Tams Keller The connection between life satisfaction and material aspirations A theoretical dilemma and some solutions

In seeking to answer the question of whether income brings happiness, Richard Easterlin (1974, 1995) found a paradox. Within a given country, higher-income respondents usually reported greater happiness; however in cross-country comparison if aggregate income in a country rises, happiness does not necessarily follow. Both theoretical and empirical social research provides a number of explanations for this paradox (see Ferrer-i-Carbonell, 2005: 9889). Of these, it is indisputably relative income theory that has evoked the most attention. According to this argument, happiness depends not on absolute, but on relative income. If the level of income rises against that of a specific reference group, that creates happiness; however, if everybodys income rises and the relative income differentials between individuals stay constant, that does not lead to happiness. In other words, the positive effect of income on happiness is counterbalanced by the negative effect of relative income (Easterlin, 1995: 36). The results of empirical research, however, are somewhat ambiguous. Senik (2004) found a positive connection between relative income and happiness. She argued that, in uncertain economies like Russias, the rise in income in the reference group might be associated with a forecast rise in the individuals own income, which may be understood as a kind of tunnel effect, as posited by Hirschman (1973). Testing the same question on German data, Ferrer-i-Carbonell (2005) estimated the impact of relative income to be negative: its impact in western Germany was greater than that of income; however, this did not hold in eastern Germany. A negative relationship between satisfaction and relative income has been found by other scholars as well (McBride: 2001; Hajdu and Hajdu: 2011). Another solution to the Easterlin paradox is that if income rises, so do income aspirations, and rising aspirations counterbalance the positive income effect (Easterlin, 1995: 41). This logic has received much less attention in the social research; however, theoretically it is also well founded. Brickman and Campbell (1971) developed the concept of the hedonic treadmill, according to which humans adapt very quickly to change in their objective circumstances, so that any gain in satisfaction lasts only for a while. The impact of income aspirations on life satisfaction seems to have been tested only once by Stutzer (2004), using Swiss data. According to his findings, income aspirations decrease life satisfaction by about the same magnitude as income increases it. According to the authors argument, the extent of income aspirations may be influenced by the income-comparison effect (i.e. relative income): people living in richer regions usually have higher aspirations, and this continues even after controlling for the difference in living standards between rich and poor regions. In this article we will shed light on the negative relationship between income aspirations and life satisfaction. Data The data come from the Special Eurobarometer survey, which is a harmonized survey carried out in the 27 Member States of the European Union. In this analysis we use the merged dataset for two surveys carried out in 2009 (reference number: 321, wave number: EB.72.2) and 2010 (reference number: 355, wave number: EB.74.1).

To measure life satisfaction, we used the following question: All things considered, how satisfied would you say you are with your life these days? Please tell me on a scale of 1 to 10, where 1 means you are very dissatisfied and 10 means you are very satisfied. The literature is not totally agreed either on whether subjective well-being should be measured by life satisfaction (Hajdu and Hajdu: 2011) or by happiness (McBride: 2001), or on whether ordinal or cardinal utility function should be used. In this article we focus on life satisfaction and do not seek to link this concept to subjective well-being by formulating any specific assumptions, like Ferrer-i-Carbonell (2005: 103). Income aspiration was measured using a question about minimum income: In your opinion, what would be the very lowest net monthly income that your household would need in order to have a minimum acceptable standard of living, given the present circumstances and composition of your household? This is net income (in Euros) after tax and social security contributions have been deducted, and once any social benefit entitlements are included. This income was converted to equivalized income by dividing minimum income by the square root of the size of the family. All figures were converted to 2010 prices using the inflation rate for each country. Stutzer (2004) used a similar question, and he found that the minimum income considered necessary was lower than the actual disposable income, and hence was only an imperfect proxy for income aspirations (basically the same result as in our analysis, see Figure 1). However, higher disposable income is paralleled by a higher aspiration for minimum income; this means that minimum income is viewed as relative, which makes it appropriate to measure aspirations. Unfortunately, there is no information about actual household income in the Eurobarometer survey. The only available question asks the respondent to place him or herself on a scale of 1 to 10, where 10 represents a very high standard of living. With this subjective scale, the impact of income cannot be distinguished from the impact of satisfaction with the income. Using this question as a proxy for the material circumstances of the household means overestimating its impact: for example, those who are not satisfied with their income will probably rate the material circumstances of the household lower than those who are satisfied. Though nothing can be done about it, we need to acknowledge the problem. The dataset contains information about satisfaction with the standard of living, but it would be wrong to control for that, since we cannot be sure whether income or satisfaction with income enhances life satisfaction (in other words the impact of income very likely incorporates the impact of the satisfaction with it). If we controlled for satisfaction with the standard of living, the impact of household material circumstances would be underestimated; moreover we could not be sure that the dependent variable (life satisfaction) is independent of that (it may well be that these two variables are strongly interrelated). The empirical analysis The aim of this paper is to find out whether the negative relationship between income aspirations and life satisfaction is common across European countries. The answer to this question is yes or more precisely, yes, but... To arrive at an appropriate answer, we need to clarify other questions as well: Are income aspirations connected to the material circumstances of the household in other words, do people adapt to a given standard of living? If people do adapt (for example, if higher material circumstances go together with higher aspirations), how frequently do the aspirations exceed the level of material resources? Furthermore, what is the impact of such excessive aspirations (and indeed of income aspirations generally) on life satisfaction? And finally, what differences are to be found in the impact of income aspirations?

