Can money buy “happiness” for Belgians?

Graduate Seminar in Economics Emily Van de Walle

Overview 1. Introduction & Literature Review

2. Data

3.List of Relevant Variables

4.The Econometric Model & Inference Procedures

5.The Results

6.Conclusion

Introduction & Literature Review The starting point: Can happiness be bought?

Research Questions

1

Can happiness be bought?

Belgium

2010

Can money buy “happiness”?

3 aspects

(1) Relationship between income & subjective well-being

(2) Marginal effect of income on subjective well-being

(3) The Satiation Point

(1) Relationship between income & subjective well-being

Can money buy “happiness”?

Positive relationship across countries and over time

HOWEVER....

(2) The marginal effect of income on subjective well-being (3) The satiation point

Can money buy “happiness”?

Level of GDP per capita

Hap

pine

ss

Satiation point

“The modified version of Easterlin’s hypothesis”

(Stevenson & Wolfers, 2013)

Source: Stevenson & Wolfers, 2013

Understanding subjective well-being 2 different aspects → (1) Emotional well-being

→ (2) Life evaluation → Robust positive relationship for life evaluation! (Kahneman & Deaton)

Data Exploring the European Social Survey

2

European Social Survey (ESS)

5th round (2010) – Belgium

European Social Survey

Source: http://www.europeansocialsurvey.org/

List of Relevant Variables

An overview of the dependent & independent variables

3

Dependent variable: Subjective well-being

Definition “Good mental states, including all of the various evaluations, positive and negative, that people make of their lives and the

affective reactions of people to their experiences” (OECD, 2013, p. 12)

Affect Life evaluation

Eudaimonia

Dependent variable: Subjective well-being

Affect Eudaimonia Life Evaluation

Definition – Life evaluation (life satisfaction) “A reflective assessment of a person’s life or some aspect of it”

(OECD, 2013, p. 12)

Subjective well-being: Life evaluation

Life satisfaction/Life evaluation (stflife) “All things considered, how satisfied are you with your life as a

whole nowadays” on a scale of 0 to 10 (ESS, n.d. c, p. 37)?

Happiness (happy) “Taking all things together, how happy would you say you are ”

on a scale of 0 to 10 (ESS, n.d. c, p. 40)?

→ Primary measure

→ Alternative measure

Independent variables

Marital status

Number of children

Gender

Age

Health

Employment status

Social life

Education Discrimin -ation

Handicap Religion

Job satisfaction

Household income

Main independent variable: Household income

Income deciles 1 < €11 040 2 € 11 040 – € 14 160 3 € 14 160 – € 17 640 4 € 17 640 – € 21 360 5 € 21 360 – € 25 560 6 € 25 560 – € 30 600 7 € 30 600 – € 37 440 8 € 37 440 – € 44 880 9 € 44 880 – € 56 760 10 > € 56 760

= Household’s total net income originating from all possible sources

Cardinal variable

→ Indicator variables (ordinal information)

incomeD1,...,incomeD10,incomeQ1,...,incomeQ5

→ Income deciles, income quintiles

“Based on deciles of the actual household income range in Belgium” (ESS,n.d.f.,pg.2)

ESS

, n.d

. f.,

p.4

The Econometric Model & Inference Procedures

The Methodology

4

4.1 The starting point

𝒔𝒕𝒇𝒍𝒊𝒇𝒆 = 𝜷𝟎 + 𝜷𝟏 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟐 + 𝜷𝟐 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟑 + 𝜷𝟑 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟒 + 𝜷𝟒 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟓 + 𝜷𝟓 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟔 + 𝜷𝟔 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟕 + 𝜷𝟕 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟖 + 𝜷𝟖 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟗 + 𝜷𝟗 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟏𝟎 + 𝜷𝟏𝟎 𝒎𝒂𝒓𝒓𝒊𝒆𝒅 + 𝜷𝟏𝟏 𝒄𝒉𝒊𝒍𝒅𝒓𝒆𝒏+ 𝜷𝟏𝟐 𝒎𝒂𝒍𝒆 + 𝜷𝟏𝟑 𝒂𝒈𝒆 + 𝜷𝟏𝟒 𝒉𝒆𝒂𝒍𝒕𝒉𝒚 + 𝜷𝟏𝟓 𝒉𝒂𝒏𝒅𝒊𝒄𝒂𝒑+ 𝜷𝟏𝟔 𝒘𝒐𝒓𝒌(𝒋𝒐𝒃𝒔𝒂𝒕) + 𝜷𝟏𝟕 𝒆𝒅𝒖𝒚𝒓𝒔 + 𝜷𝟏𝟖 𝒔𝒐𝒄𝒊𝒂𝒍 + 𝜷𝟏𝟗 𝒊𝒏𝒎𝒅𝒊𝒔𝒄 + 𝜷𝟐𝟎 𝒓𝒆𝒍𝒊𝒈𝒊𝒐𝒖𝒔 + 𝜷𝟐𝟏 𝒅𝒊𝒔𝒄𝒓𝒊 + 𝒖

