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Income, Growth, Comparisons, Inequality and Subjective Well-Being

Claudia Senik and Andrew Clark

The research field of subjective well-being (SWB) has recently experienced remarkable growth, largely centered on the statistical analysis of large-scale representative surveys (often panel data) including subjective evaluations such as self-reported life or job satisfaction, or other measures of mental well-being. Further, SWB is one of the perhaps rare subjects that have inspired research across a variety of social science disciplines, with key contributions in Economics, Psychology, Political Science and Sociology.

Using subjective variables can help address various policy questions for which standard methods of analysis have not sufficed to provide unambiguous results. Income distribution, income comparisons and other types of social interactions and preference interdependence are clearly the types of phenomena for which the usual method of revealed preferences is unhelpful, and for which the recourse to subjective data can be helpful.

The main motivation of the subjective well-being literature is the famous “Easterlin paradox” that the average self-declared happiness does not increase during periods of sustained income growth (in post-war Japan for instance), even though the cross-section relationship between income and subjective well-being is positive. Hence, “raising the incomes of all will not increase the happiness of all” (Easterlin, 1974). Two common explanations of this paradox are income comparisons and adaptation, both of which reduce or eliminate the welfare benefits of income growth.

This course presents this new literature and how it has shed light on the issue of income inequality, income comparisons and the need for public interventions aimed at correcting these gaps. The main questions addressed by this literature are: the measurement of well-being, evidence for comparisons and adaptation, and the degree and type of income inequality that are desired by the population, and for which motives.

The question of income comparisons and income inequality has arguably become increasingly relevant, with the rise in income inequality, including wage inequality, in the countries of the OECD, starting in the 1980s (Atkinson and Piketty, 2007). On the other hand, the weight of government transfers for income redistribution has doubled in developed countries since the 1960s (Alesina and La Ferrara, 2005). Given the importance of income inequality and of policies aimed at reducing it, it is important that for economic research to provide some information about the subjective perception of these phenomena.

Accordingly, the course will address the following points:

• The Measurement of well-being
• Income growth and subjective well-being
• Income comparisons and subjective well-being
• Adaptation, expectations and subjective well-being
• Income inequality, SWB and the demand for income redistribution
• The cultural dimension of subjective well-being.