The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.
|Easterlin Paradox||– The Easterlin Paradox, named after economist Richard Easterlin, is a concept in the field of economics and well-being. It suggests that, within a given country, increases in income do not necessarily lead to increased happiness or life satisfaction. In other words, as people become wealthier, their happiness does not consistently increase.|
|Origin||– Richard Easterlin first introduced this concept in a 1974 paper titled “Does Economic Growth Improve the Human Lot? Some Empirical Evidence.” His research questioned the idea that economic growth directly correlated with greater happiness.|
|Key Points||– 1. Relative Income: The paradox highlights the importance of relative income rather than absolute income. People tend to compare their income and living standards with those of others. If everyone’s income rises equally, there is no relative gain. – 2. Adaptation: Humans tend to adapt quickly to changes in income and material possessions, which can lead to a temporary increase in happiness but not sustained long-term satisfaction. – 3. Hedonic Treadmill: The concept of the “hedonic treadmill” suggests that people’s expectations and desires for a higher standard of living also increase as their income rises, making it difficult to achieve lasting happiness from income alone.|
|Research Findings||– Empirical studies have supported the Easterlin Paradox to varying degrees. While there is evidence that higher income can lead to increased happiness in low-income countries, the relationship is less clear in high-income countries where people have already met their basic needs. – Factors like social relationships, health, and sense of purpose play a significant role in overall well-being.|
|Policy Implications||– The Easterlin Paradox has implications for policymakers. It suggests that focusing solely on economic growth and income may not be the most effective way to improve the well-being of citizens. Policies that address social and psychological factors, such as healthcare, education, and social support, can have a more substantial impact on overall happiness.|
|Critiques and Debates||– The Easterlin Paradox has been a subject of debate and research. Some economists argue that the paradox is not consistently supported by empirical data and that the relationship between income and happiness is more complex. – Critics also point out that individual preferences and cultural factors can significantly influence the impact of income on happiness.|
|Conclusion||– The Easterlin Paradox challenges the conventional wisdom that higher income directly leads to greater happiness. While income can contribute to well-being, it is not the sole determinant. Factors like social connections, health, and a sense of purpose play crucial roles in overall life satisfaction. Understanding this paradox is important for a more comprehensive approach to improving the quality of life for individuals and societies.|
Understanding the Easterlin paradox
It is worth noting that it is the long-term trends in happiness and income that are unrelated. In the short term, the two factors normally go up and down together. For example, consider the sentiment that accompanies stock market crashes. Consumers tend to be sad in the immediate aftermath of a crash but become happier as the market starts to recover.
The Easterlin paradox has been hotly debated because of the inherent problems with defining happiness and the far-reaching implications for public policy. Indeed, if economic growth does little to enhance happiness beyond a certain point, should governments instead focus on measures of national happiness?
Easterlin paradox findings
In a comparative study using data from the United States and 11 other countries, Easterlin reported the following findings:
- Within countries, wealthier individuals reported a higher level of subjective wellbeing (SWB) than did poorer individuals.
- Across countries, there was no comparable difference in the SWB of countries deemed to be rich and countries deemed to be poor.
- Third, the results of a longitudinal study found that the economic development of a country did not increase the individual SWB of that countries’ citizens.
From these findings, Easterlin made two conclusions:
- On the micro-level, the income of an individual increases subjective well-being significantly.
- On the macro level, the national economic growth of a country expressed as per capita GDP does not necessarily increase subjective well-being.
Interestingly, these conclusions were consistent across countries with different traditions, cultures, natural environments, economic environments, and political systems.
Criticisms of the Easterlin paradox
In addition to subjective definitions of happiness and broader policy implications, there is much debate around the validity of the Easterlin paradox itself. Though beyond the scope of this article, Easterlin’s data collection and analysis techniques have been called into question.
Subsequent empirical studies found that SWB was much higher in rich countries than it was in poor countries. What’s more, there was also a significant correlation between per capita GNP and national wealth with the subjective well-being of a nation’s citizens.
Another study in 2006 by Veenhoven and Hagerty found that the SWB in developing nations such as India, South Korea, Philippines, South Africa, Brazil, and Nigeria had increased substantially over the previous 50 years. In releasing their data, the pair refuted Easterlin’s claim that economic growth did not add to the quality of life measures that increased happiness.
Further economic data from China also cast doubt on the Easterlin paradox. The data showed that Easterlin’s conclusion at the micro-level was supported. However, at the macro level, the data showed that stagnation in SWB among Chinese citizens was evident but not because of economic development per se.
In the case of China, the period of rapid growth caused many citizens to lift themselves out of poverty and become happier as a result. However, the fact that the period of growth occurred for so long meant the increase in happiness was offset by widening income inequality. These two effects canceled each other out and caused SWB to trail behind economic growth in the country – but not for the reasons Easterlin’s theory stipulates.
