Psychology | Economical psychology » Christopher J. Boyce - Subjective Well-Being, An Intersection between Economics and Psychology

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Subjective Well-Being: An Intersection between Economics and Psychology By Christopher J. Boyce Thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in Psychology University of Warwick, Department of Psychology September 2009 ii TABLE OF CONTENTS 1 Subjective Well-Being Research: An Overview. 1 1.1 The Development of Subjective Well-Being Research in Economics and Psychology . 2 1.11 The Use of Subjective Well-Being Data as a Proxy for Utility . 3 1.12 Subjective Well-Being – A Viable Tool for Economic Analysis . 6 1.2 Overview of Key Research Areas . 8 1.21 Income and Well-Being . 9 1.211 Evidence of a Relationship between Income and Well-Being 9 1.2111 Income and Well-Being over Time 9 1.2112 Income and Well-Being within a Country 10 1.2113 Income and Well-Being across Countries 10 1.212 Explaining the Income and Well-Being Data – Relative Income Effects 11 1.2121 Relative Income Effects in Economics 12 1.2122 Relative Judgment

Models in Psychology 13 1.2123 Rank Income Effects 14 1.213 Explaining the Income and Well-Being Data – Income is relatively Unimportant for Well-Being . 15 1.214 Explaining the Income and Well-Being Data – Personality 18 1.2141 Controlling for Personality in Economics 20 1.2142 Personality Interacts with Demographic Characteristics 21 1.22 Employment Status and Well-Being. 23 1.221 Unemployment 23 1.222 Occupational Status 24 1.3 Overview of the Thesis . 25 2 Money and Happiness: Rank of Income, not Income, Affects Life Satisfaction . 27 2.1 Abstract . 27 2.2 Introduction . 28 Method . 30 2.3 2.4 Results . 31 2.5 Discussion . 36 3 Money or Mental Health: The Cost of Alleviating Psychological Distress with Monetary Compensation versus Psychological Therapy . 38 3.1 Abstract . 38 3.2 Introduction . 39 3.3 Money - A Common Metric for valuing Life Events and the Movement towards Compensation . 40 The Clinical and Cost Effectiveness of Psychological Therapy . 41 3.4 3.5 A Cost

Effectiveness Comparison between Psychological Therapy and Direct Financial Compensation . 42 3.6 Practical Implications of our Argument . 45 3.61 For Judges . 45 3.62 For Policy Makers and Society . 47 4 Understanding Fixed Effects in Human Well-Being . 49 4.1 Abstract . 49 4.2 Introduction . 50 iii 4.3 The Use of Personality Measures in Economics. 56 4.4 Methodology . 58 4.5 Data . 63 4.6 Results . 67 4.7 Conclusion . 77 4.8 Appendix . 80 4.81 Note to Tables . 80 4.82 Personality Variables in GSOEP . 81 4.821 Big Five Personality Inventory 81 4.822 Positive and Negative Reciprocity 82 4.823 Locus of Control 83 4.824 Pessimism 83 5 Which Personality Types have the Highest Marginal Utilities of Income? . 85 5.1 Abstract . 85 5.2 Introduction . 86 Methodology . 90 5.3 5.4 Data . 92 5.5 Results . 95 5.51 Robustness Tests . 100 5.6 Conclusion . 103 Appendix . 106 5.7 5.71 Note to Tables . 106 5.72 Personality Variables in GSOEP . 106 5.721 Big Five Personality Inventory 107 5.722

Individual Autonomy 107 5.723 Pessimism 108 5.724 The Construction of Personality Measures 108 6 The Dark Side of Conscientiousness: Conscientious People Suffer more from Unemployment . 110 6.1 Abstract . 110 Introduction . 111 6.2 6.3 Method . 113 6.31 Participants and Procedure . 113 6.32 Measures . 114 Results . 115 6.4 6.5 Discussion . 118 7 Do People Become Healthier after Being Promoted?. 121 7.1 Abstract . 121 7.2 Introduction . 122 7.3 Earlier Work. 122 7.4 Methodology . 125 7.5 Data and Estimation Issues . 126 7.6 Results . 129 7.7 Objections and Counter Arguments . 136 7.71 Issue #1: Noise . 137 7.72 Issue #2: Endogeneity . 137 iv 7.73 Issue #3: Poor Health as a Predictor . 138 7.74 Issue #4: Sample Changes . 139 7.8 Conclusion . 141 7.9 Appendix . 142 7.91 Notes to Tables . 142 7.92 Sample Construction . 143 7.921 Control Groups 143 7.922 Treatment Groups 143 7.93 Definition of GHQ Mental Ill-health . 144 8 Conclusion . 145 8.1 Summary . 145 8.2 Implications for

Economic-Psychology Subjective Well-Being Research . 148 8.21 The Use of Large Data Sets in Psychology . 148 8.22 Improved Understanding of Social Comparisons . 149 8.23 Rank Based Comparisons . 151 8.24 Subjective Well-Being Research and Policy . 151 8.25 The Link between Health and Occupational Status . 152 8.26 Personality within Economics. 153 8.3 Conclusion . 154 9 References . 155 v LIST OF TABLES AND FIGURES Table 2.1: Pooled OLS regression on life satisfaction comparing logarithm of absolute income and income rank by sample. 32 Table 2.2: Pooled OLS regressions on life satisfaction comparing logarithm of mean income and income rank using various reference groups . 34 Table 4.1: Summary statistics across the 6 year panel used in analysis and a longer 12 year panel (N = 93016/135486) – non-standardised . 66 Table 4.2: Fixed effect, REMT and pooled OLS life satisfaction regressions 68 Table 4.3: Predicting the fixed effects residual (from column 2 of Table 42) using the

mean levels of various objective characteristics and personality variables . 70 Table 4.4: Correlations between observable characteristics and the unobservable component of the fixed effect residual errors . 73 Table 4.5: Introducing personality into life satisfaction regressions using the fixed effect vector decomposition technique (3rd stage) and the random effects model . 74 Table 5.1: Summary statistics (N = 93256) – non-standardized 94 Table 5.2: Fixed effect and pooled OLS life satisfaction regressions 96 Table 5.3: Fixed effects and pooled OLS analysis of income interactions with personality 99 Table 5.4: Robustness of the personality-income interactions 101 Table 6.1: Two hierarchical regression analyses predicting the life satisfaction of individuals in the years following unemployment . 116 Table 7.1: Pearson correlation coefficients for the three ill-health measures 129 Table 7.2: Ill-health over time within the whole sample 129 Table 7.3: Cross-section regression

equations for subjective ill-health, visits to the doctor, and mental strain . 130 Table 7.4: Ill-health among the non-promoted non-supervisors and those promoted to manager (at time T) . 132 Table 7.5: Ill-health among the non-promoted and those promoted to any category (at time T) 135 Table 7.6: Difference-in-Difference ((T+3)-(T-1)) estimates (with controls) for individuals working in the public sector and in the manufacturing industry, those individuals who stay at the same address across all 5 years and those who stay in the promoted position up until T+5 . 136 Table 7.7: Probit equations using health at T-1 as a predictor of promotion 138 Table 7.8: Regressions showing health differences across promoted groups, and those who subsequently left the workforce or changed role . 140 Figure 6.1: The life satisfaction change following unemployment as moderated by conscientiousness . 118 vi ACKNOWLEDGMENTS This thesis would not have been possible without the help, advice and

encouragement from so many people. I have been extremely fortunate First, I would like to thank Gordon Brown and Andrew Oswald for absolute first rate supervision. Both have always made themselves available to give me great guidance in my academic development. I have taken great pleasure from our many meetings and both have never failed to inspire me. I am also in great debt to Alex Wood who has been pivotal in my development as a researcher and who helped me develop so many of the ideas in this thesis. I would also like to thank the department of psychology at the University of Warwick for making the transition from economics to psychology surprisingly easy and providing an excellent academic climate in which to pursue my research. Everyone in my office has been hugely supportive and I’d like to thank them for lifting my spirits on many a grey day. I am extremely grateful to Roxanne Rees-Channer whom without I would never have thought it possible for me to do a PhD. Thank you for

helping me to believe in myself There are also many close friends who have shared with me both the good and bad times during the last 3 years. Thank you for listening to my moans I’d also like to thank everyone I’ve ever had a conversation with about my “happiness” research and for helping me to stay passionate about what I do. Finally, I’d like to thank my family for their love. vii DECLARATION The research reported in this thesis is my own work unless otherwise stated. No part of this thesis has been submitted for a degree at another institution. Chapter 2 was written in collaboration with Gordon Brown and Simon Moore. Chapters 3 and 5 were written in collaboration with Alex Wood. Chapter 6 was written in collaboration with Alex Wood and Gordon Brown and Chapter 7 was written in collaboration with Andrew Oswald. Chris Boyce viii NOTE ON INCLUSION OF PUBLISHED WORK Certain chapters have been previously published during the period of the PhD registration Copyright

of these papers resides with the publishers, but under the terms of the copyright agreements these papers are reproduced as chapters in this thesis. These papers are as follows Chapter 2: Boyce, C. J, Brown, G D A, Moore, S C (in press) Money and happiness: Rank of income, not income, affects life satisfaction. Psychological Science Chapter 4: Boyce, C. J (in press) Understanding fixed effects in human well-being Journal of Economic Psychology. Chapters 3, 5 and 7 are currently under review. ix LIST OF ABBREVIATIONS ALT: Adaptation Level Theory BHPS: British Household Panel Survey CBT: Cognitive Behaviour Therapy FE: Fixed Effects FEVD: Fixed Effect Vector Decomposition GHQ: General Health Questionnaire GP: General Practitioner GSOEP: German Socio-Economic Panel OLS: Ordinary Least Squares R: Income Rank RE: Random Effects REMT: Random Effects with a Mundlak (1978) Transformation RFT: Range-Frequency Theory SES: Socio-Economic Status SR: Subjective Income Rank SWB: Subjective