Let us answer these questions one by one. In Figure 1, equivalized net household income (data from EU-SILC) is plotted against income aspirations (equivalized net minimum income). One can see a relatively strong positive relationship: in better-off countries (x-axis) people require a higher minimum income (y-axis). However, it is also noticeable that in richer countries (where disposable income is more than EUR 1,000 a month) a one-unit increase in disposable income translates to a smaller gain in income aspirations than is the case in countries with lower disposable income. There are only three countries (Romania, Bulgaria and Hungary) where the level of aspiration exceeds the level of disposable income. These countries are above the x=y line. Figure 1 The connection between income aspirations and disposable income in the EU Member States
2000

LU

x=y

Regression line IT DK

1500 Income aspirations

GR

FR SE NL DE FI BE AT UK

1000
BG CZ HU EE SK PL LV LT PT SI

ES

MT

500
RO

0 0 500 1000 1500 2000 2500 Disposable income 3000 3500 4000

R-Squared=0.8335

Income aspirations (y axis): Equivalized net minimum income in Euros. Prices are inflated to the 2010 income level. Source of data: EB.72.1 (2009) and EB.74.1 (2010). Disposable income (x axis): Equivalized net household income in Euros. Prices are inflated to the 2010 income level. Source of data: EU-SILC. Data refer to 2009 income year. Applied equivalence scale: the square root of the number of household members. Cyprus and Ireland do not appear on the diagram due to missing data.

In the graph, disposable income was used from an external dataset. We now perform the same type of analysis at an individual level (not using country-means). Since material circumstances and minimum income are measured on different scales, the following procedure is employed. First, both the variables in each country are standardized separately. The standardized coefficients can be interpreted as the distance between the mean values, where the unit of distance is the standard deviation. Then the difference between the two standardized variables is calculated (aspirations minus material circumstances). This shows whether an individual holds the same place in the country-specific distributions of the two variables. If the difference is positive, individuals have higher aspirations than their selfplacement based on material circumstances. In the case of a negative value, the respondent compared to the country averages requires less minimum income than his/her material circumstances would suggest. Table 1 contains the descriptive statistics on this discrepancy index by country. As one can see, the median of this variable is below the 10 per cent

standard deviation unit in the majority of countries, and exceeds that value only in Lithuania, Italy and Estonia (countries are ranked according to the median value in column P50). It is also noticeable that positive deviations (see the maximum values) have a much higher level in absolute value than negative deviations (comparing column Maximum to column Minimum). This means that in some cases respondents tend to have unrealistic aspirations; in this case, there is a sizeable mismatch between material circumstances and income aspirations. Table 1 Some descriptive statistics, by country, on the difference in minimum income and material circumstances
Minimum -3.15 -3.36 -4.10 -3.72 -3.94 -3.66 -3.39 -3.48 -3.48 -4.59 -4.10 -3.34 -3.83 -3.78 -4.12 -3.58 -3.45 -4.59 -3.39 -3.44 -4.25 -4.01 -4.37 -4.15 -3.34 -3.06 -4.02 P5 -1.85 -1.73 -1.86 -1.98 -1.96 -2.01 -1.74 -1.90 -1.99 -1.97 -1.92 -1.88 -2.29 -1.85 -1.92 -2.07 -1.92 -1.92 -1.84 -1.76 -1.84 -1.85 -1.90 -2.01 -1.84 -1.83 -2.03 P50 -0.16 -0.14 -0.12 -0.10 -0.09 -0.09 -0.09 -0.09 -0.08 -0.08 -0.08 -0.06 -0.06 -0.06 -0.06 -0.06 -0.05 -0.05 -0.05 -0.04 -0.03 -0.03 -0.02 0.00 0.01 0.04 0.06 P95 2.18 2.27 2.22 2.16 2.40 2.32 1.87 2.29 2.29 2.39 2.15 2.26 2.27 2.10 2.22 2.23 2.12 2.09 1.75 1.91 2.28 2.11 2.21 2.49 2.06 1.87 2.13 Maximum 13.33 7.42 16.63 18.41 9.35 16.17 16.39 10.24 6.37 5.26 15.95 6.78 7.49 14.21 9.10 6.12 9.08 13.84 18.59 16.80 6.20 15.52 10.09 4.88 5.61 15.30 6.14 Mean 0.03 0.00 0.01 0.01 0.04 0.01 -0.02 0.02 0.01 0.04 0.02 0.00 -0.02 0.04 0.03 0.02 0.03 0.03 0.03 0.03 0.03 0.04 0.03 0.07 0.03 0.07 0.03 Standard deviation 1.41 1.27 1.38 1.37 1.36 1.41 1.20 1.31 1.28 1.36 1.33 1.31 1.41 1.34 1.28 1.31 1.26 1.37 1.29 1.38 1.26 1.35 1.29 1.37 1.18 1.30 1.26