First Econometric Model

4.1 The starting point Ordinary Least Squares (OLS) Estimation Procedure

→ BUT: Life evaluation = Ordinal variable

→ Ordered choice model is more appropriate!!

→ Ferrer-i-Carbonell & Frijters (2004):

Cardinal OLS ↔ Ordered choice model

“Differences between the models are negligible”

Design Weights

→ “Correct for a [potential sample] bias that is introduced by e the sampling design” (ESS, 2014, p.1)

4.2 Inference procedures

Jobsat (job satisfaction) v.s. Work (employed/unemployed)

→ Jobsat = Significant ↔ Work = Insignificant

→ Jobsat → Sample limited to employed people

P>|t| for work P>|t| for jobsat

Econometric model using income deciles 0.50 0.00***

Econometric model using income quintiles

0.44 0.00***

4.2 Inference procedures Income deciles

Income deciles P>|t|

incomeD2 0.906

incomeD3 0.556

incomeD4 0.715

incomeD5 0.285

incomeD6 0.205

incomeD7 0.234

incomeD8 0.093*

incomeD9 0.092*

incomeD10 0.104

Income quintiles P>|t|

incomeQ2 0.526

incomeQ3 0.037**

incomeQ4 0.011**

incomeQ5 0.003***

Econometric models using jobsat - Significance level = 10%

v.s. Income quintiles

4.2 Inference procedures Tests of statistical significance

P>|t|

incomeQ2 0.526

incomeQ3 0.037**

incomeQ4 0.011**

incomeQ5 0.003***

married 0.021**

children 0.006***

male 0.844

Age 0.571

P>|t|

healthy 0.519

handicap 0.100

jobsat 0.000***

eduyrs 0.395

social 0.006***

inmdisc 0.126

religious 0.811

discri 0.839

Econometric models using jobsat, income quintiles - Significance level = 10%

(1) discri = 0 (2) male = 0 (3) religious = 0 (4) age = 0 (5) healthy = 0 (6) eduyrs = 0 (7) inmdisc = 0 (8) handicap = 0 (9) incomeQ2 = 0 F( 9, 713) = 0.76 Prob > F = 0.6527

Individual t-tests Joint F-test

4.2 Inference procedures Insignificant variables

→ discri

→ religious

→ handicap

→ inmdisc

→ incomeQ2

→ age

→ healthy

→ eduyrs

→ male

Not recommended by academic literature → Omit!

Another (significant) variable which proxies social life → Omit!

Relevant to our research question → Retain!

Highly recommended by the literature

→ Omit!

age, age² (significant) → Retain! rhealth (significant) → Retain!

The Econometric Models

𝒔𝒕𝒇𝒍𝒊𝒇𝒆 = 𝜷𝟎 + 𝜷𝟏 𝒊𝒏𝒄𝒐𝒎𝒆𝑸𝟐 + 𝜷𝟐 𝒊𝒏𝒄𝒐𝒎𝒆𝑸𝟑 + 𝜷𝟑 𝒊𝒏𝒄𝒐𝒎𝒆𝑸𝟒 + 𝜷𝟒 𝒊𝒏𝒄𝒐𝒎𝒆𝑸𝟓 + 𝜷𝟓 𝒎𝒂𝒓𝒓𝒊𝒆𝒅 + 𝜷𝟔 𝒄𝒉𝒊𝒍𝒅𝒓𝒆𝒏 + 𝜷𝟕 𝒂𝒈𝒆 + 𝜷𝟖 𝒂𝒈𝒆² + 𝜷𝟗 𝒓𝒉𝒆𝒂𝒍𝒕𝒉 + 𝜷𝟏𝟎 𝒋𝒐𝒃𝒔𝒂𝒕 + 𝜷𝟏𝟏 𝒔𝒐𝒄𝒊𝒂𝒍 + 𝒖