Well-Being x ABSTRACT This thesis uses subjective well-being data to understand the impact that an individual’s economic circumstances have on their well-being. Chapters 2, 3, 4 and 5 look specifically at the role of income on well-being; whilst Chapters 6 and 7 focus on the effect of employment status. This thesis draws heavily on psychological concepts and ideas; highlighting that an interdisciplinary approach to subjective well-being data can have substantial benefits to the study of well-being. Chapter 2 seeks to understand how people compare their incomes with one another. Relative judgment models from psychology are explored and the evidence suggests that individuals may be concerned with their rank position rather than their absolute position or how they compare relative to a mean level. Applying this idea to relative income studies it is shown that an individual’s rank income provides a better explanation of life satisfaction than either absolute income or their income

relative to the mean income of those around them. Chapter 3 highlights that although more money may reduce psychological distress it is a relatively inefficient way to do so. This chapter provides medical evidence to suggest that psychological therapy is a more efficient way to reduce psychological distress. Income growth does not appear to increase national well-being in developed countries so this chapter suggests that increasing access to mental health care could be a better way to raise national well-being. Personality, although appropriately controlled for, is mostly ignored by economists researching subjective well-being data. Chapters 4, 5 and 6 therefore explore the use of personality measures in economic subjective well-being research. Chapter 4 proposes a new methodological technique that incorporates personality measures. Chapters 5 and 6 then show that personality interacts with important economic variables. These chapters show that personality is an important aspect to be

understood by economists. Chapter 7 demonstrates the importance of using longitudinal data to understand causal effects on well-being. Improvements to occupational status have been argued to lead directly to improvements to health. This argument has been based solely on the cross-sectional association that individuals with high occupational status tend to have better health. Chapter 7 shows that improvements to occupational status actually tend to increase mental strain. Taken altogether these studies suggest that subjective well-being data provides a useful arena in which interdisciplinary research can be conducted. 1 CHAPTER 1 1 SUBJECTIVE WELL-BEING RESEARCH: AN OVERVIEW This thesis takes a cross disciplinary approach to understanding human happiness. How can we improve our lives? How can we be healthier, happier and more satisfied? Such questions seem fundamental to the human condition and have been continually discussed and debated throughout human history. Ancient Greek

philosophers, for example, considered eudaimonia – directly translated as “happiness”, but a more accurate meaning would be “human flourishing” – to be the most important of human goals. In the United States’ Declaration of Independence of 1776, the pursuit of happiness, alongside life and liberty, is touted as one of the unalienable rights of its citizens. In the present day some researchers have suggested that well-being indices should be favoured over commonly used economic indices like Gross National Product (Diener, 2000; Easterlin, 1974; Kahneman, Krueger, Schkade, Schwarz, & Stone, 2004; Marks & Shah, 2005). Although the importance of and concern for happiness within an individual’s life is unquestionable, what do we really know about what makes an individual happy? When compiling research in the 1960s on the characteristics of the happy individual, Wilson (1967) remarked that their had been relatively few advances in the theory of the happy life since

the ancient Greeks. Whether this statement was an accurate reflection of the times or not, the research into what makes an individual happy has since thrived. Researchers now routinely use self reported measures of well-being to understand human happiness. Such subjective well-being research, however, includes more than just the study of the transitory emotion of happiness. The term reflects both the cognitive and affective evaluations an individual has about their existence, including aspects of an individual’s physical and mental health. Such evaluations have been shown to be distinctly separate (Lucas, Diener, & Suh, 1996), 2 having their own set of correlates, which can be usefully analysed. The use of subjective wellbeing data, therefore, allows researchers to empirically test many of their well-being hypotheses It would perhaps be fair to now say that there have been considerable advances in the study of human well-being since the ancient Greeks (Diener, Suh, Lucas,

& Smith, 1999). This thesis attempts to add to our knowledge of what improves human well-being. To do this the thesis focuses entirely on an individual’s economic circumstances, for example their income and employment status. Specifically this thesis considers the importance of income rank for individual well-being, suggests an alternative way of increasing the well-being of our nations besides economic growth, shows that personality measures can help us understand how economic circumstances impact on well-being, and questions whether improvements to occupational status will bring health benefits. The topics covered in this thesis, although wide-ranging, share one common theme: They all draw heavily on concepts and ideas from psychology to answer important economic questions. 1.1 The Development of Subjective Well-Being Research in Economics and Psychology Subjective well-being research forms part of what is often referred to as the positive psychology movement (Seligman &

Csikszentmihalyi, 2000). Positive psychology is a focus on the positive elements of the human experience. The movement is concerned with human flourishing and akin to the Greek’s intended meaning of the word eudaimonia. More simply the movement attempts to understand how individuals can live their lives in more fulfilling and satisfying ways. This concern for understanding the positive aspects of the human experience arose in reaction to a discipline that, post-World War 2, had largely become pre-occupied with the negative. Psychologists had a relatively good understanding of mental illness and its treatment, but could offer very little in the way of help to individuals who, although not 3 necessarily mentally ill, could neither be defined as mentally healthy. Although early humanistic psychologists, such as Maslow (1954) and Rogers (1959), saw mental health as a continuum and developed theories on how to improve individual functioning and mental health, it is only in recent

years that psychology has fully embraced the study of the positive. Subjective well-being research forms an important part of this study of the positive, seeking to understand how individuals can shine during relatively benign conditions (Seligman & Csikszentmihalyi, 2000). There has been a great deal of progress in subjective well-being research in recent decades, as the extensive reviews carried out by Wilson (1967), Diener (1984) and Diener et al. (1999) show. Initially the concern was with determining the individual characteristics that were most strongly correlated with high well-being. Wilson (1967) found – using only bivariate associations – that happy individuals tended to be young, healthy, well-educated, well-paid, extroverted, optimistic, worry-free, religious, married with high self esteem, have high job morale and modest aspirations. Many of these early conclusions, however, which focused heavily on demographic factors, have since been overturned and psychologists

have increasingly focused on psychological factors, such as personality, adaptation, goal striving and coping strategies. More up to date evidence suggests that individuals with high subjective well-being are those that have a positive temperament, do not ruminate excessively over bad events, live in economically developed societies, have strong social relationships and possess adequate resources to progress towards their goals (Diener et al., 1999) 1.11 The Use of Subjective Well-Being Data as a Proxy for Utility Psychologists have naturally dominated the development of subjective well-being research but in the last decade or so economists have begun to show considerable interest in the area. Economists have recognised that subjective well-being research has the potential to unlock 4 answers to questions that have previously been thought of as unanswerable by acting as a proxy for an individual’s utility. The concept of utility – the satisfaction derived from consuming goods

– permeates modern economic thought. Essentially all economic behaviour is assumed to reflect an attempt to increase one’s utility and therefore any observation of an individual’s behaviour should reveal something about their preferences. This revealed preference approach, pioneered by economists such as Samuleson (1938), is central to modern economic thought and has been for most of the twentieth century. If an individual chooses one bundle of goods over another then theory states that it is simply because it is preferred and therefore must yield more utility. Although an individual’s decision is based on the principle of utility maximisation this does not necessarily mean the maximum utility will actually be realised. For this to realistically occur, individuals would need to be perfectly rational, have perfect recall and foresight, and have access to all information. Researchers have pointed out that there is often a wide gap between an individual’s “decision utility”

and their “experienced utility”, and that as a result individuals may conceivably make sub-optimal choices (Kahneman, Fredrickson, Schreiber, & Redelmeier, 1993; Kahneman, Wakker, & Sarin, 1997). It has now been well documented, mostly by psychologists, that individuals exhibit many cognitive biases and consistently make bad, or seemingly illogical, economic decisions. For instance, it is well known that individuals favour the avoidance of losses over the acquisition of gains and that they subjectively weight probabilities non-linearly (Kahneman & Tversky, 1979). There are strong endowment effects, whereby individuals tend to place higher values on the objects that they own than ones they do not (Kahneman, Knetsch, & Thaler, 1990; Thaler, 1980), and an economic decision can be heavily dependent on the way it is framed (Tversky & Kahneman, 1981). Some researchers argue that individuals have neither the 5 access to all the necessary information nor the time to

make truly optimal decisions and therefore rely mainly on heuristics – short cut answers (Gigerenzer & Selton, 2001; Gigerenzer & Todd, 1999). Nevertheless, in order to understand an individual’s preferences and what brings the greatest utility, economists have generally analysed an individual’s economic decisions. However, utility, as it was originally conceptualised, was more akin to “experienced utility”. The concept of utility was initially developed by utilitarianists, such as Bentham (1748-1832) and Mill (1806-1873), who suggested using the term utility to represent the tendency for an object or action to increase or decrease overall happiness (Read, 2007). Their proposition was that individuals ought to desire the things that brought them the most utility. They suggested that, in theory at least, it would be possible to obtain the total utility of some action by summing up the total amount of pleasure that an action brought to an individual. They further argued

