yu=$69.27 per week)
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h* = 32 hrs/week
Actual = 43 hours per week!
eSUPPLY=0.0006!
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Typical estimates range from 0.2 to 0.5
Self-Reported Happiness leve
Degrees of Misery?
Evidence from HILDA
8.10
8.05
8.00
7.95
7.90
7.85
7.80
7.75
7.70
7.65
7.60
Total Mean
Male Mean
Female Mean
University
Post School
High School
Highest Education Level Achieved
Year 11 or
Below
Happiness relative to overall mean by
educational attainment (LSAY)
(a) Lower educational attainment categories
0.20
0.10
0.00
-0.10
-0.20
1997
1998
1999
2000
Year 10
2001
Year 11
2002
Year 12
2003
2004
Yr 12 +Cert
2005
2006
Happiness relative to overall mean by
educational attainment (LSAY)
(b) Highest educational attainment categories
0.20
0.10
0.00
-0.10
-0.20
1997
1998
1999
2000
Apprent
2001
Diploma
2002
2003
Degree
2004
Post-grad
2005
2006
Selected references
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Clark, A. E. and Oswald, A. J. (1994), ‘Unhappiness and unemployment’,
Economic Journal, 104, 648-59.
Dockery, A. M. (2010), Education and happiness in the school-to-work
transition, National Centre for Vocational Education Research, Adelaide.
Dockery, A. M. (2005) “The happiness of young Australians: empirical
evidence on the role of labour market experience”, Economic Record, 81,
255, pp. 322-335.
Dockery, A. M. (2006), “Mental health and labour force status: panel
estimates with four waves of HILDA”, CLMR Discussion Paper Series 06/1,
Centre for Labour Market Research, Curtin Business School.
Frank, R. (1999), Luxury Fever, Princeton University Press, Princeton.
Frey, B. S. and Stutzer, A. (2002), “What can economists learn from
happiness research?”, Journal of Economic Literature, 40, June, 403-435.
Neumark, D. and Postlewaite, A. (1998), “Relative income concerns and
the rise in married women’s employment”, Journal of Public Economics,
70, pp. 157-183.
Schor, J. B. (1992), The overworked American: The unexpected decline of
leisure, Basic Books: New York.