Second Econometric Model

𝒔𝒕𝒇𝒍𝒊𝒇𝒆 = 𝜷𝟎 + 𝜷𝟏 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟐 + 𝜷𝟐 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟑 + 𝜷𝟑 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟒 + 𝜷𝟒 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟓 + 𝜷𝟓 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟔 + 𝜷𝟔 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟕 + 𝜷𝟕 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟖 + 𝜷𝟖 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟗 + 𝜷𝟗 𝒊𝒏𝒄𝒐𝒎𝒆𝑫𝟏𝟎 + 𝜷𝟏𝟎 𝒎𝒂𝒓𝒓𝒊𝒆𝒅 + 𝜷𝟏𝟏 𝒄𝒉𝒊𝒍𝒅𝒓𝒆𝒏+ 𝜷𝟏𝟐 𝒎𝒂𝒍𝒆 + 𝜷𝟏𝟑 𝒂𝒈𝒆 + 𝜷𝟏𝟒 𝒉𝒆𝒂𝒍𝒕𝒉𝒚 + 𝜷𝟏𝟓 𝒉𝒂𝒏𝒅𝒊𝒄𝒂𝒑+ 𝜷𝟏𝟔 𝒘𝒐𝒓𝒌(𝒋𝒐𝒃𝒔𝒂𝒕) + 𝜷𝟏𝟕 𝒆𝒅𝒖𝒚𝒓𝒔 + 𝜷𝟏𝟖 𝒔𝒐𝒄𝒊𝒂𝒍 + 𝜷𝟏𝟗 𝒊𝒏𝒎𝒅𝒊𝒔𝒄 + 𝜷𝟐𝟎 𝒓𝒆𝒍𝒊𝒈𝒊𝒐𝒖𝒔 + 𝜷𝟐𝟏 𝒅𝒊𝒔𝒄𝒓𝒊 + 𝒖

First Econometric Model

The Econometric Models

First Econometric Model Second Econometric Model

R² 0.1240 0.1445

Adjusted R² 0.0980 0.1314

AIC 2 546.656 2 509.376

BIC 2 647.703 2 564.492

Comparison of the first and second econometric model

4.2 Inference procedures

Testing the functional form (FF)

→ Ramsey RESET test

→ 1st econometric model: FF misspecification

→ 2nd econometric model: no FF misspecification

First Econometric Model Second Econometric Model

Prob > F 0.000 0.1445

Ramsey RESET test

Ramsey RESET test using powers of the fitted values of stflife H0: Model has no omitted variables

4.2 Inference procedures

Multicollinearity

→ Variance inflation factor (VIF)

→ Mean VIF > 5 → High multicollinearity!

→ Multicollinearity can be tolerated

Variable VIF

age 65.53

age2 64.92

incomeQ4 6.89

incomeQ5 6.09

incomeQ3 5.28

incomeQ2 3.88

children 1.44

married 1.41

rhealth 1.08

social 1.04

jobsat 1.03

MEAN VIF 14.42

4.2 Inference procedures

Testing for heteroscedasticity

→ White test: Heteroscedasticity!

→ Solution: Robust standard errors + Weights

Second Econometric Model

P-value 0.104

White Test

H0: Constant variance (Homoscedasticity) White’s general test statistic: 91.790 Chi-sq(63) P-value = 0.0104

Results Can money buy “happiness” for Belgians?

5

Second Econometric Model

5.1 Relationship between income & subjective well-being Sign?

→ Positive relationship

Significance?

→ Depends on…

- the reference group (here: incomeQ1)

- the income quintile

Interpretation: Sign + Significance

Variable Coef. P>|t|

incomeQ2 .1115 0.752

incomeQ3 .6364 0.058*

incomeQ4 .7023 0.034**

incomeQ5 .8626 0.010*

Second econometric model

5.1 Relationship between income & subjective well-being

Magnitude?