for the maximisation of social utility and that the morally right action was the one that produced the greatest amount of pleasure for the greatest number of people. Although their theory of utility suggested that individuals desired the greatest amount of utility, at no point did their formulation imply that individuals would necessarily choose the option that would yield the most utility. The inability to measure utility served as a major limitation to the utilitarianists’ idea of utility. Utility as it was originally conceptualised fell afoul of economists, such as Vilfredo Pareto (1848-1923) and Lionel Robbins (1898-1984) (Vaggi & Groenewegen, 2003), and as discussed in Read (2007), the original conception of utility was eventually abandoned. Economists soon came to favour the observation of an individual’s behaviour and decisions. At the time economists had not figured out a way to measure utility, and hence actual experienced utility was unobservable. The argument was

that behaviour was observable and that decision 6 utility would in any case make a good approximation to experienced utility. The revealed preference approach, which assumed that rational individuals chose the option according to a stable set of preferences, soon became dominant. In this model utility became of no intrinsic relation to happiness and could not be compared or aggregated across, or even within, individuals. Utility simply became an abstraction that could be used to state that if an individual had chosen x over y then x must necessarily have a higher utility than y. However, with the rise in subjective well-being research the measurement of utility in the way utilitarianists originally suggested finally seemed a possibility. 1.12 Subjective Well-Being – A Viable Tool for Economic Analysis The use of subjective well-being data rests on the assumption that such data are a suitable proxy for an individual’s utility. Researchers at Leyden University, such as Van Praag

(1971) and Kapteyn (1994), were the first to suggest the use of subjective data to measure welfare in economics. The Leyden approach, as it became known, initially focused solely on economic welfare and set out to determine what individuals considered to be, for example, very bad, bad, sufficient, good or very good incomes. The values assigned were found to vary considerably across individuals and were dependent on a number of economic and non-economic factors (Van Praag & Frijiters, 1999). An interest in economic welfare soon developed into a concern for general welfare and well-being. At the time the Leyden approach was particuarly novel and as such came against substantial criticism from economists who generally consider utility as immeasurable (e.g Seidl, 1994) Even in the present day economists are unconvinced of the use of subjective data to answer economic questions or inform policy. For example, Johns and Ormerod (2007) comment that national well-being levels, although they

may not have risen in line with GNP, have also not 7 appeared to have risen in line with other aspects that one would firmly expect to contribute to well-being, such as rising longevity, greater gender equality, and improved democratic institutions. They take this as evidence that subjective well-being data is an insensitive measure of welfare. Will Wilkinson (2007) argues that current well-being measures, due to very simple and sometimes inconsistent questioning, are blunt instruments that cannot be realistically interpreted or aggregated across individuals. Researchers have also warned of increased paternalism (Johns & Ormerod, 2007; W. Wilkinson, 2007), believing that the individual is always in the best position to make decisions that will promote their own well-being. However, many of the findings from the use of subjective well-being data suggest that free-market models might not always be the best way of promoting overall happiness (Layard, 2006a). In economics

subjective well-being research is still relatively young and many of the findings challenge economic thought of the last 200 years. Although some scepticism within economics is only natural the current findings are somewhat compelling and need considerable reflection. There is much less scepticism in psychology where subjective well-being data has been in use for much longer. Psychologists have spent considerable time ensuring that the self-reported measures they use have both reliability and validity. That is, measures of well-being yield consistent results across repeated tests and they truly represent the intended underlying construct (Fordyce, 1988; Lepper, 1998; Lucas et al., 1996; Pavot & Diener, 1993a; Sandvik, Diener, & Seidlitz, 1993). Further, there is strong evidence that self reported measures predict observable behaviour. For instance, self report measures have been shown to be related to how often an individual genuinely smiles – the Duchenne smile (Ekman,

Friesen, & Davidson, 1990), the length of an individual’s life (Palmore, 1969) and coronary heart disease (Sales & House, 1971). Individuals that report themselves to be satisfied with life are much less likely to commit suicide 8 (Koivumaa-Honkanen et al., 2001) and positive well-being has been shown to directly relate to health-relevant biological processes. It has additionally been shown that happy countries have less hypertension (Blanchflower & Oswald, 2008). Ultimately subjective responses from individuals about how happy or satisfied they are with their lives cannot simply be ignored. Self report measures are of course far from perfect For example, there is still some concern over whether scores can be treated as cardinal or ordinal (Ferrer-i-Carbonell & Frijters, 2004) and, due to it being unlikely that scores will be comparable across individuals, self report measures cannot yet be aggregated across individuals in the way originally suggested by

utilitarianists (Read, 2007). Nevertheless, the use of subjective wellbeing data to proxy for utility has helped researchers understand the contribution that economic circumstances have to an individual’s well-being. Economic subjective well-being research, or “happiness economics”, as it has popularly and perhaps misleadingly become known, is a rapidly growing area of research. The use of subjective well-being data in economics is seen by some economists as a large step forward and its use is gradually, and rightfully, being acknowledged as a useful counterpart to the revealed preference approach (Frey and Stutzer, 2002). 1.2 Overview of Key Research Areas Subjective well-being is currently researched by economists and psychologists with equal rigour. In spite of this there are often huge gaps in the way that economists and psychologists approach the topic. In part, this arises due to fundamentally different research questions Additionally, however, subjective well-being

researchers are not always aware of the progress made outside of their immediate field. Much of the work in this thesis centres on the relationships between income and well-being and an individual’s employment status and wellbeing. These relationships have received extensive cross-disciplinary coverage, as the next 9 section demonstrates, but there are key differences across the disciplines and therefore important gaps. This thesis attempts to highlight this disciplinary divide and show how these gaps could be bridged to benefit both disciplines and ultimately our understanding of human happiness. 1.21 Income and Well-Being The importance of income for well-being is an area in which there has been a healthy amount of interest from both psychologists and economists. This section first discusses the evidence for a relationship between income and well-being. It then discusses possible explanations and offers ways in which these explanations can be explored and refined. 1.211

Evidence of a Relationship between Income and Well-Being There are several ways in which to determine whether income is positively related to well-being – researchers can identify the correlation between income and well-being either; over time, within a country or across countries. The evidence for each is discussed below 1.2111 Income and Well-Being over Time One of the earliest and most influential studies on income and well-being came from the economist, Richard Easterlin in 1974. Many years ahead of the explosion of subjective wellbeing research in economics, Easterlin (1974) questioned whether economic growth had improved the human lot. Instead of using productivity data or standard of living indexes that would give an objective answer to his question, Easterlin used the proportion of randomly sampled individuals that stated they were “very happy” with their lives. He was able to demonstrate using this subjective data that, in developed countries at least, economic growth

had not seemed to improve the human lot. It appeared that once countries achieved a certain level of economic development, further development was associated with very little increases in average 10 national well-being. Although there are some that are sceptical of this finding (C S Fischer, 2008; Hagerty & Veenhoven, 2003; Stevenson & Wolfers, 2008) it has been replicated on numerous occasions, by both economists and psychologists (Blanchflower & Oswald, 2004; Diener & Oishi, 2000; Easterlin, 1995; Kenny, 1999). Such a finding could invite one to question why economic growth remains a priority in developed countries. 1.2112 Income and Well-Being within a Country But does money buy happiness at the individual level? If we only observed people’s behaviour then our conclusions would be that it surely must. Utility maximising individuals choose to spend money on goods and services; implying that money, by allowing them to increase the goods and services that they can

buy, ought to bring them more utility. Early research into the relationship between income and well-being within a country was mostly carried out by psychologists (Diener, 1984; Diener & Biswas-Diener, 2002; Haring, Stock, & Okun, 1984; Myers & Diener, 1995; W. Wilson, 1967) and it has consistently been found that within a country individuals with higher incomes tended to also have higher well-being. Economists have further shown using longitudinal data that this relationship may be truly causal (Frijters, Haisken-DeNew, & Shields, 2004; Gardner & Oswald, 2007). 1.2113 Income and Well-Being across Countries Easterlin (1974) also asked whether richer countries were happier countries. The evidence he presented suggested that richer countries were not happier. However, there were a number of issues with his original research as pointed out in Veenhoven and Hagerty (2003). Easterlin has since updated his work (Easterlin, 1995) and, as has been replicated on numerous

occasions, there is in fact a positive relationship between a countries income and their well-being (e.g 11 Diener, Sandvik, Seidlitz, & Diener, 1993; Hagerty & Veenhoven, 2003). However, this positive relationship appears to be concave and beyond $10,000, the average income level appears to have very little effect on average well-being (Frey & Stutzer, 2002). The relationship between income and well-being across countries is not entirely reliable. Not only are there cultural limitations to making subjective well-being comparisons across countries but further it is likely that there are other factors that accompany high income per capita, such as democracy (Inglehart, Foa, Peterson, & Welzel, 2008), health or basic human rights (Frey & Stutzer, 2002), that may have resulted in the higher happiness levels. 1.212 Explaining the Income and Well-Being Data – Relative Income Effects The combination of a correlation between income and well-being within a country and

