Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245696 
Year of Publication: 
2021
Series/Report no.: 
IZA Discussion Papers No. 14645
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
The answer is that people's evaluations of their income situation are based on different considerations when the economy is expanding and when it is contracting. When, in the course of economic growth, incomes generally are rising, evaluations tend to be dominated by "social comparison"—what is happening to the incomes of others. An increase in the incomes of others undercuts the tendency for happiness to grow with an increase in one's own income, and happiness remains fairly constant. But in a recession, as people increasingly have difficulty meeting their fixed financial obligations, the benchmark for income evaluations turns inward. "Financial hardship", the shortfall from one's own previous peak income, takes over, and the greater the shortfall, the less one's happiness. There is thus an asymmetry in the psychological roots of income evaluations when income is rising vs. falling , and this causes a corresponding asymmetry in the response of happiness to the direction of income change.
Subjects: 
happiness
life satisfaction
subjective well-being
economic growth
GDP
income
easterlin paradox
recession
social comparison
financial hardship
JEL: 
I31
D60
O10
O05
Document Type: 
Working Paper

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