Finland SITRA Lecture 2006

Does Economic Growth Create Happiness?

Prof. Andrew Oswald University of Warwick U.K.

Economics is changing
Researchers are studying mental wellbeing. We are drawing closer to psychology and medicine.

Can we learn how to

Can we learn how to make Finland happier?

Using random samples of individuals from many nations Researchers have examined what influences the mental wellbeing of (i) individuals (ii) nations.

A taste of research (1) Happiness is high among:

A taste of research (1) Happiness is high among: Women People with lots of friends The young and old Married and cohabiting people The highly educated The healthy Those with high income

A taste of research (2) Happiness is particularly low among:

A taste of research (2) Happiness is particularly low among: The unemployed Newly divorced and separated people

A taste of research (2) Happiness is particularly low among: The unemployed Newly divorced and separated people and children have no effect on happiness

A taste of research (3) Economic growth does not make a country happier.

A taste of research (3) Economic growth does not make a country happier. and there is evidence that stress at work, and rates of depression, have been increasing in recent decades

A taste of research (4) Noise levels and environmental quality matter a lot to happiness.

Global warming makes these last two findings particularly important.

Statistical methods

But, how is it possible to study happiness and mental wellbeing in a systematic way?

Amygdala: emotions

Pleasure centre: septal area of the hypothalamus

Self-reported happiness relates strongly to.

activity in the brains pleasure centres health, smiles, positive emotional arousal, and future intentions

Brain Responses in Two Pictures (MRI Scans)

Source: Richard Davidson, University of Wisconsin

Reported happiness is correlated with Persons assessment of happiness by friends and family Persons assessment of happiness by spouse Persons recall of good and bad events Heart rate and blood pressure measures response to stress The risk of getting coronary heart disease

Some cheery news:

Some cheery news: In the western nations, most people are happy with their lives

The distribution of life satisfaction levels among British people

35 30 Percentage of Population 25 20 15 10 5 0 1 2 3 4 5 6 7 Self-rated Life Satisfaction

Source: BHPS, 1997-2003. N = 74,481

Interestingly, happy people cohabit with other happy people

But obviously life is a mixture of ups and downs

Statistically, wellbeing is strongly correlated with life events

Two examples
A) By Employment Status
5.40

A) By Marital Status
5.40 5.35 5.30

5.20 Average Life Satisfaction

Average Life Satisfaction

5.00

5.25 5.20 5.15 5.10 5.05 5.00

4.80

4.60

4.40

4.20 Employed Unemployed

4.95 Not Married Married

Source: BHPS, 1997-2003. N = 74,481

Happiness is U-shaped through the life cycle

The pattern of a typical persons happiness through life

5.6
Average life satisfaction score

5.5 5.4 5.3 5.2 5.1 5.0 4.9 15-20 21-30 31-40 41-50 51-60 61-70
Age group

What about money?

What about money?

The data show that richer people are happier and healthier.

The state of the mind determines the health of the body

Those with high status live longer
(being promoted seems more important than giving up smoking)

Married people are healthier (marriage

offsets smoking)

Humans are adaptive. They have amazing resilience: eg: (i) divorce (ii) disability.

Comparing two years before divorce to two years after, there is marked improvement in psychological health. We use a GHQ mental strain score.

Divorce eventually makes people happier

LeadLag Analysis for Marital Transitions
18.00

Mean GHQ Mental Stress Levels

17.20

Mean GHQ Score 12.00 14.00 16.00

14.85 14.25 12.98 12.27 11.69 10.92 10.95 11.00 11.06 13.07 12.42 11.77 11.98

10.00

11.08

0 Time

Event at time 0
Divorce Data Source: BHPS Widowed Remain married

Human beings bounce back remarkably from, say, disability.

What about happiness in whole countries?

When a nation is poor, extra riches does raise happiness.

When a nation is poor, extra riches does raise happiness.

Say we look at a scatter plot across many countries:

Life Satisfaction and GDP Per Capita

Life Satisfaction, WVS Average Score (1='Dissatisfied' to 10='Satisfied')

World Values Survey

Life Satisfaction = -0.9 + 0.8 * Log GDP (t=8.3) 8
DNK IRL CHE ISL AUT NLD FIN CAN NZL SWE USA NOR DEU BEL Australia GBR VEN SLV ARG SVN ITA BRA SGP DOM CHL URY CZE ESP ISR PRT IDN FRA PHL GRC CHN VNM JPN HRV PER IRN POL KOR MAR SVK ZAFEST BGD BIH HUN JOR DZA TUR UGA AZE EGY BGRLVA ROM ALB IND MKD LTU PAK BLR RUS GEO MDA UKR ARM MEX MLT ZWE COL LUX

NGA

TZA

2000 5000 10000 20000 35000 60000 GDP per capita in US$ at PPP (log scale)

How about Finlands happiness -- and other industrialized countries in Europe?

