The connection between life satisfaction and material aspirations

7/29/2019 The connection between life satisfaction and material aspirations

1/8

Tams Keller

The connection between life satisfaction and material aspirations

A theoretical dilemma and some solutions

In seeking to answer the question of whether income brings happiness, Richard Easterlin

(1974, 1995) found a paradox. Within a given country, higher-income respondents usually

reported greater happiness; however in cross-country comparison if aggregate income in a

country rises, happiness does not necessarily follow.

Both theoretical and empirical social research provides a number of explanations for this

paradox (see Ferrer-i-Carbonell, 2005: 9889). Of these, it is indisputably relative income

theory that has evoked the most attention. According to this argument, happiness depends not

on absolute, but on relative income. If the level of income rises against that of a specific

reference group, that creates happiness; however, if everybodys income rises and the relative

income differentials between individuals stay constant, that does not lead to happiness. Inother words, the positive effect of income on happiness is counterbalanced by the negative

effect of relative income (Easterlin, 1995: 36). The results of empirical research, however, are

somewhat ambiguous. Senik (2004) found a positive connection between relative income and

happiness. She argued that, in uncertain economies like Russias, the rise in income in the

reference group might be associated with a forecast rise in the individuals own income,

which may be understood as a kind of tunnel effect, as posited by Hirschman (1973).

Testing the same question on German data, Ferrer-i-Carbonell (2005) estimated the impact of

relative income to be negative: its impact in western Germany was greater than that of

income; however, this did not hold in eastern Germany. A negative relationship between

satisfaction and relative income has been found by other scholars as well (McBride: 2001;

Hajdu and Hajdu: 2011).

Another solution to the Easterlin paradox is that if income rises, so do income

aspirations, and rising aspirations counterbalance the positive income effect (Easterlin, 1995:

41). This logic has received much less attention in the social research; however, theoretically

it is also well founded. Brickman and Campbell (1971) developed the concept of the hedonic

treadmill, according to which humans adapt very quickly to change in their objective

circumstances, so that any gain in satisfaction lasts only for a while. The impact of income

aspirations on life satisfaction seems to have been tested only once by Stutzer (2004), using

Swiss data. According to his findings, income aspirations decrease life satisfaction by about

the same magnitude as income increases it. According to the authors argument, the extent of

income aspirations may be influenced by the income-comparison effect (i.e. relative income):people living in richer regions usually have higher aspirations, and this continues even after

controlling for the difference in living standards between rich and poor regions. In this article

we will shed light on the negative relationship between income aspirations and life

satisfaction.

Data

The data come from the Special Eurobarometer survey, which is a harmonized survey carried

out in the 27 Member States of the European Union. In this analysis we use the merged

dataset for two surveys carried out in 2009 (reference number: 321, wave number: EB.72.2)

and 2010 (reference number: 355, wave number: EB.74.1).

1


2/8

To measure life satisfaction, we used the following question:All things considered, how

satisfied would you say you are with your life these days? Please tell me on a scale of 1 to 10,

where 1 means you are very dissatisfied and 10 means you are very satisfied. The

literature is not totally agreed either on whether subjective well-being should be measured by

life satisfaction (Hajdu and Hajdu: 2011) or by happiness (McBride: 2001), or on whether

ordinal or cardinal utility function should be used. In this article we focus on life satisfactionand do not seek to link this concept to subjective well-being by formulating any specific

assumptions, like Ferrer-i-Carbonell (2005: 103).

Income aspiration was measured using a question about minimum income: In your

opinion, what would be the very lowest net monthly income that your household would need

in order to have a minimum acceptable standard of living, given the present circumstances

and composition of your household? This is net income (in Euros) after tax and social security

contributions have been deducted, and once any social benefit entitlements are included. This

income was converted to equivalized income by dividing minimum income by the square root

of the size of the family. All figures were converted to 2010 prices using the inflation rate for

each country. Stutzer (2004) used a similar question, and he found that the minimum income

considered necessary was lower than the actual disposable income, and hence was only animperfect proxy for income aspirations (basically the same result as in our analysis, see

Figure 1). However, higher disposable income is paralleled by a higher aspiration for

minimum income; this means that minimum income is viewed as relative, which makes it

appropriate to measure aspirations.