the fact that economic growth does not appear to increase national well-being leaves something of a puzzle to economists researching subjective well-being (Clark, Frijters, & Shields, 2008). How can increases to income seemingly improve an individual’s utility but not total societal utility? These two findings are commonly referred to as the Easterlin paradox and form the cornerstone of much economic research into well-being. One of the most popular explanations for the Easterlin paradox is that individuals are not concerned with absolute income but with income relative to their peers. Income will improve an individual’s well-being but only if it rises at a faster rate than the income of others. Hence, if everyone’s income increased by the same amount then no one would actually be any better off because relative positions remain unchanged. 12 1.2121 Relative Income Effects in Economics There has been some debate since using simple cross-sectional data by psychologists

over whether the effect of income is relative or absolute (Diener et al., 1993; Hagerty & Veenhoven, 2003; Veenhoven, 1991). Such evidence, however, is based solely on cross-sectional observations and can only be taken as circumstantial. Simple correlations are not enough to conclusively show that individuals care about relative income. Rather than relying on such circumstantial evidence economists have attempted to show that an individual’s relative income is an important predictor of well-being. For example, relative income variables have been shown to significantly predict various measures of well-being (Clark & Oswald, 1996; McBride, 2001). Additionally economists have also shown that there is causal link – with increases to an individual’s relative income leading to increases in well-being (e.g Ferrer-i-Carbonell, 2005; Luttmer, 2005; Senik, 2004). It now seems fairly clear that individual’s care about their income compared to those around them and will feel less

satisfied in the presence of higher earning others. The presence of relative income effects should come as no surprise to economists. The importance of relative concerns and social comparisons has received discussion throughout the history of economics and can be traced back to the works of Adam Smith (1976) and Karl Marx (1952). Veblen (1899) coined the phrase “conspicuous consumption” to refer to a type of consumption that, although not necessary to our survival, signalled to everyone else something about one’s standing or status in the community. Duesenberry (1949) discussed relative concerns with respect to savings. He suggested that in order to maintain self esteem individuals were likely to sacrifice their savings to consume goods that other people have. This “keeping up with the Joneses” effect, or “luxury fever” as Frank (1999) terms it, may mean that collectively 13 individuals may be working too hard and buying things that they don’t really need. However,

it has always been difficult to determine whether behaviour is motivated by relative, rather than absolute, effects. Neumark and Postlewaite (1998) demonstrate that the rise in women entering the workforce can, in part, be explained by relative concerns by comparing the employment decisions of sisters and sister-in-laws. However, as Luttmer (2005) points out, to really differentiate between relative and absolute income effects a proxy for utility in the form of subjective well-being data is essential. It is important that the concern for relative performance is appropriately included in an individual’s utility function (Clark & Oswald, 1998). 1.2122 Relative Judgment Models in Psychology Psychologists have carried out extensive research to suggest that individual’s make relative judgments and have therefore been ready to accept that an individual’s utility is influenced by relative income. They have, for example, demonstrated under experimental conditions that judgments are

often based on some type of relative concern (Helson, 1964; Parducci, 1965; Stewart, Brown, & Chater, 2005). Helson (1964) proposed Adaptation Level Theory (ALT) to model how individuals subjectively assessed an objective stimulus within the context of a set of other stimuli. For example, a typical experiment scenario might require an individual to assess how subjectively heavy a weight feels in comparison to other weights, where 1 = “very light” and 10 = “very heavy”. The model is simple and proposes that an assessment is made by intuitively making a comparison with a weighted mean of the background stimuli; in the example above, an average weight in the context of the other weights might be given a 5 or a 6. If the set of stimuli and mean were to increase so should the comparison level to which an assessment would be made to. The previously average weight would perhaps now be given a 3 or 4. ALT predicts that the individual’s evaluation of a given stimulus will

therefore adapt to the 14 context of comparison. This approach is very similar to that of economists researching relative income effects. It is assumed that individuals compare with the average level of income of those around them. However within psychology the data better support an alternative model of how individuals make subjective assessments: Range-Frequency Theory (RFT) (e.g Parducci, 1965, 1995). RFT suggests that an assessment is given by a weighting of the stimulus’ rank (frequency) and cardinal position relative to the highest and lowest values (range) within the set of stimuli. One issue with ALT is that two differently distributed sets of stimuli can have identical means. The distribution is not considered. An assessment under RFT, however, is modelled on a uniformly distributed rank but anchored by distribution extremes. RFT has been useful in modelling subjective assessments in an array of stimuli but importantly for economics it has been found to help model

assessments of both prices (Niedrich, Sharma, & Wedell, 2001; Qian & Brown, 2007) and incomes (Brown, Gardner, Oswald, & Qian, 2008; Mellers, 1986). RFT has also been shown to be applicable to social comparisons (R. H Smith, Diener, & Wedell, 1989) Outside of experimental conditions the range and skew of an income distribution, as predicted by RFT, affect the average happiness level across communities (Hagerty, 2000). 1.2123 Rank Income Effects The evidence from psychology suggests that the relative income models used in economics can be improved and provides the motivation for Chapter 2. This chapter uses subjective well-being data to explore two relative income models – the reference income model, where individuals compare to the average income of those around them, and a rank income model, which suggests that it is the rank of their income within the comparison set that is important. The reference income model is dominant within economists’ relative income

studies 15 so we test which model has the greatest explanation of life satisfaction. Our evidence, consistent with RFT, favours the rank income hypothesis. We also further consider that comparison is mostly made with those that are better than oneself. There is already some evidence of upward comparisons using the reference income approach (Blanchflower & Oswald, 2004; Ferrer-iCarbonell, 2005). However, we investigate upward comparison using the rank income framework and we show that individuals compare up to twice as much with those above than those below. 1.213 Explaining the Income and Well-Being Data – Income is relatively Unimportant for Well-Being A further, and perhaps less popular explanation, is that more income might simply not be very important for either national or individual wellbeing. The perceived importance of income for well-being depends heavily on how we choose to interpret statistical associations. Generally economists and psychologists interpret the

effects of income on well-being very differently. A recent review, for example, puts the correlation between individual income and well-being within countries at between 0.17 and 021 (Lucas & Dyrenforth, 2006) The correlation between income and well-being varies considerably across countries and can often be much larger in developing countries (Howell & Howell, 2008). However, the correlation can also be much smaller, for example, Diener, Sandvik, Seidlitz & Diener (1993) obtained a correlation of 0.12 in the United States. Income and well-being correlations are nearly always strongly significant, owing to the large sample sizes, but correlations of this size might typically be referred to by psychologists as small (Cohen, 1992). These correlations suggest that, at best, income explains 4% of an individual’s well-being. A psychologist might therefore argue that this small correlation makes 16 income and well-being largely of little interest, particularly when other

factors, such as personality, seem to explain much more of an individual’s well-being. Economists, on the other hand, do not use correlations to view the effect of income on well-being. Simple correlation coefficients are much more useful for interpreting the nonmeaningful scales commonly used within psychology Income is an objective characteristic that can be meaningfully interpreted, enabling economists to make statements, such as, “£10,000 is associated with a well-being rise of X” or “the well-being increase from some life event is equivalent to having an income rise of X” (e.g Blanchflower & Oswald, 2004; Di Tella, MacCulloch, & Oswald, 2003; Ferrer-i-Carbonell, 2005). Some researchers have therefore argued that simple correlation coefficients applied to income and well-being studies can actually be misleading. Lucas and Schimmack (2009), in an attempt to convince psychologists sceptical of income effects on well-being, demonstrate that small correlations can be

translated into large mean life satisfaction differences between the rich and the poor. For example, they show that the life satisfaction for those earning over $200,000 a year is between 0.79 and 088 standard deviations higher than those earning less than $10,000. This observation could lead one, in spite of the low correlation in their data set of between 0.17 and 020, to conclude that income is in fact important for well-being. However, the figures provided by Lucas and Schimmack (2009) must be interpreted with some caution. Firstly, correlation does not imply causality Their analysis is based on simple bivariate associations and the association between income and well-being is mostly driven by third variables, such as an individual’s personality (see section 1.214) Secondly, one must take into consideration the likelihood of an individual’s income increasing from below $10,000 to $200,000. Unfortunately Lucas and Schimmack (2009) do not present the standard deviation of 17

household income but it is likely to be around $30,000. This suggests that to go from $10,000 to $200,000 would require something like a six standard deviation increase in income. When we consider that six standard deviations (3 standard deviations either side of the mean) should contain around 99.7% of the observations in a normally distributed sample, we begin to see how unrealistic a change in income of such a magnitude is likely to be. The correlation coefficient is designed to describe the relationship between two variables in a standardised way. The correlation coefficient reflects how much one variable will move as a result of a one standard deviation change in the other. Hence, an alternative, and perhaps fairer interpretation, of Lucas and Schimmack (2009) is that an individual who had an income one standard deviation higher (around $30,000) than another individual would be approximately 0.17 to 02 standard deviations higher in life satisfaction. If causal effects were

considered then typically the association between income and well-being shrinks by about a third (Ferrer-i-Carbonell & Frijters, 2004), suggesting $30,000 would increase well-being by less than 0.1 standard deviations It is the intention of chapter 3 to illustrate how low the correlation between income and well-being actually is relatively to other aspects of life. To do this, we bring together disjoint areas of research from economics, psychology, law and medicine. This chapter centres its discussion on the law courts and focuses on the use of monetary compensation as a means to help individuals deal with traumatic life events. In recent work Oswald and Powdthavee (2008a, 2008b) use subjective well-being equations to suggest that current recommended compensation payouts are too low. They suggest that to truly compensate someone financially then payouts would actually need to be much higher. We argue that, although this would be a correct interpretation of subjective well-being

