Income and Happiness across Europe - Literature review Example

ECONOMIC MODELING al Affiliation ECONOMIC MODELING Introduction Among the most complex and uncertain issues in the field of Economics is on whether the income of individuals can buy their happiness. Economic theory in the modern sense approximates the measures of happiness with variables from the demographic and socio-economic variables. Several economists have tried to dwell on the issue of happiness in their theories. Such economists include Karl Marx, Adam Smith, Duisenberg, and Veblen. Through neoclassical economic theory, the factors of utility and wellbeing bear a close definition to the achievement of happiness in the economy. The following research concentrates on the work of Caporale and Tsitsianis on Income and happiness across Europe. The article tries to establish whether the various references of happiness do matter. In the analysis, the following research will summarize the selected article with a particular reference to the aim of the article and the results derived in the research article. Further, there will be a citation and summary of a similar paper to the article of Income and Happiness across Europe. Through the detailed description of the various data sets used in both researches and the methods for the collection of data, we can describe the econometric model used to analyze the research objectives. Summary of the Income and Happiness across Europe The research article attempts at finding out whether there is a direct relation between income and happiness in a case study conducted in Europe. Most people assume that they will be better off when they receive higher amounts of income. The research focuses on demographic and socio-economic variables in trying to measure the happiness of people derived from the income they receive. Through basing the research on several empirical evidences such as the work of Easterling, the research establishes that previous researchers related that higher happiness levels did not correlate to higher levels of real income. Through taking the example of industrialized countries, despite the growth of the real income of individuals in that country, the levels of happiness did not change. This is the paradox of Easterling (Caporale et al. 2009). In recent findings, however, there is a contradiction of the Easterling paradox. The consideration of relative income as having a strong impact on the happiness of people instead of the absolute income in the society explains type of contradiction. How individuals relate to their income depends on the income levels of the other individuals in the society. Through the consideration of relative income instead of absolute income in the attainment of utility in the society, there exist reference values, social norms and comparisons that matter and concern in the question of happiness. There also exists another explanation for the contradiction of the Easterling paradox (Caporale et al. 2009). Individuals can compare their incomes in effect of their own timelines, where they compare what they used to get in the past as their income and what they get now. As income of an individual increase, the individual changes his lifestyle to accommodate the increase or decrease in income, in what economists such as Brickman and Campbell refer to as the hedonic treadmill or the preference drift phenomenon (Bookwalter & Dalenberg 2010). The changing financial aspirations of an individual influence the utility of the individual in an indirect manner. Through the support of several works of various economists and the examination of various hypotheses by economists over the years, the research forms its objectives. The research utilizes the data and information from the European Social Survey (ESS) in investigating and defining a link between incomes I the society and the wellbeing of the people. The research measures happiness and satisfaction in the society. Nineteen countries in Europe conduct the research on happiness in the society from an economic perspective. Through the control of the demographic and standards personal characteristics of individuals, the research attempts at establishing the effect of reference groups and social comparisons on the subjective wellbeing of individuals (Caporale et al. 2009). The results of the research show that absolute income has a direct and positive effect on the satisfaction and happiness of people. However, the relationship weakens on the inclusion of the reference income of the individual as an explanatory variable. A Research Paper That Has Cited the Selected Paper A research paper that has cited the research by Caporale and Tsitsiani is the ‘Direct Evidence on Income Comparisons and their Welfare Effects” by Claudia Senik. The research by Senik has utilized the research on Research and Happiness to base upon its research. Senik recognizes the importance of utility maximization as the basic framework for the attainment of happiness (Senik 2009). Senik also relates to what the researchers Caporale and Tsitsiani term as the Easterling paradox, where the level of happiness does not have a positive relationship with absolute income. The research paper by Senik focuses on the issue of happiness and income and their relationship in different capacities, either directly or indirectly. The paper has also cited the Income and happiness across Europe research paper in discussing the idea of happiness across different types of relative incomes of individuals, either through the relation of one’s income to others in the society or one’s past (Schicks 2010). However, the research on the direct evidence on income comparisons and their welfare effects emphasizes on the different categorization of happiness. The research focuses on diverse research based on the evidences drawn from twenty-eight countries. Therefore, the main objective of the research is in examining and researching the different existing comparisons in the economic analysis of happiness in relation to