Unfortunately, there is no information about actual household income in the

Eurobarometer survey. The only available question asks the respondent to place him or

herself on a scale of 1 to 10, where 10 represents a very high standard of living. With this

subjective scale, the impact of income cannot be distinguished from the impact of satisfaction

with the income. Using this question as a proxy for the material circumstances of the

household means overestimating its impact: for example, those who are not satisfied with

their income will probably rate the material circumstances of the household lower than those

who are satisfied. Though nothing can be done about it, we need to acknowledge the problem.

The dataset contains information about satisfaction with the standard of living, but it would be

wrong to control for that, since we cannot be sure whether income or satisfaction with income

enhances life satisfaction (in other words the impact of income very likely incorporates the

impact of the satisfaction with it). If we controlled for satisfaction with the standard of living,

the impact of household material circumstances would be underestimated; moreover we could

not be sure that the dependent variable (life satisfaction) is independent of that (it may well be

that these two variables are strongly interrelated).

The empirical analysis

The aim of this paper is to find out whether the negative relationship between income

aspirations and life satisfaction is common across European countries. The answer to this

question isyes or more precisely, yes, but... To arrive at an appropriate answer, we need to

clarify other questions as well: Are income aspirations connected to the material

circumstances of the household in other words, do people adapt to a given standard of

living? If people do adapt (for example, if higher material circumstances go together with

higher aspirations), how frequently do the aspirations exceed the level of material resources?

Furthermore, what is the impact of such excessive aspirations (and indeed of income

aspirations generally) on life satisfaction? And finally, what differences are to be found in the

impact of income aspirations?

2


3/8

Let us answer these questions one by one. In Figure 1, equivalized net household

income (data from EU-SILC) is plotted against income aspirations (equivalized net minimum

income). One can see a relatively strong positive relationship: in better-off countries (x-axis)

people require a higher minimum income (y-axis). However, it is also noticeable that in richer

countries (where disposable income is more than EUR 1,000 a month) a one-unit increase in

disposable income translates to a smaller gain in income aspirations than is the case incountries with lower disposable income. There are only three countries (Romania, Bulgaria

and Hungary) where the level of aspiration exceeds the level of disposable income. These

countries are above the x=y line.

Figure 1 The connection between income aspirations and disposable income in the EU

Member States

BE

DKGR

ES

FI

FR

IT

LU

NL

AT

PT

SE

DE

UK

BG

CZ

EEHU

LVLT

MT

PL

RO

SK

SI

x=y Regression line

0

500

1000

1500

2000

Incomeaspirations

0 500 1000 1500 2000 2500 3000 3500 4000Disposable income

R-Squared=0.8335

Income aspirations (y axis): Equivalized net minimum income in Euros. Prices are inflated to the 2010 income

level. Source of data: EB.72.1 (2009) and EB.74.1 (2010).

Disposable income (x axis): Equivalized net household income in Euros. Prices are inflated to the 2010 incomelevel. Source of data: EU-SILC. Data refer to 2009 income year.

Applied equivalence scale: the square root of the number of household members.

Cyprus and Ireland do not appear on the diagram due to missing data.

In the graph, disposable income was used from an external dataset. We now perform the sametype of analysis at an individual level (not using country-means). Since material

circumstances and minimum income are measured on different scales, the following

procedure is employed. First, both the variables in each country are standardized separately.