LV IT EE LT FI BE PL SI GR AT HU IE MT FR UK CY ES CZ PT SK NL SE DE LU BG RO DK

Let us turn to the question of whether income aspirations decrease life satisfaction. Table 2 contains the results of an OLS regression. The dependent variable is life satisfaction. The independent variables include material circumstances of the household, the usual socioeconomic variables and country fixed effects. Our particular interest focuses on the impact of income aspirations. In column A we can see that the estimated coefficient is negative. Controlling for all other characteristics, if someone doubles his expectations of minimum income, that means a 0.06-point (ln[2]-0.09) decrease in life satisfaction. Compared to the impact of material circumstances, this is moderate, since a one-unit increase on that 10-point scale means a 0.5-point increase in life satisfaction. However, as was mentioned earlier, the impact of material circumstances is overestimated, since it is probably biased by satisfaction

with standard of living. Stutzer (2005) found, for example, a somewhat lower impact in the case of household income. Column B contains the impact of excessive aspirations on life satisfaction (this is basically the discrepancy index shown in Table 1). The estimated coefficient is again negative. It is somewhat less than in the case of income aspirations; however, we should bear in mind that the unit of measurement is different for the two variables. One standard deviation change causes nearly the same change in life satisfaction. Table 2 Explaining life satisfaction, unstandardized OLS coefficients
Dependent variable: Life satisfaction Material circumstances Income aspirations
Equivalized minimum income (ln)

A 0.544*** -0.086***

B 0.52***

Excessive aspirations
(standardized aspirations minus standardized material circumstances)

Year = 2009 Ref. Year = 2010 -0.018 Female Ref. Male -0.186*** Age -0.04*** Age square 0*** Primary education Ref. Secondary education 0.097** Tertiary education 0.351*** Retired -0.13* Self-employed Ref. Employed 0.016 Inactive -0.544*** Student 0.429*** Village 0.058* Town Ref. Large town -0.046 Country fixed effects Yes F-stat 405.96*** R square 0.28 N 44350 *** The coefficient is different from zero at 1 per cent significance level. ** The coefficient is different from zero at 5 per cent significance level. * The coefficient is different from zero at 10 per cent significance level.

-0.035** Ref. -0.019 Ref. -0.186*** -0.041*** 0*** Ref. 0.095** 0.348*** -0.13* Ref. 0.013 -0.543*** 0.428*** 0.06* Ref. -0.047 Yes 406.54*** 0.28 44350

The impact of aspirations is, however, not homogeneous. In the case of poorer1 individuals, income aspirations (Table 3, Panel A) and excessive aspirations (Table 3, Panel B) decrease life satisfaction more than among well-off respondents. Among the rich (whichever definition is applied), aspirations do not have any impact on life satisfaction. This finding is similar to that of Ferrer-i-Carbonell (2005), who basically discovered that relative income has a larger effect among the poor. It is up to future research to find out whether the difference between
1

We applied basically two definitions. We identified as poor those who placed themselves on level 1, 2 or 3 of a 10-point material circumstances scale, or who answered that they had much less money than was indicated as the minimum acceptable in the minimum income question. Similarly, the rich were identified as those who placed themselves on level 10, 9 or 8, or who answered that they had much more than the minimum acceptable income.

rich and poor can be explained by the fact that the poor usually compare their income to that of the rich, while those at the top of the income distribution find it harder to identify a richer reference group.