→ Caution: stflife = ordinal variable

→ Interpretation in terms of units

→ Statements: ↓,↑, comparisons

Variable Coef. P>|t|

incomeQ2 .1115 0.752

incomeQ3 .6364 0.058*

incomeQ4 .7023 0.034**

incomeQ5 .8626 0.010*

Second econometric model

0.8626 > 0.7023

5.2 Marginal effect of income on subjective well-being

Decreasing marginal effect?

Different conclusions depending on the method

→ 1) Second econometric model

→ 2) Plotting income quintiles on

the scale of life satisfaction Level of GDP per capita

Hap

pine

ss

Satiation point

Source: Stevenson & Wolfers, 2013

5.2.1 Assessing the marginal effect via the econometric model Second econometric model with alternating reference groups (incomeQ)

5.2.1 Assessing the marginal effect via the econometric model

Only significant upward movement: 2nd income quintile → 3rd income quintile

Marginal effect: ↑ ↓ ↑

5.2.2 Assessing the marginal effect via a plot of income quintiles on the scale of life satisfaction

Plot:

→ X-axis: Income Quintiles (1-5)

→ Y-axis: Life Satisfaction (1-10)

Decreasing marginal effect

Satiation point?

6.5

77.5

8

Life

sa

tisfa

ctio

n

1 2 3 4 5Income Quintiles

Satiation point?

5.3 The Satiation Point

Life

sa

tisfa

ction

66.5

77.5

8

0 .5 1 1.5 2 2.5Log(income)

Lowess Linear fit

Plot:

→ X-axis: Log(income)

→ Y-axis: Life Satisfaction (1-10)

→ Lowess & Linear fit

Stevenson & Wolfers (2013, p.2)

→ Satiation point:

“The non-parametric fit flattens

out once basic needs were met”

→ No satiation point

Conclusion The finishing line

6

Conclusion

Relationship between income and subjective well-being for Belgians

(1) Relationship between income and subjective well-being

→ Robust positive relationship

(2) Marginal effect of income on subjective well-being

→ Depends on the method: Model (↑,↓,↑) ↔ Plot (↓)

(3) Satiation point

→ No evidence

Can money buy “happiness” for Belgians?

References

References of the paper: Can money buy “happiness” for Belgians? ◈Adkins, L. C., & Carter Hill, R. (2011). Using Stata for Principles of Econometrics (4th ed.). John Wiley & Sons ◈Bandura, R., & Conceição, P. (2008). Measuring Subjective Wellbeing : A Summary Review of the Literature. United Nations Development Programme: research papers. Retrieved on 12/03/2016 from http://web.undp.org/developmentstudies/docs/subjective_wellbeing_conceicao_bandura.pdf ◈Binder, M., & Coad, A. (2014). Heterogeneity in the Relationship between Unemployment and Subjective Well-Being: A Quantile Approach (Working paper No. 808). Retrieved from the Levy Economics Institute of Bard College website: http://www.levyinstitute.org/publications/heterogeneity-in-the-relationship-between-unemployment-and-subjective-well-being-a-quantile-approach ◈Deaton, Q., & Kahneman, D. (2010). High income improves evaluation of life but not emotional well-being. PNAS, 107(38), 16489–16493. doi:10.1073/pnas.1011492107 ◈Diener, E., Lucas, R.E., & Scollon, C.N. (2006). Beyond the hedonic treadmill: Revising the adaptation theory of well-being”. American Psychologist, 61(4), 305-314. ◈ESS. (n.d. a). ESS5 – 2010 Data Download. Retrieved on 08/02/2016 from http://www.europeansocialsurvey.org/data/download.html?r=5 ◈ESS. (n.d. b). About ESS. Retrieved on 10/03/2016 from http://www.europeansocialsurvey.org/about/index.html ◈ESS. (n.d. c). ESS5 – Appendix A6: Variables and Questions. Retrieved on 10/03/2016 from http://www.europeansocialsurvey.org/docs/round5/survey/ESS5_appendix_a6_e04_0.pdf ◈ESS. (n.d. d) Family, work and well being (ESS2 2004, ESS5 2010). Retrieved on 11/03/2016 from http://www.europeansocialsurvey.org/data/themes.html?t=family ◈ESS. (n.d. e) Personal and Social Well-being (ESS3 2006, ESS6 2012). Retrieved on 11/03/2016 from http://www.europeansocialsurvey.org/data/themes.html?t=personal ◈ESS. (n.d. f) ESS4 - Appendix A5: Income. Retrieved on 11/03/2016 from https://www.europeansocialsurvey.org/docs/round4/survey/ESS4_appendix_a5_e05_0.pdf ◈ESS. (2014) Weighting European Social Survey Data. Retrieved on 12/03/2016 from https://www.europeansocialsurvey.org/docs/methodology/ESS_weighting_data_1.pdf ◈Ferrer-i-Carbonell, A. and Frijters, P. (2004). How Important is Methodology for the Estimates of the Determinants of Happiness? The Economic Journal, 114, 641–659. ◈Gabaix, X., & Laibson, D. (2008). The Seven Properties of Good Models. NYU Methodology Conference. Retrieved on 11/03/2016 from http://scholar.harvard.edu/files/laibson/files/seven_properties_2008.pdf ◈Griffiths, E.W., Carter Hill, R., & Lim, G.C. (2012). Principles of econometrics (4th ed.). Asia: John Wiley & Sons. ◈Happiness economics. (2016). In Wikipedia. Retrieved on 08/02/2016 from https://en.wikipedia.org/wiki/Happiness_economics ◈Helliwell, J.F. (2002). How’s life? Combining individual and national variables to explain subjective well-being (Working paper No. 9065). Retrieved from the Bureau of Economic Research website: http://www.nber.org/papers/w9065