The standardized coefficients can be interpreted as the distance between the mean values,

where the unit of distance is the standard deviation. Then the difference between the two

standardized variables is calculated (aspirations minus material circumstances). This shows

whether an individual holds the same place in the country-specific distributions of the two

variables. If the difference is positive, individuals have higher aspirations than their self-

placement based on material circumstances. In the case of a negative value, the respondent

compared to the country averages requires less minimum income than his/her material

circumstances would suggest. Table 1 contains the descriptive statistics on this discrepancyindex by country. As one can see, the median of this variable is below the 10 per cent

3


4/8

standard deviation unit in the majority of countries, and exceeds that value only in Lithuania,

Italy and Estonia (countries are ranked according to the median value in column P50). It is

also noticeable that positive deviations (see the maximum values) have a much higher level in

absolute value than negative deviations (comparing column Maximum to column

Minimum). This means that in some cases respondents tend to have unrealistic aspirations;

in this case, there is a sizeable mismatch between material circumstances and incomeaspirations.

Table 1 Some descriptive statistics, by country, on the difference in minimum income and

material circumstances

Minimum P5 P50 P95 Maximum Mean

Standard

deviation

LV -3.15 -1.85 -0.16 2.18 13.33 0.03 1.41

IT -3.36 -1.73 -0.14 2.27 7.42 0.00 1.27

EE -4.10 -1.86 -0.12 2.22 16.63 0.01 1.38

LT -3.72 -1.98 -0.10 2.16 18.41 0.01 1.37FI -3.94 -1.96 -0.09 2.40 9.35 0.04 1.36

BE -3.66 -2.01 -0.09 2.32 16.17 0.01 1.41

PL -3.39 -1.74 -0.09 1.87 16.39 -0.02 1.20

SI -3.48 -1.90 -0.09 2.29 10.24 0.02 1.31

GR -3.48 -1.99 -0.08 2.29 6.37 0.01 1.28

AT -4.59 -1.97 -0.08 2.39 5.26 0.04 1.36

HU -4.10 -1.92 -0.08 2.15 15.95 0.02 1.33

IE -3.34 -1.88 -0.06 2.26 6.78 0.00 1.31

MT -3.83 -2.29 -0.06 2.27 7.49 -0.02 1.41

FR -3.78 -1.85 -0.06 2.10 14.21 0.04 1.34

UK -4.12 -1.92 -0.06 2.22 9.10 0.03 1.28

CY -3.58 -2.07 -0.06 2.23 6.12 0.02 1.31

ES -3.45 -1.92 -0.05 2.12 9.08 0.03 1.26

CZ -4.59 -1.92 -0.05 2.09 13.84 0.03 1.37

PT -3.39 -1.84 -0.05 1.75 18.59 0.03 1.29

SK -3.44 -1.76 -0.04 1.91 16.80 0.03 1.38

NL -4.25 -1.84 -0.03 2.28 6.20 0.03 1.26

SE -4.01 -1.85 -0.03 2.11 15.52 0.04 1.35

DE -4.37 -1.90 -0.02 2.21 10.09 0.03 1.29

LU -4.15 -2.01 0.00 2.49 4.88 0.07 1.37

BG -3.34 -1.84 0.01 2.06 5.61 0.03 1.18

RO -3.06 -1.83 0.04 1.87 15.30 0.07 1.30

DK -4.02 -2.03 0.06 2.13 6.14 0.03 1.26

Let us turn to the question of whether income aspirations decrease life satisfaction. Table 2

contains the results of an OLS regression. The dependent variable is life satisfaction. The

independent variables include material circumstances of the household, the usual socio-

economic variables and country fixed effects. Our particular interest focuses on the impact of

income aspirations. In column A we can see that the estimated coefficient is negative.

Controlling for all other characteristics, if someone doubles his expectations of minimum

income, that means a 0.06-point (ln[2]-0.09) decrease in life satisfaction. Compared to the

impact of material circumstances, this is moderate, since a one-unit increase on that 10-point

scale means a 0.5-point increase in life satisfaction. However, as was mentioned earlier, the

impact of material circumstances is overestimated, since it is probably biased by satisfaction

4


5/8

with standard of living. Stutzer (2005) found, for example, a somewhat lower impact in the

case of household income.