equations, the high values suggested actually reflect money’s inefficiency at alleviating psychological distress. We make an alternative suggestion – 18 the use of psychological therapy. We then go on to illustrate, using medical evidence of psychological therapy’s cost-effectiveness, that psychological therapy could be over 30 times more cost effective than money at alleviating psychological distress. We use this evidence to question the pursuit of income growth as a means to increase well-being in developed countries (Blanchflower & Oswald, 2004; Diener & Oishi, 2000; Easterlin, 1995; Kenny, 1999). If money is relatively unimportant to well-being then developed societies might be better off pursuing objectives that are more likely to increase national wellbeing. Mental illness appears to be rising worldwide (Michaud, Murray, & Bloom, 2001) and we suggest that there needs to be a greater focus on mental health and improved access to mental health care, such as

psychological therapy. In Chapter 3 we argue that good mental health is undervalued in our societies and that as a result there could be enormous benefit if resources were channelled into mental health care rather than solely focusing on economic growth. 1.214 Explaining the Income and Well-Being Data – Personality A further explanation of the data, which shows that national income growth does not lead to increases in well-being and that there is only a small correlation between an individual’s income and their well-being, is that there is a third variable that causes both high income and high well-being. For example, it is likely that aspects of an individual’s personality may drive them to earn a higher income yet also mean they have higher levels of well-being over the course of their life. Psychologists have shown that an individual’s well-being can mostly be explained by either personality or genetic factors. For example, Lykken and Tellegen (1996) show that between 44%

and 52% of well-being is the result of individual differences. Once personality is controlled for the effect of income on well-being decreases by up to a third (Ferrer-i-Carbonell & Frijters, 2004). It has further been argued that demographic factors contribute substantially less to 19 well-being compared to other factors such as personality (Argyle, 1999). Psychologists have, therefore, begun to focus less on demographic factors and are instead interested in understanding the types of personality and the psychological processes that accompany high well-being (Diener et al., 1999) One theory of well-being that seeks to understand the role of personality and the psychological processes is the set-point theory of subjective well-being. This is the idea that individuals receive short term fluctuations in their well-being due to changes in their life circumstances, but that given time, they revert back to a baseline level of well-being that is dependent on an individual’s

personality (Headey & Wearing, 1989). Lykken and Tellegen (1996) estimate the stable component of well-being to be around 80%. Adaptation to traumatic life events represents a practical application of set-point theory. An early demonstration of adaptation came from Brickman, Coates and Janof-Bulman (1978), who seemed to show that lottery winners were not significantly happier than a control group and that individuals with spinal-cord injuries were not as unhappy as one might expect. However, these early results have often been criticised (Lucas, 2007; Oswald & Powdthavee, 2008b) - not only are the results based on cross-sectional differences using tiny samples of individuals, but the results have often been misinterpreted to support complete adaptation. Frederick and Loewenstein (1999) provide an in-depth discussion of adaptation and suggest that whilst considerable adaptation seems to take place in some domains (e.g imprisonment, disability and income), it does not appear to

in others (e.g noise, cosmetic surgery and food). Recent longitudinal evidence suggests that, although it can take a while, individuals partially adapt to the loss of a loved one (Oswald & Powdthavee, 2008a). Researchers have also observed that individuals appear to fully adapt to marriage, divorce, widowhood and the birth of 20 child (Clark, Diener, Georgellis, & Lucas, 2008) but not necessarily to unemployment (Clark, Diener et al., 2008; Lucas, Clark, Georgellis, & Diener, 2004) The process of adaptation offers an explanation as to why income growth may not provide as much of an increase to individual and national well-being as one might expect. After the initial benefit of an income increase wears off individuals drift back to a fixed long term level of well-being. Individuals get use to their new wealthier environment (Easterlin, 2001, 2005). Much of the well-being work in psychology attempts to understand what determines this important long term level of

well-being. 1.2141 Controlling for Personality in Economics Economists would generally agree that personality explains a substantial component of individual well-being (Ferrer-i-Carbonell & Frijters, 2004). However, in economics personality is only of limited interest. Economists are much more interested in areas of life that can be changed and influenced by policy, hence personality, due to its apparent non-changing nature (Costa & McCrae, 1980, 1988), seems of little direct intrinsic interest. Economists are very aware of the need to control for non-changing characteristics when trying to establish causal effects on wellbeing. Their main concern is, therefore, with how to control for personality simply and effectively. Although economists have brought advanced statistical techniques to subjective wellbeing research to indirectly control for personality this seems to have precluded an awareness of the huge literature on the development of personality measures. Psychologists

routinely use personality measures that have impressive levels of validity and reliability in subjective wellbeing studies and such measures could prove useful for economic research generally (Borghans, Duckworth, Heckman, & ter Weel, 2008). This thesis devotes several of its chapters to trying to illustrate that personality measures could be hugely beneficial to economic research into subjective well-being. In turn the thesis also 21 attempts to demonstrate to psychologists that an understanding of demographic influences on well-being can also be improved with the aid of personality (Gutierrez, Jimenez, Hernandez, & Puente, 2005). Our work mainly relies on the German Socio-Economic Panel, which is a large data set primarily used by and developed for economists. In a recent wave a number of personality questions were included. Since psychologists do not routinely use these types of large data sets it is therefore rare to find measures like personality included in them. In

Chapter 4 these personality measures are used to suggest an alternative to the dominant statistical technique used by economists in subjective well-being research. Typically economists use what is often referred to as a fixed effect model to control for unobservable personality characteristics. Essentially the fixed effect model focuses on explaining the within-person variation and controls for the aspects of an individual’s well-being that could be considered fixed. This fixed component of well-being is similar to the long term level of well-being that was addressed earlier and discussed in Lykken & Tellegen (1996). Chapter 4 first tries to determine how much of the fixed effect can be explained by personality. The chapter then goes on to suggest an alternative statistical technique to the standard fixed effect model that exploits personality measures and then argues that the alternative technique produces more reliable casual estimates on individual well-being for

characteristics such as marital status, disability and income. 1.2142 Personality Interacts with Demographic Characteristics Chapters 5 and 6 extend the argument for using personality measures in economic research. These two chapters demonstrate that personality interacts with variables that economists are typically more interested in, suggesting that personality cannot be simply indirectly controlled for and largely ignored in the way that it has up to now. 22 Although part of this thesis demonstrates that income is relatively unimportant for wellbeing this does not mean the topic is of little interest. Economists will always naturally be more interested in the effects of income on well-being simply because income is central to the discipline. However, there are two further reasons that should make research into income and well-being of interest to researchers across all disciplines. Firstly, income, unlike personality, can be actively changed through policy and secondly, some

understanding is needed as to why income does not bring as much improvement to well-being as one might expect. Although the data seem to suggest that income is relatively unimportant there remains a belief within our societies that more money will bring substantially greater well-being. Individuals desire higher incomes and the use of financial incentives, either through the tax system or through pay bonuses, to change behaviour is endemic in many developed societies. This sets up the motivation for Chapter 5. Most income and well-being studies only focus on average effects across a large sample. We present evidence that the marginal utility of income varies greatly according to an individual’s personality and suggest that policy could benefit from being personality specific. There has been some call for understanding the interaction between personality traits and external circumstances (Diener et al., 1999) and the work in Chapter 5 answers this call Chapter 6 offers a further

demonstration of when personality can be important for the experience of a life event. Chapter 6 explores the role of conscientiousness when becoming unemployed The topic of Chapter 6, however, will be discussed in relation to the employment status and well-being literature, which is outlined in the next section. 23 1.22 Employment Status and Well-Being Another area in which there has been a great deal of cross-disciplinary research with respect to well-being concerns individuals’ employment status. In the standard economic utility function work typically enters negatively, but there is substantial evidence to suggest that work has many benefits for an individual’s well-being that goes beyond the simple acquisition of income (Myers & Diener, 1995). The remainder of the thesis addresses two separate areas: the psychological consequences from unemployment and understanding the positive association between occupational status and physical and mental health. Researchers across

the disciplines have approached these areas in fairly similar ways. The largest difference appears to be mainly methodological. 1.221 Unemployment Typically individuals suffer deep psychological consequences from unemployment (McKee-Ryan, Song, Wanberg, & Kinicki, 2005) and this goes beyond the simple loss of income. Psychologists have generally been much more interested in the topic of unemployment since, unlike income, it seems to have a substantial impact on an individual’s well-being. For example, in their meta-analysis McKee-Ryan et al. (2005) review over one hundred, mainly psychological, studies, and observe that there is a mental health difference between employed and unemployed of 0.57 standard deviations Although longitudinal studies are less common they further observe that mental health drops on average by 0.38 standard deviations when an individual becomes unemployed. Economists, although beginning their research much later, have generally approached the topic of

unemployment in a similar way (Frey & Stutzer, 2002). However, economists have brought the use of large scale longitudinal data sets to subjective well-being research and with the help of their advanced econometric techniques (see for example 24 work by Clark, Diener et al. (2008), Clark et al (2001) and Winkelmann & Winkelmann (1998)), they have advanced the understanding of the causal effects of unemployment on well-being. One issue identified in unemployment studies, as with that of income studies, is that estimates are generally based on the average effect across a sample. Researchers have established specific circumstances under which unemployment is at its most psychologically damaging. For example, the local unemployment rate (Clark, 2003; Powdthavee, 2007; Russell, 1987; Turner, 1995), the length of unemployment (Clark et al., 2001; Creed, Lehmann, & Hood, 2009; Winefield & Tiggemann, 1989) and the degree of unemployment protection (Nordenmark, Strandh,

