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Abigail P. Dumalus December 2018 Macroeconomics of Life Satisfaction

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Abigail P. Dumalus December 2018 Macroeconomics of Life Satisfaction Abigail P. Dumalus December 2018 Macroeconomics of Life Satisfaction Inequality (Working Paper, Unpublished) Abstract Not much is known about the variations that macroeconomic movements bring to the significance of how people’s subjective life satisfaction (LS) assessments are aggregately distributed. Now more than ever, leaders, policymakers, academia, the media, and the general public may find it worthwhile to know more about LS inequality. The question “How do macroeconomic shifts influence LS inequality?” is closely examined. Whereas most subjective well-being (SWB) studies in economic literature have been dealing with causes and consequences of overall happiness across societies, this paper investigates the macroeconomics of LS inequality. Using internationally comparable upward-looking LS inequality and measures of macroeconomic shifts within a nested cross-country dataset, robust and conclusive empirical evidence is provided to highlight the fundamental role of macroeconomic movements in shaping perceived differences in LS. Findings in this research adequately bolster the substance of how such changes in the macroeconomic landscape have a bearing on shaping SWB or happiness on the aggregate level. Results also carefully explore how disparities in well-being are adversely or favorably motivated by extreme LS responses due to macroeconomic fluctuations. This study makes a twofold contribution to the literature on the effects of macroeconomic movements on well-being. First, using the Cowell-Flachaire status-inequality method, this paper constructs the first multi-country estimate of LS inequality, which could be a more suitable measure of overall welfare. The distribution of LS illustrates a more inclusive and substantial investigation of the impacts of any inequalities that may spring from macroeconomic shifts in society. Second: simultaneously considering how these macroeconomic inequalities across different groupings, this study enriches the ‘essence’ of the misery index by providing some insights that ought to refocus the criteria for optimising overall welfare according to a particular country’s LS inequality level, income inequality level, development status, or geographic area. These groupings not only inform the current set of economic, social, political, and cultural factors that influence public policy, but also determine relevant policies that work towards attaining the ‘ideal’ LS inequality for a specific context. JEL classification: D3, I3 Keywords: life satisfaction, happiness, subjective well-being, inequality, welfare I. Introduction Since Di Tella et al. (2003) published their groundbreaking “Macroeconomics of Happiness” paper, it has been broadly established that movements in macroeconomic policy variables influence happiness in nations (Deaton, 2012; Mohseni-Cheraghlou, 2013; Blanchflower et al., 2014; Helliwell & Huang, 2014; Cahill et al., 2015; Frijters et al., 2015; Hariri et al., 2015; Ratcliffe & Taylor, 2015; Mertens & Beblo, 2016). Their empirical contribution has proposed a new approach to examine patterns in how people’s subjective well-being (SWB) evaluations vary as macroeconomic conditions affect their lives in society. For instance, others have recently centered on the consequences of economic and financial crises in the context of individual well-being (e.g. Hoynes et al., 2012; McInerney et al., 2013; Chadi, 2015). Although existing findings are still mixed, interest in the relationship between SWB and income inequality has been significantly growing (e.g. Hagerty, 2000; Clark, 2003; Blanchflower & Oswald, 2004; Alesina et al., 2004; Graham & Felton, 2006; Smyth & Qian, 2008). Macroeconomic shifts are considered to produce substantial income and, arguably, non-income shocks at the individual level, which, influence people’s decision-making and behaviour, and, eventually, subjective well-being (SWB). Remarkable macroeconomic fluctuations could yield both economic and social insecurity, which modify individual assessment of opportunities and intensifies the sense of uncertainty to manage appropriately over time. Researchers have also tackled the negative outcomes of aggregate inflation, and unemployment on individual happiness. Inflation’s adverse effects on SWB usually involve: worse living standards for people, lower wages due to rising prices of goods and services, political instability, and more risky investment climate, among others (Wolfers 2003; Gandelman and Hernández-Murillo 2009; Ruprah and Luengas 2011; Blanchflower et al., 2014). Previous literature has offered empirical evidence on inflation having consistently negative effect on SWB across individuals (e.g. Graham & Pettinato, 2001; Di Tella et al., 2001, 2003; Wolfers, 2003). Investigating data from the United States and Europe, Alesina et al. (2004) have seen that inflation has a more negative impression on SWB for those with right-leaning political ideology than those who with left-leaning attitudes. On the other hand, unemployment lowers SWB due to either reduced economic security, or general negative externalities (Wolfers 2003; Paul & Moser 2009; Bell & Blanchflower, 2010; Luechinger et al. 2010; Green 2011). Whilst becoming unemployed frequently suggests giving up one’s primary income source, it also has non-pecuniary, psychological stress, which might involve potential loss of self-esteem, social stigma, reduction in social interactions at the workplace, impairment in structure of daytime activities, and so forth (Clark & Oswald, 1994; Helliwell, 2003; Layard et al., 2012). For society at large, unemployment has undesirable external consequences, such as marriage and social problems, suicide risks, alcoholism, and higher prevalence of criminal behaviour (Winkelmann & Winkelmann, 1998; Kassenboehmer et al., 2009). There have been studies that weigh between the costs incurred from inflation and unemployment. Frey and Stutzer (2000) have observed that unemployment has more unfavorable costs on people’s SWB than inflation. Di Tella and MacCulloch (2006) have offered evidence that relate political beliefs with preferences for inflation and unemployment: in that the latter and its outcomes are more distressing for 2 left-wing individuals than right-wing cohorts. Although most scholars acknowledge that unemployment has more deleterious outcomes for individual well-being, the tangible relative unemployment-inflation trade-off remains ambiguous (Frey & Stutzer, 2002; Blanchflower et al., 2014). Before studies on SWB or individual happiness came into existence, economic literature has been exploring the idea of utility for centuries. According to Bentham (1789/2008), utility is that feature that goods have in providing pleasure or preventing displeasure. Hence, maximising utility has been perceived as either the enrichment of collective pleasure or the reduction of collective displeasure. Pigou (1920) has supported utilitarianism: given an overall (i.e. social) income, society’s welfare could reach its optimum level via reallocation of income from richer to poorer individuals until perfect income equality would be reached. Obviously, this view has seemed paradoxical as social welfare maximisation could be solely attained with the culmination of perfect income equality. Other economists have argued that in a society with varying individual utilities, income equality does not necessarily indicate equality in utilities; thus, the optimal degree of inequality may actually be different from zero (Dalton, 1920; Tinbergen, 1970). This debate not only accentuated how diverging hypotheses about individual utilities leads to quite different solutions for maximising overall welfare, but also initiated the idea of relativity as utility functions represented specific individual tastes for goods and services in the economy. Much earlier, both Adam Smith (1776/1981) and Karl Marx (1847) have mentioned the idea of interdependent utilities, in which each person’s utility depends on the utility of others. Related to this, Veblen (1898) has observed that individual consumption is also useful for conveying position and status in society. Almost a century later, Frank (1985) has developed Veblen’s observation in a theory about positional goods. From another perspective, people not only differ in their own assessment of goods, but they also differ in the way their utilities depend on the evaluation done by others on these goods. The social welfare optimisation problem has now gained another aspect because utility is simultaneously dependent on absolute status and relative status. With relative income hypothesis, Duesenberry (1949) has noticed that households care about communal consumption standards, and that this interest causes savings rates to go up as a household’s position in the income distribution rises. Moreover, he has also learned that individuals are likely to overestimate upward comparisons whilst downward comparisons are overlooked. Bearing this in mind, addressing the social welfare optimisation puzzle has become even more interesting with asymmetric social comparisons. In the same year, Stouffer et al. (1949) have released their work on World War II American soldiers’ reported well-being. Their findings have noted that these soldiers’ happiness primarily hinged on the specific context and reference group, which were fellow soldiers with whom they served in the army. Runciman (1966) has further shed light on this concept as relative deprivation in his social justice theory. Relative deprivation has been explained as the situation
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