the income of individuals. The research uses observation as the source of data collection in the research, where a random sampling methodology collects data from the population. Although there is an equal distribution of the genders, there exist different ages of individuals, with a specific favor on the elderly population. In order to maintain on the lack of bias of the research the research takes effect with OLS specifications with the coefficients of the research having direct interpretations in terms of their elasticity. The main differences between the two economic researches that focus on income and happiness are that while the initial research evaluates whether reference values matter (Senik 2009). The data from the European Social Survey (ESS) enables inform on the research through testing whether reference groups and social comparisons have importance on the determination of the wellbeing of individuals in the society. On the other hand, the research on direct evidences on income comparisons focuses more on different comparisons of income and whether these comparisons relate to the welfare effects in the society. Through questioning on the applicability of comparison question questions in the various individuals chosen in the random sample, the research had the capability of establishing whether there exist welfare effects in the presence of these comparisons (Schicks 2010). Data Used in the Analysis In consideration of the first two waves of the European Social Survey, from the year 2003 and 2004, the research has conducted an empirical analysis. The data used is from nineteen countries in the European region. The European commission, scientific bodies from the members of the ESS and the European Science Foundation fund the ESS (Bookwalter & Dalenberg 2010). The nineteen countries that the research obtained data from include the countries of Ireland, Switzerland, Norway, Netherlands, Czech Republic, Poland, Denmark, Portugal, Austria, Belgium, the United Kingdom, Spain, Slovenia, Luxembourg, Hungary, Greece and Sweden. The data contained in European Social Survey contains information on the satisfaction of life and happiness. The elements of life satisfaction and happiness are the dependent variables. The dependent variables allow for the testing of whether the reference groups and social comparisons that exist in the society have an impact of the subjective wellbeing of the individuals in the society (Caporale et al. 2009). The research consisted of using structured questionnaires in collecting information from the population in the nineteen European countries. Some of the questions asked in concern to the dependent variable of satisfaction of life include the measure of happiness of the respondent and satisfaction in life, with the value 0 meaning being extremely dissatisfied with life. The scale for the questionnaires ranged from 0 to 10, where 0 indicated extremely unhappy and 10 meant extremely happy. Further, the research used regressions to analyze data. Through the data obtained from the ESS, it is possible to set standards of labor market and demographic characteristics. These characteristics obtained from the accumulated data have usage as controls of the dependent variables of happiness and the satisfaction in life, especially when conducting the regressions. The controls of the dependent variables include education, size of establishment, personal characteristics, and attributes, status of the labor force, health of the individuals and their income. Additionally, the data obtained on the experiences of past employment evaluates the perceptions of individuals on the existing economic situation. The economic situation of the respondents who cause the collection of the data also has the influence of income shocks that happened in the past, and especially, the shocks associated with the issue of unemployment. The reference income is the independent variable. The research utilizes two major proxies in order to measure the reference income. In the first proxy, the reference group contains individuals in the range of five years either older or younger in age, than the individual under consideration. In the second proxy, the reference income group contains all the individuals that have a similar level of education, have the same age bracket, and live in the same country. Further, in the data sets obtained by the European Social Survey, educational backgrounds of individuals have categorization in five distinct groups that include primary school level, lower secondary, the upper category of secondary education, and post-secondary. The tertiary levels and beyond do not have consideration in the data sets during the research. Therefore, the age brackets used in the analysis include those younger than the age of 25, the ages between 25 and 65, and those older, than 66. The different age brackets form the measurement of the reference income in the second proxy. The sampling for the collection of data limits to full-time employees who receive a monthly salary (Caporale et al.2009). Usage of Econometric Model The research utilizes a statistical econometric model in analyzing the data collected for the research. The research has both dependent and explanatory variables that enable for the analysis of the research objective. The research used econometric model, the probit model. The dependent variables of happiness and satisfaction in life have an ordinal nature, requiring for the conduct of a probit regression. The probit model associates with the function of quantiles that have a strong relation to the function of standard normal distribution (Breen, Karlson & Holm 2013). Through the utilization of the probit model function, there is the inverse computation of the probability values that give rise to random variables. The research by Caporale and Tsitsiani utilizes the probit model through the application of the assumption of the continuous and latent quantification of the dependent variable in the research (Caporale et al. 2009). The dependent variables are the proxies for the derivation of utility in life, as represented through the function below: Si* = β1 zi + ei, The vector for the explanatory variables has representation through zi. The explanatory variables explain the characteristics of the firm and individuals in the society. On the other hand, β represents the estimation parameter, while ei describes the error term for the normal distribution. The case of positivity of the estimated parameter of β indicates a higher value and level of the satisfaction in life due to the increasing associated variable. Through the probit model, the research had a good basis for a regression (Caporale et al. 2009). The model also enabled for the statistical analysis of the deviation. Issues that could arise in Using the Probit Model Through the probability of a binary response when collecting data for the research from the population, the research utilized the probit model to form a regression on the variables. The probit model presents the disadvantage of not being a simple econometric model to use for the finding of normal distribution in variables. In the case of a polytomous data, there is the requirement of a multivariate logistic, also referred to as the normal distribution and the probit model cannot offer that function with ease (Breen, Karlson & Holm 2013). In the analysis of the data from the research, the distribution of the dependent variables of happiness and satisfaction in life does not have clarity. There is the depiction of a close but not an exact correlation between satisfaction in life and happiness. The two measures used in the research show a high happiness level or the satisfaction in life among the respondents from all the nineteen countries participating in the research, and with the mode of a score of eight as the measure of well-being. With the probit model, the distribution of the dependent variable happiness also appears to have a skew while approaching the high end. During the reporting periods of the research derived from the data of the European Social survey (ESS) in the years 2003 and 2004, there appears to be very little variation in the distribution and expression of happiness. It may be that the two periods did not have significant economic changes between the two periods, or it may be that the probit model does not present enough availability and room for the exact interpretation of the results obtained (Breen, Karlson & Holm 2013). When compared to a close alternative for the probit model, the logit model presents for an exact interpretation and summary of the research data during data analysis. It summarizes the data that has a close relation to the non-parametric regression. The estimated coefficients of the data analysis reveal the fact that men have a lower satisfaction in life than women. Married couples also have greater satisfaction in life that their counterparts who have undergone divorces or single. Further, the results of the probit regression of the ordinal values not dependent variables of life satisfaction and happiness indicate that people with children tend to have lesser satisfaction in life. However, there arises another major weakness in the analysis of the academic qualifications as one of the controls of the dependent variables (Breen, Karlson & Holm 2013). The results show that a higher level of education attracts lower satisfaction in life. The evidence presented from the analysis is that people with a post-secondary education have a negative coefficient in relation to satisfaction in life, showing that the coefficient is statistically significant. The probit model does not also show the correlation between the firm size and the satisfaction in life dependent variable. Conclusion The major aim of the research was to examine and test the link that exists between income and the subjective wellbeing of the populations in the European Countries that participated in the research. A higher amount of absolute income in the society has relation to a higher attainment of satisfaction in life. With the probit regression model, there is the depiction of a pattern of the estimated income coefficients for the model has an income bracket of above 350 to 460 Euros. The income coefficient is statistically significant and positive. In conclusion, income buys happiness in Europe. There exist a positive relationship between income and the happiness of individuals. In the two proxies determined for the purpose of the research, there is the control of the relative income in the measurement of the strength of the link between income and happiness. The proxies also arrive at the conclusion of the certainty of the dependent variables as the factors that affect the correlation of income and happiness. The research utilizes the probit econometric model due to the availability of the binary values in the functions of the research. There is also the comparison of a journal that cited the Income and Happiness across Europe research, which is the Direct Evidence on Income Comparisons and their Welfare Effects” by Claudia Senik. Bibliography Bookwalter, J. T & Dalenberg, D. R 2010, ‘Relative to what or whom? The importance of norms and relative standing to well-being in South Africa,’ World Development, vol. 38, no. 3, pp. 345-355. Breen, R, Karlson, K. B & Holm, A 2013, ‘Total, direct, and indirect effects in logit and probit models,’ Sociological Methods & Research, 0049124113494572. Caporale, G. M, Georgellis, Y, Tsitsianis, N & Yin, Y. P 2009, ‘Income and happiness across Europe: Do reference values matter?’ Journal of Economic Psychology, vol. 30, no. 1, pp. 42-51. Schicks, J 2010, ‘Microfinance Over-Indebtedness: Understanding its drivers and challenging the common myths,’ Bruxelles: Centre Emilee Bergheim, Solvay School of Business, CEB Working Paper, 10, 048. Senik, C 2009, ‘Direct evidence on income comparisons and their welfare effects,’ Journal of Economic Behavior & Organization, vol. 72, no. 1, pp. 408-424. Read More