What does income matter?

Income determines what we can consume. We get if from working, from others, from reaping past investments etc., Does it do us any good? A recent paper alluded to in an earlier post attempts to debunk the Easterlin hypothesis. This paper is much more closely aligned to how we traditionally think of income: namely more is better controlling for the effort required to obtain it.

However, there is also a huge literature that attempts to examine more subtle motivations that link income to well-being. There have been many other attempts to explore the well-being pay-off from income. One strand of the literature essentially posits income as a component of a zero-sum game. Reference-dependency is viewed as a key motivation for acquiring income and a key mediator of how much benefit we derive from the income we have. Papers by McBride, Clark and Oswald and others makes this case forcefully. Recent work by Mary Daly and colleagues even claims that such negative reference effects may underpin the link between suicide and income. Senik's paper below makes a slightly more complex point that sometimes it might be good to see your reference group get ahead as it acts as a good sign for your own prospects but the general view in the literature is that seeing people like you getting ahead increases the pressure on you and dampens the well-being increments from increasing levels of income.

McBride Paper

Daly et al Suicide Paper

Senik Paper

As well as reference dependency with respect to others, reference dependency with respect to ourselves through time is also considered in a number of papers as a key aspect of how income enters in to our utility. Burchardt and colleagues have verified the preference for ascending sequences in work using the British Household Panel Survey. This type of work is important as we get to grips with a potential recession in many countries.

Burchardt Paper

As several countries face slowdowns it raises some fundamental questions of how people evaluate their income and convert this evaluation in to more general well-being. Do we process merely absolute income (the literature would say no)? Which reference groups do we compare ourselves to and is there some element of choice in how we do this? How do we evaluate our position through time? Which time periods of our life are given most salience? For example, surely people could simply reason that despite the slowdown they are better off than ten years ago even if worse off than last year? Why would some time-reference points be more salient than others? How do personality and motivation affect the relationship between income fluctuations and well-being fluctuations?

Literacy not intelligence moderates the relationships between economic development, income inequality and health

Abstract:Objectives. Kanazawa (2006) presented data allegedly supporting a racist version of evolutionary psychology that claims that the populations of wealthier and more egalitarian societies live longer and stay healthier, not because they are wealthier and more egalitarian, but because they are more intelligent. The objectives of this study are: (i) to determine the relationship between IQ and literacy in Kanazawa's sample of countries and (ii) to reanalyse Kanazawa's dataset using measures of literacy in lieu of national IQ test scores.

Method. Correlation and regression were employed.
Results. National literacy scores across the countries in the sample are highly skewed. In spite of this, the literacy measures are highly correlated with alleged differences in national IQ (r = .83-.86). The measure of literacy together with economic development (GDPpc) and income inequality (Gini coefficient) control at least 59-64% of the variance in national life expectancy at birth.

Conclusions. There is no scientific justification for believing that alleged intelligence differences play any role in explaining international differences in health status. Measures of alleged national IQ scores are highly confounded with differences in literacy. Literacy is a key factor in the health of any community and policies designed to enhance the literacy of a population are expected to lead to significant improvements in health status.

Marks (2007)


The Kanazawa paper 'IQ and the wealth of states' and his paper Mind the gapin intelligence: Re-examining the relationship between inequality and health have been criticised in several papers:

Dickins et al. (2007)

Kanazawa (2006) has put forward an evolutionarily grounded theory which claims that individuals in wealthier and more egalitarian societies live longer and stay healthier not because they are wealthier or more egalitarian but because they are more intelligent (2006: 637). The claim rests on an argument which asserts that general intelligence is a solution to evolutionarily novel problems and that most dangers to health in contemporary society are evolutionarily novel. Kanazawa also claims that this relationship does not hold in sub-Saharan Africa. These claims are based on a cross-national analysis which finds a positive correlation between 'national' IQ scores and mortality data. The implication is that intelligence is the principal factor determining longevity in the rest of the world, regardless of issues such as adequacy of diet and availability of health care. Kanazawa's theoretical claims about the evolution of general intelligence as a domain-specific adaptation are inconsistent with adaptationist analysis: natural selection does not solve general problems. The assumptions that sub-Saharan Africa is more representative of the evolutionary past than is the rest of the world, and that most hazards to health in contemporary society are evolutionarily novel, are implausible. The methods used are inadequate because Kanazawa argues for causation from correlation and fails to consider alternative explanations. The IQ data are flawed for reasons to do with sample size and sampling, extrapolation and inconsistency across measures. Nor are they temporally compatible with the economic and demographic data

From Geoff (2007)
Kanazawa concludes that `wealthier and more egalitarian societies live longer and stay healthier … because they are more intelligent'. The result does not apply to sub-Saharan Africa, but this exception is explained by reference to his theory of evolutionary psychology, `The Savanna Principle'. We reanalyse the data, taking into account non-linearity in the relationship of GDP to life expectancy and find that the results no longer support his conclusions. We also argue that HIV prevalence rates are a more parsimonious explanation for differences between sub-Saharan Africa and elsewhere.

Income, aging, health and wellbeing around the world

During 2006, the Gallup Organization collected World Poll data using an identical questionnaire from national samples of adults from 132 countries. This paper presents an analysis of the data on life-satisfaction (happiness) and health satisfaction and their relationships with national income, age, and life-expectancy. Average happiness is strongly related to per capita national income, with each doubling of income associated with a near one point increase in life satisfaction on a scale from 0 to 10. Unlike previous findings, the effect holds across the range of international incomes; if anything, it is slightly stronger among rich countries. Conditional on national income, recent economic growth makes people unhappier, improvements in life-expectancy make them happier, but life-expectancy itself has little effect. Age has an internationally inconsistent relationship with happiness. National income moderates the effects of aging on self-reported health, and the decline in health satisfaction and rise in disability with age are much stronger in poor countries than in rich countries. In line with earlier findings, people in much of Eastern Europe and in the countries of the former Soviet Union are particularly unhappy and particularly dissatisfied with their health, and older people in those countries are much less satisfied with their lives and their health than are younger people. HIV prevalence in Africa has little effect on Africans’ life or health satisfaction; the fraction of Kenyans who are satisfied with their personal health is the same as the fraction of Britons and higher than the fraction of Americans. The US ranks 81st out of 115 countries in the fraction of people who have confidence in their healthcare system, and has a lower score than countries such as India, Iran, Malawi, or Sierra Leone. While the strong relationship between life-satisfaction and income gives some credence to the measures, the lack of such correlations for health shows that happiness (or self-reported health) measures cannot be regarded as useful summary indicators of human welfare in international comparisons.

Deaton '07

Status, Happiness, and Relative Income

This may make you happiness types happy

By:	John Beath (University of St. Andrews) Felix FitzRoy (University of St. Andrews and IZA)
URL:	http://d.repec.org/n?u=RePEc:iza:izadps:dp2658&r=cbe
Models of status based on Frank’s (1985) count of the number of people with lower conspicuous consumption are inconsistent with the extensive empirical literature on happiness and well-being. The alternative approach to consumption interaction which uses some form of relative income has been developed in various contexts. These predict that a representative agent’s well-being will increase with real income or consumption. However, this is again inconsistent with the time-series evidence for advanced economies. In this paper we combine a simple model of relative income with a distribution of ability that correctly predicts both time series results of near constant utility, and the positive, concave crosssectional relation between income, working time and happiness.