& Layte, 2006) all moderate the effect that unemployment has on well-being. However, much less is known about which specific types of individuals suffer the most psychologically following unemployment. This provides the motivation for Chapter 6, which presents evidence that individuals with high levels of conscientiousness suffer the most during unemployment. Typically conscientiousness has a positive relationship with well-being (DeNeve & Cooper, 1998; Hayes & Joseph, 2003) but our finding suggests that under certain circumstances this relationship can be completely reversed. 1.222 Occupational Status Individuals with high occupational status tend to have much better mental and physical health (Marmot, Shipley, & Rose, 1984). The idea of status links in with the earlier discussion of the importance of rank. Epidemiologists have been trying to understand the reasons for this strong correlation and the theory that has dominated the literature is that there is a causal

relationship going from status to health (Marmot, 2004; R. Wilkinson, 2001) The argument underlying their theory is convincing and suggests that individuals in low status positions have low control over their life. A low control in life results in psychosocial stressors and it is these 25 stressors that can be detrimental to human health. It therefore follows that any improvement to status will improve an individual’s level of control and psychosocial stressors will diminish. The result should be a direct improvement to an individual’s health. Most of the evidence for a causal link running from status to health, however, comes mainly from cross-sectional evidence. The problem with relying solely on cross-sectional associations is that it is impossible to determine the direction of causality. A cross-sectional association could be the result of one variable causing a change in another or alternatively it could mean that the two variables move together as a result of a change in

a third variable. This means that whilst higher occupational status may lead to health the cross-sectional association another explanation could be simply that healthy individuals get promoted. Alternatively it could be that some other factor, such as behavioural or genetic factors, causes movements in both. Generally economists are less satisfied with simple cross-sectional associations and much of their subjective well-being research has focused on establishing causal effects. Economists are more aware of the availability of large longitudinal data sets that enable them to control for pre-existing levels of some variable. Chapter 7 applies a longitudinal analysis to the question of whether occupational status improves an individual’s health. As far as we are aware this is the first longitudinal analysis of its kind. We illustrate that although individuals in high occupational positions have much better health than those in lower occupational positions, a promotion between these

positions does not result in better health. We show that in some promotion categories mental strain may even increase. 1.3 Overview of the Thesis This thesis, although primarily concerned with economic decisions and how they contribute to well-being, takes a cross disciplinary approach to the study of subjective well-being 26 data. This thesis uses concepts and ideas from psychology to enhance economic research into subjective well-being. First, a rank income interpretation of well-being is presented (Chapter 2) Second, the low importance of income for well-being is highlighted and it is further suggested that developed societies could gain substantial well-being benefits by investing in mental health care (Chapter 3). Third, the thesis demonstrates that personality measures can be of considerable use to economists researching subjective well-being by showing that they allow alternative statistical techniques to be used (Chapter 4) and that personality interacts with important

economic variables (Chapters 5 and 6). Finally, the thesis demonstrates the importance of longitudinal data to draw causal conclusions by showing that, against common belief, improved job status does not bring health benefits (Chapter 7). 27 CHAPTER 2 2 MONEY AND HAPPINESS: RANK OF INCOME, NOT INCOME, AFFECTS LIFE SATISFACTION 2.1 Abstract Does money buy happiness, or does happiness come indirectly from the higher rank in society that money brings? Here we test a rank hypothesis, according to which people gain utility from the ranked position of their income within a comparison group. The rank hypothesis contrasts with traditional reference income hypotheses, which suggest utility from income depends on comparison to a social group reference norm. We find that the ranked position of an individual’s income predicts general life satisfaction, while absolute income and reference income have no effect. Furthermore, individuals weight upward comparisons more than downward

comparisons According to the rank hypothesis, income and utility are not directly linked: Increasing an individual’s income will only increase their utility if ranked position also increases and will necessarily reduce the utility of others who will lose rank. Previously published as: Boyce, C. J, Brown, G D A, Moore, SC (in press) Money and Happiness: Rank of Income, not Income, Affects Life Satisfaction. Psychological Science 28 2.2 Introduction Is there a true causal relation between money and happiness? According to conventional economics, there is: Money can buy happiness because it can be exchanged for goods that will increase an individual’s utility. Thus money and happiness are assumed to be causally linked, and higher incomes should lead to greater happiness. In line with this absolute income hypothesis richer people are happier than those less well off within the same society (Diener, 1984). The correlation between money and happiness is often small, but effect

sizes are larger in low-income developing economies (Howell & Howell, 2008) and even small correlations can reflect substantial real differences in happiness (Lucas & Schimmack, 2009). Such results, however, do not necessarily reflect a simple causal relation between money and happiness. The idea that absolute income leads to increased happiness is unable to account for the Easterlin paradox – that income and happiness are positively associated within a country at a given time, but not (or less well) correlated within a country over time (Easterlin, 1974). Furthermore, being amongst people richer than oneself can be detrimental to wellbeing variously measured (Blanchflower & Oswald, 2004; Clark, Frijters et al., 2008; Clark & Oswald, 1996; Ferrer-i-Carbonell, 2005; Luttmer, 2005), consistent with income comparison. Self-rated happiness and satisfaction scores have been shown to act as valid and reliable proxies for utility (e.g Lepper, 1998; Sandvik et al, 1993) The

data have therefore been taken to suggest that an individual’s utility is influenced not by absolute level of income but instead by their income relative to that of their peers. The reference income hypothesis is the dominant model of income comparison and suggests that individuals care about how their income compares to the norm, or reference income, of a socially constructed comparison group. Again, a direct causal link is assumed: 29 Increased income will lead to increased utility for an individual if all else is held constant. Individuals gain utility to the extent that their income exceeds the average or reference income of people in their comparison set, and lose it to the extent that their own income falls below the reference level. The average income of an assumed reference group typically negatively and significantly predicts a number of variables related to well-being, consistent with the reference income approach (e.g Clark & Oswald, 1996) Here we suggest instead

that utility is based on an individual’s ranked position within a comparison group – the rank income hypothesis. According to the rank-based model, people gain utility from occupying a higher ranked position within an income distribution rather than from either absolute income or their position relative to a reference wage (Brown et al., 2008; Clark, Kristensen, & Westergard-Nielsen, 2009a; Clark, Masclet, & Villeval, in press; Hagerty, 2000; R. H Smith et al, 1989) For example, people might care about whether they are the second most highly paid person, or the eighth most highly paid person, in their comparison set (which might contain fellow workers of a similar age and qualification level, neighbours, friends from college, etc). The ranked position of an income will be highly correlated with the position of that income relative to a mean, so evidence previously taken to support reference income accounts may be consistent with a rank income account. Not only do rank and

reference based models predict very different savings and consumption behaviour (Bilancini & Boncinelli, 2007) but also, according to the rank income hypothesis, there is no simple causal relationship between money and happiness: An increase in income need not increase ranked position and hence need not increase happiness. A rank based approach to judgment is independently motivated by the fact that judgments about items within a context of other items are known to be influenced by the ranked position of 30 the item along the dimension of interest. This perspective originated within psychophysics in the judgment of quantities like weight or pitch, but has since been extended to economic and social phenomena (e.g Mellers, 1986; Niedrich et al, 2001; Parducci, 1995; Stewart, Chater, & Brown, 2006). Subjective judgments of utility may be governed by context just like judgments of other quantities (Parducci, 1995). There is already some evidence that rank income rather than

reference or absolute income may be important, although previous large scale studies have looked only at satisfaction with economic conditions and not overall life satisfaction. In a study of 16,000 British workers wage satisfaction depended on the ordinal rank of an individual’s wage within a workplace (Brown et al., 2008) Further, a study of 9,000 small neighbourhoods researchers found that satisfaction with economic conditions increased with ranked position within a neighbourhood (Clark et al., 2009a). Other studies have considered rank in the broader context of range-frequency theory (Hagerty, 2000; R. H Smith et al, 1989) However no large-scale study has examined the effect of income rank on self reported general life satisfaction. Here we use data from 12,000 British adults to examine this question. We also examine whether upward comparison (the number of people earning more than oneself) has a greater influence on life satisfaction than downward comparison (Duesenberry, 1949).