◈Happiness economics. (2016). In Wikipedia. Retrieved on 08/02/2016 from https://en.wikipedia.org/wiki/Happiness_economics ◈Helliwell, J.F. (2002). How’s life? Combining individual and national variables to explain subjective well-being (Working paper No. 9065). Retrieved from the Bureau of Economic Research website: http://www.nber.org/papers/w9065 ◈Inglehart, R. (2002). Gender, aging, and subjective well-being. International Journal of Comparative Sociology, 43 (34), 391-408. doi: 10.1177/002071520204300309 ◈International Wellbeing Group. (2013). Personal Wellbeing Index: 5th Edition. Melbourne: Australian Centre on Quality of Life, Deakin University. Retrieved on 12/03/2016 from http://www.acqol.com.au/iwbg/wellbeing-index/pwi-a-english.pdf ◈Lamu, A.N., & Olsen, J. A. (2016). The relative importance of health, income and social relations for subjective well-being: An integrative analysis. Social Science & Medicine, 152, 176-185. doi: 10.1016/j.socscimed.2016.01.046 ◈Michalos, A.C. (2007). Education, happiness and wellbeing. OECD, 2nd World Forum, Istanbul 2007. Retrieved on 24/04/2016 from http://www.oecd.org/site/worldforum06/38303200.pdf ◈OECD. (2013). OECD Guidelines on Measuring Subjective Well-being. OECD Publishing. doi: 10.1787/9789264191655-en ◈Stevenson, B.,& Wolfers, J. (2013). Subjective well-being and income: Is there any evidence of satiation. American Economic Review, 103(5), 598-604. doi:http://dx.doi.org/10.1257/aer.103.3.598 ◈The U-bend of life. (2010, December 16). The Economist. Retrieved on 24/04/2016 from www.economist.com ◈Van Praag, B.M.S., Frijters, P., & Ferrer-i-Carbonell, A. (2003). The anatomy of subjective well-being. Journal of Economic Behaviour and Organisation, 51, 29-49. Credits concerning the presentation ◈ Presentation template by SlidesCarnival ◈ Photographs by Benedikt Geyer ◈ Other images: - http://www.theasian.asia/wp-content/uploads/2013/09/1_Belgium-country-shape-and-flag1.png - https://d30y9cdsu7xlg0.cloudfront.net/png/21216-200.png - http://image005.flaticon.com/1/png/512/49/49232.png

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