Column B contains the impact of excessive aspirations on life satisfaction (this is

basically the discrepancy index shown in Table 1). The estimated coefficient is again

negative. It is somewhat less than in the case of income aspirations; however, we should bear

in mind that the unit of measurement is different for the two variables. One standard deviationchange causes nearly the same change in life satisfaction.

Table 2 Explaining life satisfaction, unstandardized OLS coefficients

Dependent variable: Life satisfaction

A B

Material circumstances 0.544*** 0.52***

Income aspirationsEquivalized minimum income (ln) -0.086***Excessive aspirations(standardized aspirations minus standardized material

circumstances) -0.035**Year = 2009 Ref. Ref.

Year = 2010 -0.018 -0.019

Female Ref. Ref.

Male -0.186*** -0.186***

Age -0.04*** -0.041***

Age square 0*** 0***

Primary education Ref. Ref.

Secondary education 0.097** 0.095**

Tertiary education 0.351*** 0.348***

Retired -0.13* -0.13*

Self-employed Ref. Ref.

Employed 0.016 0.013

Inactive -0.544*** -0.543***

Student 0.429*** 0.428***

Village 0.058* 0.06*

Town Ref. Ref.

Large town -0.046 -0.047

Country fixed effects Yes Yes

F-stat 405.96*** 406.54***

R square 0.28 0.28

N 44350 44350

*** The coefficient is different from zero at 1 per cent significance level.

** The coefficient is different from zero at 5 per cent significance level.* The coefficient is different from zero at 10 per cent significance level.

The impact of aspirations is, however, not homogeneous. In the case of poorer1 individuals,

income aspirations (Table 3, Panel A) and excessive aspirations (Table 3, Panel B) decrease

life satisfaction more than among well-off respondents. Among the rich (whichever definition

is applied), aspirations do not have any impact on life satisfaction. This finding is similar to

that of Ferrer-i-Carbonell (2005), who basically discovered that relative income has a larger

effect among the poor. It is up to future research to find out whether the difference between

1 We applied basically two definitions. We identified as poor those who placed themselves on level 1, 2 or 3 ofa 10-point material circumstances scale, or who answered that they had much less money than was indicated as

the minimum acceptable in the minimum income question. Similarly, the rich were identified as those whoplaced themselves on level 10, 9 or 8, or who answered that they had much more than the minimum acceptable

income.

5


6/8

rich and poor can be explained by the fact that the poor usually compare their income to that

of the rich, while those at the top of the income distribution find it harder to identify a richer

reference group.

6


7/8

Table 3 The impact of aspirations on life satisfaction according to material status a

sensitivity analysis (unstandardized OLS coefficients)

Dependent variable: Life satisfaction

Poor Rich

Definition of income status

The impactin the

wholesample

(Table 1)

Low material

circumstances(Values: 3, 2,

1)

Net income of

the householdis much less

than theindicated

minimumincome

High material

circumstances(Values: 10, 9,

8)

Net income of

the householdis much more

than theindicated

minimumincome

A

Materialcircumstances

0.54*** 0.64*** 0.55*** 0.2** 0.41***

Income aspirationsEquivalized minimumincome (ln)

-0.09*** -0.22** -0.16* 0.06 0.05

B

Materialcircumstances 0.52*** 0.56*** 0.51*** 0.22** 0.43***

Excessive aspirations(standardized aspiration

minus standardized materialcircumstances)

-0.04** -0.13*** -0.07** 0.05 0.02

Other control variables: yes; country fixed effects: yes. The control variables are identical to those appearing inTable 1.

The OLS models were run on a selected sample. The selection criterion is defined in the first row of the table.*** The coefficient is different from zero at 1 per cent significance level.

** The coefficient is different from zero at 5 per cent significance level.* The coefficient is different from zero at 10 per cent significance level.