2.3 Method We test a simple rank-based model according to which the individual compares themself to a sample of other people in their reference group and assesses whether each sampled individual earns more or less than themselves (Stewart et al., 2006) Those assigned “worse than” (i-1) are compared to the total number within the reference group (n-1). The ratio gives the individual a relative rank (Ri) normalized between 0 and 1: 31 (2.1) Ri  i 1 n 1 We use Ri to predict life satisfaction in a multiple regression after the influence of other relevant variables have been partialled out. Data are taken from seven years of the British Household Panel Survey (BHPS), which is a representative longitudinal sample of British households. All adults, from 1997 to 2004, who answered a life satisfaction question, are included in the analysis1 (n= 86679). Life satisfaction is the respondent’s answer on a 1 to 7 scale to the question: “how dissatisfied or satisfied are you

with your life overall?” and is taken here to proxy for an individual’s utility and standardized. Household incomes were adjusted for regional living cost differences and number of individuals in the household: Total household income was divided by 2004 regional living costs and weighted by household size (adults = 1 unit; each child = 0.5 units) After such adjustment those with children, or those that may stay at home in the presence of a big income earner, will have comparable spending powers. Demographic characteristics were controlled for in all analyses. We first report analyses comparing rank income and income in the overall sample, then divide the sample into reference groups to test the rank income hypothesis against the reference income hypothesis. Finally, we look for evidence of asymmetric (upward) comparison 2.4 Results First, the ranked position of each individual’s income within the entire sample in a given year was compared to the individual’s absolute income

as a predictor of life satisfaction. Table 1 The 2001 wave included no life satisfaction question and was therefore excluded. 32 Table 2.1: Pooled OLS regression on life satisfaction comparing logarithm of absolute income and income rank by sample Independent Variables: Dependent Variable: Life Satisfaction (standardized) 1 2 3 Income Ranka 0.288 (21.46)* Log(Household Incomeb) R-Squared Observations 0.302 (10.60)* 0.10 (18.66)* -0.006 (0.53) 0.0826 86679 0.0838 86679 0.0838 86679 Absolute value of t-statistics in parentheses * significant at 5% level; significant at 1% level All analyses included demographic controls: age, gender, education, marital status, children, housing ownership, labour force status and disabilities, and dummy variables identifying both region and wave. In all cases, these variables accounted for significant variation in life satisfaction. a. Based on the individual’s household income adjusted for household size and deflated by regional

living costs b. Adjusted for household size and deflated by regional living costs 2.1 compares absolute income (logarithmically transformed2) and rank income variables Each is significant when entered as the only income-related predictor after controls (columns 1 and 2). The coefficient from column 1 suggests that, once controlling for other factors, the life satisfaction difference between the highest and lowest earners is 0.29 standard deviations Alternatively, the coefficient on the logarithm of household income shown in column 2 suggests that on average an individual will be 0.1 standard deviations higher in life satisfaction than someone earning about half as much. However, rank explains significantly more of the overall variation (R2) in life satisfaction. Furthermore, when both income variables are entered simultaneously, rank income dominates and absolute income accounts for no additional variance 2 The natural logarithm of income is the transformation typically used in

income and happiness studies so provides a useful benchmark against which to test rank income. Higher order polynomials in income against rank income were also tested, but logarithm of income explained more of the variation in life satisfaction 33 (column 3) consistent with a role for ranked position of income, not income per se, in determining life satisfaction.3 Next, we compared the rank and reference income hypotheses. To do this we constructed various reference groups to explore the possibility that people compare their income to others in the same geographical region (of which there were 19 in the BHPS), of the same gender and education (three levels: graduate, college and neither) giving six groups in total, or of the same age (we used 12 different age groupings: all less than 20 years old, 20-24, 25-29, 30-24, 35-39, 40-44, 45-49, 50-54, 55-59, 60-64, 65-69 and all older than 70). In each case we computed the relative rank of each individual’s income within the reference

group and also the mean income of all individuals within the reference group. We then predicted each individual’s life satisfaction from (a) their relative rank within the reference group, (b) their absolute income (logarithmically transformed), and (c) mean reference group income (logarithmically transformed). We were then able to test the rank income hypothesis against both absolute income and reference income hypotheses. Results are shown in Table 22 and the t-statistics are adjusted for clustering (Moulton, 1990). In all cases the rank position of an individual’s income within their reference group dominated the explanation of life satisfaction. When geographically-defined reference groups were assumed, rank income was significant whilst absolute income was not (column 1). An R-squared comparison further reveals that rank income also explained more of 3 A fixed effect analysis, analyzing the within person variation, was also undertaken. The fixed effect analysis controls for

unobservable heterogeneous factors. Again rank dominates: when entered simultaneously the coefficient on the rank variable is 0.06 and significant, whereas the coefficient on the absolute income variable is 002 and insignificant. 34 Table 2.2: Pooled OLS regressions on life satisfaction comparing logarithm of mean income and income rank using various reference groups Dependent Variable: Life Satisfaction (standardized) Reference Group: Independent Variables: Log(Household Incomeb) Income Ranka Region 1 -0.004 (0.38) 0.101 (16.30)* 0.294 (9.36)* Log(Mean Reference Group Incomeb) Observations R-Squared 2 86679 0.0838 Gender and Education 3 4 -0.004 (0.38) -0.007 (0.50) 0.294 (9.46)* 0.289 (10.89)* -0.050 (0.47) 0.011 (0.11) 86679 0.0826 86679 0.0838 86679 0.0839 Age 5 6 7 8 9 0.101 (7.43)* -0.007 (0.50) 0.003 (0.20) 0.103 (9.43)* 0.013 (0.76) 0.289 (11.07)* 0.270 (4.95)* -0.213 (0.79) -0.130 (0.48) 86679 0.0826 86679 0.0839 86679 0.0838 0.244

(3.68)* -0.365 (2.10)* -0.263 (1.34) 86679 0.0831 86679 0.0840 Absolute value of t-statistics in parentheses (adjusted to account for clustering as a result of aggregated variables (see Moulton, 1990). * significant at 5% level; significant at 1% level All analyses included demographic controls: age, gender, education, marital status, children, housing ownership, labour force status and disabilities, and dummy variables identifying both region and wave. In all cases, these variables accounted for significant variation in life satisfaction a. Based on the individual’s household income adjusted for household size and deflated by regional living costs b. Adjusted for household size and deflated by regional living costs 35 the variation in life satisfaction than the reference group income model (column 2). Neither reference income nor absolute income explained any additional variance over rank income (column 3). Similar results were found when individuals were assumed to

compare themselves to others of the same education level and gender (columns 4, 5 and 6) or to others of similar age (columns 7, 8 and 9). The final analyses examined whether upwards comparisons were weighted more heavily. It is commonly suggested that comparison is asymmetric, being made mostly to those above oneself (Blanchflower & Oswald, 2004; Duesenberry, 1949; Ferrer-i-Carbonell, 2005). Does the model improve when upward comparison is accommodated? The relative rank measure can be adapted in a way such that higher ranked others have greater (or lesser) impact on the individual’s assessment of their own income than those below (above). We refer to this as subjective income rank (SR) (Brown et al., 2008): (2.2) SRi  05  (i  1)   (n  i) 2 (i  1)   (n  i) Here, η captures the degree of upward comparison and increases the weight given to those who earn more. If η = 1, equation 22 can be re-written as equation 21 When η > 1, individuals

earning more than i influence perception of the individual’s rank more than those earning less. If η = 2, for example, the number of individuals that earn more than i matters twice as much as those that earn less. Subjective rank, based on the whole sample for each wave according to equation 2.2 with a given value of η, was compared to the simple relative rank income variable (η = 1). With η set to 175 (the optimal value is based on explaining the highest variation in life satisfaction) significant additional variance is accounted for [F(1, 86641) = 8.75; p < 0.01] The coefficient on the rank variable that incorporates this degree of upward 36 comparison is 0.394 and significant, whereas the coefficient on the absolute income variable is 003 and insignificant This result supports Duesenberry’s (1949) claim that comparison is primarily upwards and shows further that people compare to those above themselves one and a three-quarter times more than those below. 2.5

Discussion In analysis of more than 80,000 observations the relative rank of an individual’s income predicts the individual’s general life satisfaction, and removes the effect of absolute income. In analyses assuming that individuals compare themselves to smaller reference groups, relative rank of income continues to dominate life satisfaction. Results suggest that individuals sample from a reference group and compare their own income with sampled incomes ordinally – satisfaction is gained from each “better than” comparison and lost for each “worse than” comparison. No calculation of mean reference group income is required. We note that rank could be influencing either an “underlying internal utility”, or an individual’s interpretation of their own utility. On the latter interpretation, individuals will score themselves as more happy to the extent that they perceive themselves as ranking higher in happiness than others. Although this possibility is difficult to

exclude, we note considerable evidence for relative effects in neuroscience (e.g Fliessbach et al., 2007) along with the observation that subjective wellbeing ratings correlate well with observable behavioural measures (Ekman et al., 1990; Koivumaa-Honkanen et al, 2001) We also note that income rank may well act as a proxy for more general social rank (Powdthavee, in press), with the analyses then showing that social rank is key to wellbeing. The rank hypothesis carries several implications. First, it assumes no direct causal relationship between income and wellbeing. Unless the individual’s ranked position were perceived to 37 change, income could increase without increasing utility.4 Rank income also predicts a concave utility function when comparison incomes are positively skewed, because an increasing income at the lower end of the income distribution will increase rank faster (Brown et al., 2008; Kornienko, 2004; Stewart et al., 2006) Finally, to the extent that there are

effects only of rank, income distribution cannot affect society’s income-derived utility. However, dissatisfaction could still result from inequality per se (Alesina, Di Tella, & MacCulloch, 2004). Our study underlines concerns regarding the pursuit of economic growth. There are fixed amounts of rank in society – only one individual can be the highest earner. Thus pursuing economic growth, although it remains a key political goal, might not make people any happier. The rank hypothesis may explain why increasing the incomes of all may not raise the happiness of all, while at the same time wealth and happiness are correlated within a society at a given point in time. 4 We note the possibility that “previous self” may enter the comparison set (e.g Vandestadt, Kapteyn, & Vandegeer, 1985), in which case any increase in income could lead to increased utility. 38 CHAPTER 3 3 MONEY OR MENTAL HEALTH: THE COST OF ALLEVIATING PSYCHOLOGICAL DISTRESS WITH MONETARY