Happiness in countries (alphabetically) from our equations

Austria Czech Republic Denmark Estonia Finland France Germany Great Britain Greece Hungary Ireland Israel Italy Luxembourg Netherlands Norway Poland Portugal Slovenia Spain Sweden Switzerland .1579 (3.60) -.7257 (16.65) 1.0328 (22.32) -.9561 (17.84) .5954 (14.13) -.7163 (11.85) -.3270 (8.03) -.2920 (6.77) -1.0964 (25.07) -1.1882 (20.48) -.0799 (1.46) -.6521 (11.75) -.3312 (4.89) .6689 (13.38) .1737 (3.57) .2788 (6.50) -1.0671 (23.18) -1.1954 (25.45) -.3857 (7.73) -.2362 (4.98) .4185 (9.80) .5993 (14.02)

Happiness in countries (alphabetically) from our equations

Austria Czech Republic Denmark Estonia Finland France Germany Great Britain Greece Hungary Ireland Israel Italy Luxembourg Netherlands Norway Poland Portugal Slovenia Spain Sweden Switzerland .1579 (3.60) -.7257 (16.65) 1.0328 (22.32) -.9561 (17.84) .5954 (14.13) Approximately -.7163 (11.85) -.3270 (8.03) -.2920 (6.77) -1.0964 (25.07) -1.1882 (20.48) -.0799 (1.46) -.6521 (11.75) -.3312 (4.89) .6689 (13.38) .1737 (3.57) .2788 (6.50) -1.0671 (23.18) -1.1954 (25.45) -.3857 (7.73) -.2362 (4.98) .4185 (9.80) .5993 (14.02)

4th happiest in Europe currently

Yet Growth in income is now not correlated with growth in happiness This is the Easterlin paradox

A simple graph to worry finance ministers all over the world:

Average Happiness and Real GDP per Capita for repeated cross-sections of Americans.
24000 2.6 1975 1980 1985 Year 1990 1995 Real GDP per Capita Mean Happiness 1.8 2 2.2 2.4 Mean Happiness

15000

Real GDP per Capita 18000 21000

Wellbeing is flat through time in the other rich countries

4 3.5 Average Life Satisfaction 3 2.5 2 1.5 1 0.5 0 1973 1977 1980 1983 1986 1988 Year 1990 1993 1996 2000 2004

UK

France

Germany

Italy

Netherlands

and
In the USA, real income levels have risen six-fold over 100 years but:
Year 1900 Suicide rate = 10 in 100,000 people Year 2005 Suicide rate = 10 in 100,000 people

Are there diminishing returns to real income?

Are there diminishing returns to real income? Very probably yes.

Source: World Values Survey, 1995

1995/2000 World Values Survey results

Life Satisfaction World Values Survey 9 8 SALV 7 6 INDEX 5 4 3 2 1 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 GDP per capita, PPP (constant 2000 international $) Nig Colombia Mexico Ven Arg Bra Dom Uru Chile MALT Den Swi Irl ICE Austria Fin Netherlands Can New Zealand Nor US SWE Ger Belg Australia UK Slovenia Italy Cze Isr Spa SIN PORT FRA GRE the western countries

Vietnam Iran CROA MOR Slo EST S.AFR BAN Bosn Hun Alg Uga Bulgaria Lat ALB India MacRom Lit PAK Bela Rus MOL Ukr ARM ZIM Tanz

Similar results within a nation

(though cardinality questionable)

Take American families in 1994 for example

What, exactly, goes wrong when a wealthy country gets richer? We are not certain, but..

Some clues
Social comparison (you compare your 3 BMWs to people with 3 BMWs) Habituation: people adapt to money Mistaken choices (long commutes and working hours)

Social Comparisons

Can we produce a happier society?

Some ideas
Envy and social comparisons are counterproductive at the aggregate level Some argue for a corrective tax system one that reduces work effort to a level where the fruitless incentive to raise your relative income has been fully offset (Frank and Layard) In terms of positional goods, e.g. luxury cars could be taxed much more

Another difficulty: Long working hours in the EU

Graph 1: % of employees working over 45 hours per week
35% 30% 25% 20% 15% 10% 5% 0%
Sw ed en Ge r m an y Fr a nc e UK EU 15
7 7 19 12 9 24 25 33 28

Women Men
11

Source: European Working Conditions Survey, 2000

Gross National Happiness (GNH) Policy in Bhutan

4 pillars of public policy - Sustainable and equitable socio-economic development - Conservation of environment (e.g. banning of plastic bags) - Preservation and promotion of culture (e.g. ban US programmes and advertising) - Promotion of good governance
Source: Jigmi Y. Thinley, Minister of Home and Cultural Affairs, Bhutan

A key finding from our equations

Friends and partners matter much more than money.

How much are social relationships worth in terms of happiness?

See friends once a month See friends once a week See friends on most days Getting married Losing a job
Source: BHPS, Powdthavee (2006).

Valuations (in ) 57,500 p.a. 69,500 p.a. 85,000 p.a. 50,500 p.a. -143,000 p.a.

As a society, we could also pay attention to improving public goods, and the environment in the broadest sense.

Summing up Given our current real income levels:

Summing up Given our current real income levels: Growth is not making the industrialized nations happier.

The natural conclusion Policy in the coming century will need to concentrate on non-materialistic goals. GNH not GNP.

Thank you

Does Economic Growth Create Happiness?

Andrew Oswald University of Warwick
Papers and supporting material downloadable at www.andrewoswald.com
I owe a great debt to the work of Paul Frijters, Nick Powdthavee, and Justin Wolfers