If we consider that the positive impact of material circumstances is counterbalanced by thenegative impact of aspirations, we should find out why this does not hold in the case of the

rich. One solution is offered by the research of Kahneman and Deaton (2010). Those authors

found that material resources do not increase life satisfaction according to some monotone

increasing function; instead there is an inflection point in income, after which any further

increase does not translate into a gain in life satisfaction (because emotional and relationship

aspects gain emphasis). If we continue this logic, it may be that, once the satiation point is

reached, neither income nor aspiration has any impact on life satisfaction. It could serve as an

indication of this that when we investigated the connection between disposable income and

income aspirations (Figure1), we also found some elasticity. In richer countries the same unit

increase in disposable income translated to a smaller gain in income aspirations. Indisputably,

however, more research is needed to test this hypothesis.

Summary and some statements about the connection between life satisfaction and

aspirations

1. The average magnitude of income aspirations in a country is positively related to

disposable income. In those countries where disposable income is low, people find a lower

level of minimum income acceptable. However, there is some elasticity in the connection

between income aspirations and disposable income. The discrepancy between the

minimum income and disposable income increases with increasing disposable income

(Figure 1). In other words, respondents adapt to a certain level of income and articulatetheir aspirations on the basis of this income level.

7


8/8

2. Income aspirations are quite realistic. However we could not compare economic

aspirations to real material resources; what we could do was compare the deviation from

the country-means in income aspirations and perceived household resources (Table 1).

Based on this comparison, we can conclude that, on average, people tailor their aspirations

to the perceived level of income. On the one hand, this finding underlines the fact that

aspirations grow if material resources increase. On the other hand, however, we shouldconsider that the level of discrepancy (in absolute value) is much higher if aspirations

exceed perceived material resources than vice versa.

3. Income aspirations and excessive aspirations both decrease life satisfaction

(Table 2). The positive impact of material resources on life satisfaction is somewhat

counterbalanced by the negative impact of aspirations. This relationship also holds when

country fixed effects and some socio-economic variables are controlled for.

4. The negative impact of aspirations is stronger among the poor. This contradicts

somewhat the assumption that income and aspirations go together, but it might be

explained by some recent findings that, beyond a certain income level, increasing income

does not translate into a gain in life satisfaction (Table 3).

Literature

BRICKMAN, Philip and CAMPBELL, Donald T. (1971). Hedonic relativism and planning the good

society. In: APLEY, M. H. (ed.), Adaptation-level Theory: A Symposium. New York:

Academic Press: 287302.

EASTERLIN, Richard A. (1974). Does economic growth improve the human lot? Some empirical

evidence. In: DAVID, Paul A. and REDER, Melvin W. (eds), Nations and Households in

Economic Growth: Essays in Honour of Moses Abramowitz. New York and London:

Academic Press: 89125.

EASTERLIN, Richard A. (1995). Will raising the incomes of all increase the happiness of all?

Journal of Economic Behavior & Organization, 27: 3548.

FERRER-I-CARBONELL, Ada (2005). Income and well-being: An empirical analysis of the

comparison income effect.Journal of Public Economics, 89: 997 1019.

HAJDU, Gbor and HAJDU, Tams (2011). Elgedettsg s relatv jvedelem. Szociolgiai

Szemle, 21(3): 83106.

HIRSCHMAN, Albert O. (1973). Changing tolerance for income inequality in the course of

economic development. Quarterly Journal of Economics, 87: 54466.

KAHNEMAN, Daniel and DEATON, Angus (2010). High income improves evaluation of life but

not emotional well being. Proceedings of the National Academy of Sciences, 107(38):

1648993.

MCBRIDE, Michael (2001). Relative-income effects on subjective well-being in the cross-section.Journal of Economic Behavior & Organization, 45: 25178.

SENIK, Claudia (2004). When information dominates comparison. A panel data analysis using

Russian subjective data.Journal of Public Economics, 88: 2099123.

STUTZER, Alois (2004). The role of income aspirations in individual happiness. Journal of

Economic Behavior & Organization, 54: 89109.

8

Documents

The connection between life satisfaction and material aspirations