In response, Easterlin revised the theory and posited that a U-shaped pattern best illustrated the relationship between economic development and SWB. In the short term, SWB is positively correlated with a nation’s economic growth. In the long term, however, this growth has a limited effect on individual income. This revision, at least to some extent, made the Easterlin paradox more convincing to skeptics and arguably more relevant to countries undergoing similar economic growth.
- Income and Individual Happiness:
- Example 1: Studies show that in many countries, individuals with higher incomes tend to report greater life satisfaction and well-being compared to those with lower incomes.
- Example 2: A survey conducted in a developed nation reveals that people with higher salaries often express higher levels of happiness and contentment in their lives.
- Cross-Country Comparisons:
- Example 1: Comparing two countries, Country A and Country B, shows that despite Country A having a significantly higher per capita income than Country B, the citizens of both countries report similar levels of life satisfaction.
- Example 2: Research spanning multiple nations indicates that while wealthier countries generally exhibit higher average incomes, this does not necessarily translate into higher average happiness levels among their populations.
- Long-Term Economic Growth:
- Example 1: Over the past several decades, Country X has experienced consistent economic growth, resulting in increased per capita GDP. However, surveys tracking happiness levels among its citizens show that overall happiness remains relatively stable during this period.
- Example 2: Country Y, after a prolonged period of economic stagnation, undergoes a phase of rapid economic development. Despite substantial income growth, citizens’ self-reported happiness levels do not exhibit significant increases.
- Subjective Well-Being and Income:
- Example 1: Research within a country reveals a strong positive correlation between individual income levels and subjective well-being (SWB). People with higher incomes tend to report higher levels of SWB.
- Example 2: A study conducted in a developing nation shows that as people’s incomes rise, their self-reported life satisfaction and overall happiness also increase.
- Economic Development and Happiness:
- Example 1: Country Z embarks on a program of economic development, leading to a substantial increase in per capita GDP over a decade. However, surveys find that the citizens’ average reported happiness levels do not experience a corresponding increase during this period.
- Example 2: A nation’s economic policies focus on improving citizens’ income levels, but despite economic growth, there is little change in the nation’s overall happiness scores.
- The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent. It was first described by then professor of economics at the University of Pennsylvania Richard Easterlin in 1974.
- The Easterlin paradox found that on the micro-level, the income of an individual increases subjective well-being significantly. On the macro level, the national economic growth of a country does not necessarily increase subjective well-being.
- The Easterlin paradox has attracted criticism for the data on which it is based. Subsequent studies found a strong correlation between economic growth and subjective well-being in developing countries. Data from a period of growth in China also found that the relationship between income and happiness was more nuanced than the Easterlin paradox accounts for.
Key Highlights on the Easterlin Paradox:
- Origin of the Easterlin Paradox: The Easterlin paradox was introduced by economist Richard Easterlin in the 1970s. He observed that despite economic growth in the United States over several decades, average happiness levels among Americans remained relatively constant.
- Income and Happiness Relationship: According to the Easterlin paradox, income and happiness are positively correlated up to a certain point. Beyond this threshold, increased income does not significantly contribute to greater happiness.
- Temporal Aspect: The Easterlin paradox pertains to long-term trends in happiness and income. In the short term, these factors tend to fluctuate together. For instance, stock market crashes lead to temporary unhappiness, which recovers as the market rebounds.
- Debate and Implications: The paradox has sparked debates about how happiness is defined and its implications for public policy. It raises questions about whether governments should prioritize measures of national happiness over economic growth.
- Easterlin’s Findings:
- Wealthier individuals within a country tend to report higher subjective well-being (SWB) compared to poorer individuals.
- Across different countries, there is no significant difference in SWB between rich and poor nations.
- Economic development at the national level, expressed as per capita GDP, does not necessarily increase the subjective well-being of a country’s citizens.
- Consistency Across Diverse Contexts: Easterlin’s conclusions held true across various countries with differing cultures, environments, and economic systems.
- Criticisms and Revisions: The Easterlin paradox faced criticism regarding data collection and analysis. Some subsequent studies found that subjective well-being was higher in wealthier countries and correlated with per capita GNP. Data from China challenged the paradox, with income inequality offsetting gains in happiness. Easterlin later revised his theory to incorporate a U-shaped relationship between economic development and SWB.
- U-Shaped Relationship: Easterlin’s revised theory posits that in the short term, economic growth positively correlates with SWB. However, in the long term, the impact on individual happiness diminishes, resulting in a U-shaped pattern of relationship.
- Business Models
- Business Strategy
- Business Development
- Distribution Channels
- Marketing Strategy
- Platform Business Models
- Network Effects
Connected Economic Concepts
Main Free Guides: