The relative income, subjective well-being connect

A key policy lesson would be to pursue a strategy of shared growth through remunerative employment

Updated - September 20, 2021 03:06 pm IST

Published - September 20, 2021 12:02 am IST

illustration of rupee bag 3d blue icon

illustration of rupee bag 3d blue icon

“Well-being is attained little by little, and nevertheless is no little thing itself,” pronounced philosopher Zeno of Citium. While the centrality of the notion of well-being is hard to dispute, its measurement is far from straightforward. There are two distinct approaches to measurement of well-being: one is the conventional approach of measuring it in terms of objective criterion such as income/expenditure; and the second is the growing consensus around a measure of subjective well-being/SWB/life satisfaction/happiness that takes into account not just objective criteria such as income but also individual characteristics including age, gender, schooling, religion, caste, marital status, health, employment, social networks, and the overall economic and natural environment. The intuitive appeal of SWB measures is that these are influenced not just by objective criterion of income/expenditure but also by perceptions of individuals about their experiences of whether they are better-off, just the same or worse-off.

In a previous OpEd article, Kulkarni et al. (“ Money vs. happiness ” – Subjective well-being and income are intricately linked, The Hindu , February 18, 2021), it was argued that subjective well-being varies with level of income but at a diminishing rate. Here, however, our focus is on whether relative income (i.e., relative to that of a reference group) matters more than the level of income and, in that case, whether a shift in policy is necessary to enhance SWB. Our analysis draws upon the two rounds of the nationally representative India Human Development Survey (IHDS), conducted by National Council of Applied Economic Research (NCAER) and University of Maryland, covering the years 2005 and 2012. The data were released in 2015. Its salient features are: it is the only all-India panel survey; apart from the wide coverage of demographic, health, economic, and social variables, it asks a question on SWB. The question is: compared to seven years ago (2005), would you say your household is economically doing the same, better or worse today (2012)? Specifically, therefore, it is a measure of change in SWB, but for convenience of exposition we refer to it interchangeably as SWB, or, SWB outcomes. Admittedly, a broader coverage of both economic and social aspects (such as questions about the best possible life on a scale) would have been more helpful for comparisons with studies conducted using the Gallup World Poll.

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SWB and income/expenditure are positively related but at a diminishing rate. Besides, the association is weak and arguably transitory. These findings are not surprising. First, we find that the relative income effect (actual per capita income/expenditure as a fraction of the maximum in the primary sampling unit) is much larger. This is consistent with the relative income hypothesis formulated by Duesenberry (1949) and the famous Easterlin paradox (1973). This paradox states that at a point in time, SWB/happiness varies directly with income both among and within nations, but over time, happiness does not trend upward as income continues to grow.

Indeed, rank in the income distribution influences life satisfaction. As a society becomes richer, the average rank does not change and thus average life-satisfaction remains stable despite income growth. The relative income hypothesis cannot by itself explain why a permanent increase in an individual’s income has a transitory effect on his/her well-being, as relative standing would increase. However, the increase in relative standing can be offset by change in the reference group: with this increase, the new peers serve as a reference point, and the previous peers lose salience.

On material goods

Second, individuals adapt to material goods, and these goods yield little joy for most individuals. Thus, increases in income, which are expected to raise well-being by raising consumption opportunities, may in fact have minor lasting effect because consumption of material goods has little effect on well-being above a certain level of consumption or because of hedonic adaptation. This has been questioned on the grounds that there is no income threshold at which SWB diverged. Instead, higher incomes are associated with both feeling better moment-to-moment and being more satisfied with life overall. While there may be some point beyond which money loses its power to improve well-being, the current view is that the threshold may be higher than previously thought .

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Income changes

We further analysed how relative income changed during 2005-2012. We classified relative income/expenditure into three intervals: 0-25%, >25-50% and above >50% in both 2005 and 2012. The cross-tabulation unravels sharp changes. Consider the first interval with lowest relative income, 0-25%, in 2005. About 40% remained in this interval, while about the same proportion experienced a sharp increase in relative income (by moving to the interval, >25-50%), and above a fifth a substantial increase (by moving into the interval, >50%). The next interval with higher relative income, (>25-50%), revealed a different pattern. While about 40% remained in this interval, more than a third ascended into the highest relative income interval, >50%, implying substantial narrowing of the income/expenditure disparity. However, a distressing feature was that well over one fourth experienced a marked increase of this disparity or lower relative income (i.e., by moving into the interval 0-25%). In the third interval, >50%, about 51 % remained in it, while about one third experienced a marked reduction in relative income (by moving into the lower interval, >25-50%) and a considerably lower proportion (over 16%) registered a sharp reduction (by moving into the highest relative income interval, 0-25%).


Going forward

So, to recapitulate, the lower the relative income, the lower is SWB. What our analysis shows is that a large majority of those with lowest relative income experienced substantially higher relative incomes; also, a large majority of those in the next higher range (>25-50%) recorded significantly higher relative incomes; and, nearly half of those in the highest range of relative income (>50%) recorded lower relative incomes in 2012. During a period of steady growth of per capita income (just under 6% annually), the benefits in terms of higher relative income accrued largely to those in the lower intervals.

In sum, the important policy lesson is that, instead of relentless pursuit of income growth, more attention must be given to a strategy of shared growth through remunerative employment in order to enhance well-being.

Varsha S. Kulkarni is affiliated to Harvard University, Cambridge, MA, U.S. Raghav Gaiha is Research Affiliate, Population Aging Research Centre, University of Pennsylvania, Philadelphia, U.S., and (Hon.) Professorial Research Fellow, Global Development Institute, University of Manchester, Manchester, England

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