Table 3 The impact of aspirations on life satisfaction according to material status a sensitivity analysis (unstandardized OLS coefficients)
Dependent variable: Life satisfaction Poor Net income of the household Low material is much less circumstances than the (Values: 3, 2, indicated 1) minimum income 0.64*** -0.22** 0.56*** -0.13*** 0.55*** -0.16* 0.51*** -0.07** Rich Net income of the household High material is much more circumstances than the (Values: 10, 9, indicated 8) minimum income 0.2** 0.06 0.22** 0.05 0.41*** 0.05 0.43*** 0.02

The impact in the Definition of income status whole sample (Table 1) Material circumstances A Income aspirations
Equivalized minimum income (ln)

0.54*** -0.09*** 0.52*** -0.04**

Material circumstances B Excessive aspirations

(standardized aspiration minus standardized material circumstances)

Other control variables: yes; country fixed effects: yes. The control variables are identical to those appearing in Table 1. The OLS models were run on a selected sample. The selection criterion is defined in the first row of the table. *** The coefficient is different from zero at 1 per cent significance level. ** The coefficient is different from zero at 5 per cent significance level. * The coefficient is different from zero at 10 per cent significance level.

If we consider that the positive impact of material circumstances is counterbalanced by the negative impact of aspirations, we should find out why this does not hold in the case of the rich. One solution is offered by the research of Kahneman and Deaton (2010). Those authors found that material resources do not increase life satisfaction according to some monotone increasing function; instead there is an inflection point in income, after which any further increase does not translate into a gain in life satisfaction (because emotional and relationship aspects gain emphasis). If we continue this logic, it may be that, once the satiation point is reached, neither income nor aspiration has any impact on life satisfaction. It could serve as an indication of this that when we investigated the connection between disposable income and income aspirations (Figure1), we also found some elasticity. In richer countries the same unit increase in disposable income translated to a smaller gain in income aspirations. Indisputably, however, more research is needed to test this hypothesis. Summary and some statements about the connection between life satisfaction and aspirations 1. The average magnitude of income aspirations in a country is positively related to disposable income. In those countries where disposable income is low, people find a lower level of minimum income acceptable. However, there is some elasticity in the connection between income aspirations and disposable income. The discrepancy between the minimum income and disposable income increases with increasing disposable income (Figure 1). In other words, respondents adapt to a certain level of income and articulate their aspirations on the basis of this income level. 7

2. Income aspirations are quite realistic. However we could not compare economic aspirations to real material resources; what we could do was compare the deviation from the country-means in income aspirations and perceived household resources (Table 1). Based on this comparison, we can conclude that, on average, people tailor their aspirations to the perceived level of income. On the one hand, this finding underlines the fact that aspirations grow if material resources increase. On the other hand, however, we should consider that the level of discrepancy (in absolute value) is much higher if aspirations exceed perceived material resources than vice versa. 3. Income aspirations and excessive aspirations both decrease life satisfaction (Table 2). The positive impact of material resources on life satisfaction is somewhat counterbalanced by the negative impact of aspirations. This relationship also holds when country fixed effects and some socio-economic variables are controlled for. 4. The negative impact of aspirations is stronger among the poor. This contradicts somewhat the assumption that income and aspirations go together, but it might be explained by some recent findings that, beyond a certain income level, increasing income does not translate into a gain in life satisfaction (Table 3). Literature BRICKMAN, Philip and CAMPBELL, Donald T. (1971). Hedonic relativism and planning the good society. In: APLEY, M. H. (ed.), Adaptation-level Theory: A Symposium. New York: Academic Press: 287302. EASTERLIN, Richard A. (1974). Does economic growth improve the human lot? Some empirical evidence. In: DAVID, Paul A. and REDER, Melvin W. (eds), Nations and Households in Economic Growth: Essays in Honour of Moses Abramowitz. New York and London: Academic Press: 89125. EASTERLIN, Richard A. (1995). Will raising the incomes of all increase the happiness of all? Journal of Economic Behavior & Organization, 27: 3548. FERRER-I-CARBONELL, Ada (2005). Income and well-being: An empirical analysis of the comparison income effect. Journal of Public Economics, 89: 997 1019. HAJDU, Gbor and HAJDU, Tams (2011). Elgedettsg s relatv jvedelem. Szociolgiai Szemle, 21(3): 83106. HIRSCHMAN, Albert O. (1973). Changing tolerance for income inequality in the course of economic development. Quarterly Journal of Economics, 87: 54466. KAHNEMAN, Daniel and DEATON, Angus (2010). High income improves evaluation of life but not emotional well being. Proceedings of the National Academy of Sciences, 107(38): 1648993. MCBRIDE, Michael (2001). Relative-income effects on subjective well-being in the crosssection. Journal of Economic Behavior & Organization, 45: 25178. SENIK, Claudia (2004). When information dominates comparison. A panel data analysis using Russian subjective data. Journal of Public Economics, 88: 2099123. STUTZER, Alois (2004). The role of income aspirations in individual happiness. Journal of Economic Behavior & Organization, 54: 89109.