Relative Income and Subjective Wellbeing: Intra-National and Inter-National Comparisons by Settlement and Country Type

Abstract

We extend the Easterlin Paradox (EP) literature in two key respects, testing whether inter-national as well as intra-national income comparisons matter for subjective wellbeing, and testing whether these effects differ by settlement-type as well as by country-type. We confirm the intra-national EP predictions (that subjective wellbeing is left unchanged by an equi-proportionate rise in all intra-country incomes) across four developed country settlement types ranging from rural areas to large cities. The EP result also holds for rural areas in transitional countries but not for larger settlement sizes in those countries. For all country-settlement types, we confirm the importance also of inter-national income comparisons in determining people’s subjective wellbeing. Again, however, the effect is less prominent in larger transitional country cities. We also show that once we control for personal characteristics and income-related factors, we cannot reject the presence of a spatial equilibrium in life satisfaction. Our results indicate that each individual government that wishes to raise the life satisfaction of its residents still needs to boost those residents’ incomes in order to raise their subjective wellbeing. However, at least amongst developed countries, this practice results in an international Prisoners Dilemma in which mean life satisfaction stays stable despite rising global incomes.

Keywords: Income comparison, wellbeing, Easterlin Paradox, spatial equilibrium

JEL Classification: I31, H39, H24, R13