Happiness pays: measuring the effect of subjective well-being on later income using sibling fixed effects

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1 Happiness pays: measuring the effect of subjective well-being on later income using sibling fixed effects Jan-Emmanuel De Neve (UCL & CEP) Andrew Oswald (Warwick & IZA) 27 March 2012 (RES) De Neve & Oswald Happiness Pays 1/20

2 Happiness pays 1. Intro and lit review 2. Data: Add Health 3. Analyses: does well-being predict later income? Full sample OLS Sibling fixed effects Time series fixed effects Granger causality 4. Mediation 5. Conclusion De Neve & Oswald Happiness Pays 2/20

3 Large literature on income and happiness: assumed unidirectional and causal Does money buy happiness? Graham (2010) Kahneman & Deaton (2010) Proto & Rustichini (2011) Pischke (2011) Ye et al (2011)... Do richer nations produce happier individuals? Easterlin (1974, 2010) Oswald (1997) Stevenson & Wolfers (2008)... But little consideration of potential reverse causality: perhaps happiness pays? De Neve & Oswald Happiness Pays 3/20

4 Literature on Does happiness pay? 1. Diener et al (2002) Correlate cheerfulness at time of college entry with income 19 years later. 2. Graham et al (2005) Correlate happiness in Russian sample (1995) with income 5 years later. 3. Lyubomirsky, King, and Diener (2005) Suggest happiness advantage has broad-based positive consequences including income. 4. Literature in OB on affect & job satisfaction and organizational performance (Barsade & Gibson 2007, Judge et al 2001) 5. Oswald, Proto, and Sgroi (2009) Lab study of mood manipulation (comedy clip) and resulting productivity. De Neve & Oswald Happiness Pays 4/20

5 Contributions 1. US representative, large-n study of both life satisfaction and positive affect (Kahneman & Deaton 2010, Stone et al 2010) on later income. 2. Greater robustness against OVB (using sibling fixed effects). 3. Mediation analyses to better understand how happiness influences later income. De Neve & Oswald Happiness Pays 5/20

6 Data The National Longitudinal Study of Adolescent Health (Add Health) explores health-related behavior of adolescents as they age into adulthood (Harris et al 2009) 1. Wave I (1994) 2. Wave II (1996) 3. Wave III (2001) 4. Wave IV (2008) N = approx. 15,000 Wave I participants underwent in-home interview (around 30 years old in Wave IV) Add Health is a US nationally representative study (gender, race, geography) Includes about 3,000 individuals in sibling clusters Add Health data has produced important contributions in economics (Echenique, Fryer and Kaufman 2006, Alcott, Karlan, Mobius, Rosenblat and Szeidl 2007, Norton and Han 2009) De Neve & Oswald Happiness Pays 6/20

7 Variables Income (personal earnings) Wave IV 2008 (aged 29) Life satisfaction Wave III (2001) How satisfied are you with your life as a whole? (answers range from very dissatisfied to very satisfied ) Standard question and answer formulation in the economics of happiness literature (Diener 1996, Kahneman 1999, Di Tella et al 2001, Frey 2008) Life satisfaction question has been cross-validated (Kahneman and Krueger 2006, Bartels and Boomsma 2009) Objective confirmation of life satisfaction measure (Oswald and Wu 2010) Criticized for inducing a focussing illusion by drawing attention to relative standing rather than moment-to-moment hedonic experience (Kahneman et al 2006) Positive affect measured in Waves I, II, and IV De Neve & Oswald Happiness Pays 7/20

8 Positive affect CES-D Positive Affect subscale (Radloff 1977) additively composed of: How often was each of the following true during the last week? 1. You felt that you were just as good as other people 2. You felt hopeful about the future 3. You were happy 4. You enjoyed life Answers range from never or rarely to most of the time or all of the time For Wave IV the felt hopeful question is missing De Neve & Oswald Happiness Pays 8/20

9 Descriptive analysis De Neve & Oswald Happiness Pays 9/20

10 Full sample OLS De Neve & Oswald Happiness Pays 10/20

11 Sibling fixed effects De Neve & Oswald Happiness Pays 11/20

12 Sibling fixed effects model predicted values De Neve & Oswald Happiness Pays 12/20

13 Sibling fixed effects model predicted values De Neve & Oswald Happiness Pays 13/20

14 Time series fixed effects De Neve & Oswald Happiness Pays 14/20

15 Granger causality De Neve & Oswald Happiness Pays 15/20

16 Mediation Mediation (or indirect effect) is product of paths a and b. The direct effect is given by c (Baron & Kenny 1986). De Neve & Oswald Happiness Pays 16/20

17 Mediation: univariate analyses De Neve & Oswald Happiness Pays 17/20

18 Mediation: joint analysis De Neve & Oswald Happiness Pays 18/20

19 Support from the natural sciences? Important to also consider neurological mediation pathways. Positive emotions (reward) help release dopamine (for overview see Breuning 2012). Dopamine stimulates cognitive functioning including memory tasks, and attention span (Fredrickson et al 2005, Pessiglione 2006). Cognitive functioning is key in schooling and labor market outcomes. De Neve & Oswald Happiness Pays 19/20

20 Conclusion: why does this matter? 1. Academics: Reveals the strong possibility for reverse causality between income and happiness a relationship that most have assumed unidirectional and causal (e.g. language by Kahneman, Wolfers, etc.) 2. Policy: Promoting general well-being may also have productive effects. 3. General: The emotional well-being of young adults is key to their future success and hence the need to provide an emotionally stable and positive upbringing. De Neve & Oswald Happiness Pays 20/20

A Blueprint for Exploring International Differences in Well-Being

A Blueprint for Exploring International Differences in Well-Being A review of International Differences in Well-Being by Ed Diener, John Helliwell, and Daniel Kahneman (Eds.) New York, NY: Oxford University