COMPENSATION VERSUS PSYCHOLOGICAL THERAPY 3.1 Abstract Money is the default way in which intangible losses, such as pain and suffering, are currently valued and compensated in law courts. Economists have suggested that subjective well-being regressions can be used to guide compensation payouts for psychological distress following traumatic life events. We bring together studies from law, economic, psychology and medical journals to show that alleviating psychological distress through psychological therapy could be at least 32 times more cost effective than financial compensation. This result is not only important for law courts but has important implications for public health. Mental health is deteriorating across the world – improvements to mental health care might be a more efficient way to increase the health and happiness of our nations than pure income growth. Revise and resubmit for Health Economics, Policy and Law 39 3.2 Introduction Putting a price tag on “pain

and suffering” seems an impossible task but judges in law courts are regularly expected to make such decisions. Equating money with an intangible loss may seem peculiar but in tort law an individual who has suffered should, as nearly as possible, be restored to the same position had they not sustained some wrong (Lunney & Oliphant, 2008). In law courts monetary compensation is the expected remedy and there are established monetary guidelines to compensate for the “pain and suffering” of various injuries (Mackay, Bruffell, Cherry, Hughes, & Tillett, 2006). In the UK, the Fatal Accidents Act 1976 provides a one off payment for the “bereavement” of family members. Economists have developed a method to place monetary values on various life events (Blanchflower & Oswald, 2004; Ferrer-i-Carbonell & van Praag, 2002; Powdthavee, 2008). It has further been suggested that such monetary values could be offered as compensation to help overcome psychological distress after

particularly traumatic life events (Oswald & Powdthavee, 2008a, 2008b). The economists’ calculations would suggest that court settlements would need to be much higher than present to fully compensate an individual. The high monetary values reflect money’s ineffectiveness at compensating someone for pain and suffering. We assess the evidence across law, economic, psychology and medical journals and suggest psychological therapy as an alternative. Psychological therapy would be substantially more cost effective than financial compensation at alleviating psychological distress. We extend our argument beyond the law courts and suggest that money’s low importance in achieving mental health has important implications for public health. National happiness levels have remained flat in developed countries in spite of large economic gains. Mental health, on the other hand, appears to have been deteriorating across the world for some time and is estimated to 40 deteriorate still

further (Michaud et al., 2001) The comprehensiveness and accessibility of mental health services, in particular the provision of psychological therapies in publicly funded services, have regularly been questioned. Increasing the investment in mental health and generally broadening access therefore might be a more efficient way to increase the health and happiness of our nations than pure income growth. 3.3 Money - A Common Metric for valuing Life Events and the Movement towards Compensation Monetary values have been calculated across numerous areas of life including; marriage (Blanchflower & Oswald, 2004), social relationships (Powdthavee, 2008), the fear of crime (Moore & Shepherd, 2006), noise (Van Praag & Baarsma, 2005), health (Ferrer-i-Carbonell & van Praag, 2002) and disabilities (Oswald & Powdthavee, 2008b). The income equivalences attached to such events are typically large. For example, the value of a marriage is estimated to be equivalent to having an

extra $100,000 (around £70,000 at today’s exchange rate) each year (Blanchflower & Oswald, 2004). Such values have been calculated using subjective well-being data and computation is relatively simple. The average impact of some life event on an individual’s wellbeing can be determined statistically across a large sample. This impact is then compared to the effect that income has on an individual’s well-being. Typically, a one standard deviation rise in income would be expected to induce a rise in well-being of between 0.17 and 0.21 standard deviations (Lucas & Dyrenforth, 2006) By comparing the two effects researchers can estimate how much extra income an individual would need on average to achieve an equivalent level of well-being as the life event. Compensation for injustices is an important aspect of society. In tort cases, particularly those involving psychological distress, judges are commonly faced with the dilemma of awarding 41 compensation to restore an

individual to the position they were before any injustice took place. Such a decision is mostly subjective, arbitrary and normally takes the form of a one off monetary payment (Mackay et al., 2006) Some researchers have suggested that the psychological impact of particularly traumatic life events can be evaluated in purely financial terms (Clark & Oswald, 2002). With the aim of alleviating psychological distress recent studies have suggested that such figures could be useful in a court of law to guide compensation payouts for individuals who have lost family members (Oswald & Powdthavee, 2008a) or become disabled (Oswald & Powdthavee, 2008b). Such events can devastate the lives of individuals and the sums suggested to help alleviate the psychological distress are large; much larger than those presently awarded by courts. For example, were an individual to lose a partner, then it is suggested that a compensation amount ranging from £114,000 to £206,000 per annum would be

needed to overcome psychological distress. For the loss of a child, individuals would require anything from £89,000 to £140,000 to compensate (Oswald & Powdthavee, 2008a). In the UK the Fatal Accidents Act 1976 recommends a substantially lower payout of just £10,000. If such a financial compensatory argument were extended to unemployment, which is well known to have deep psychological effects beyond the simple loss of income (Darity & Goldsmith, 1996), the income equivalence of psychological distress alone would be in the region of £34,000 to £59,000 per annum (Oswald & Powdthavee, 2008a). 3.4 The Clinical and Cost Effectiveness of Psychological Therapy Researchers have assessed the clinical and cost effectiveness of various treatments for depressed patients (Bower et al., 2000; Ward et al, 2000) The effectiveness of general practitioner care with both cognitive-behaviour therapy (CBT) and non-directive counselling 42 were all compared. Over twelve months all

treatments reduced average depression levels by at least one and a half standard deviations. The average total cost, which even included indirect costs such as work time lost, was less than £1,500. In fact, the improvement was achieved by both CBT and non-directive counselling within the first four months at a total cost of less than £800. 3.5 A Cost Effectiveness Comparison between Psychological Therapy and Direct Financial Compensation Comparing the cost effectiveness of psychotherapy and direct financial compensation in alleviating individuals from severe psychological distress has not been carried out before. There are several ways in which the costs between psychological therapy and direct financial compensation can be compared using the studies already outlined. Oswald and Powdthavee (2008a) estimate that the average psychological impact of losing a partner is about one standard deviation. They suggest that the individual would need to be compensated with at least £114,000

Pro-rata it would cost less than £600 to help the individual adjust to such a difficult life event using psychological therapy. Similarly for unemployment, which has deep psychological consequences, it would be more cost effective to provide individuals with psychological therapy (around £100-£200 pro rata) to overcome their loss of purpose in life and help them back to work rather than solely offering financial compensation. To compare the costs in another way; psychological therapy alleviates psychological distress by one and a half standard deviations at a cost of £800 over 4 months. To achieve a one and a half standard deviation reduction in psychological distress using money alone would require (based on estimates in Oswald and Powdthavee (2008a) and dependent on the statistical technique) somewhere in the region of £179,000 to £292,000 of extra income every year. This 43 illustrates that the alleviation of severe psychological distress could be worth at least £179,000

of extra income each year and suggests that financial compensation is an inefficient way of helping individuals overcome distress. The wide disparity between the effects of psychological therapy and income arises out of the poor ability of income to improve mental health. However, income’s effect on psychological distress in studies such as Oswald and Powdthavee (2008a) is likely to be under estimated. More realistic income effects can be obtained by allocating income randomly to individuals and observing the effects on individuals’ lives. Such an experiment is not possible but researchers have analyzed longitudinally the effect of medium sized lottery wins on psychological distress. An average lottery or pool win of £4,300 is found to bring approximately a quarter of a standard deviation improvement to mental health two years after the win (Gardner & Oswald, 2007). This suggests that even when the best income-psychological distress estimates are considered (Gardner &

Oswald, 2007), psychological therapy is still calculated to be at least 32 times more cost effective than financial compensation. This figure is large and places huge questions on the use of income as an effective compensation method. Our argument is not without its limitations. There are of course inherent difficulties in making inferences across studies and just like the proponents of the use of monetary compensation it is necessary to draw some conclusions from one group of individuals to another5. The evidence on the cost-effectiveness of psychological therapy is not based exclusively on individuals experiencing loss as a result of a devastating life event. Some psychological distress will undoubtedly follow from the loss of a loved one but one may question 5 The argument for using subjective well-being measures to calculate monetary compensation levels must necessarily assume that the effect of income on psychological distress, based on estimates from the entire sample, will be

the same for the small sub-sample who have recently lost a family member 44 whether, what could be considered a fairly normal response, would benefit from psychological therapy. This perhaps calls into question the purpose of psychological treatment more generally One view of psychological therapy is that mental health is a continuum and that everyone, no matter their level of psychological distress, can benefit from psychological therapy. Under this view any psychological distress would be viewed as mental disorder and therefore treatable. Another viewpoint is that mental disorder is dichotomous, in that individuals either have mental disorder or do not. This view suggests that mental disorder is the presence of distorted thought processes that can result in protracted psychological distress. In this latter view the psychological distress that arises as a normal reaction to loss might not be seen as directly treatable. However, it is likely that, without adequate support, some

unnecessary mental disorder will arise from the loss. Therapy should aim to avert such mental disorder Additionally, even if there were a substantial cost difference in helping individuals with loss and those with mental disorders, the cost-effectiveness comparison figure calculated earlier should be high enough to absorb any extra expense. A further issue that requires some discussion is the process of adaptation. People adapt to many of life’s events (Brickman et al., 1978; Clark, Diener et al, 2008) and some individuals will naturally return to their baseline level of psychological functioning given time. If individuals adapt anyway then an argument could be made against the use of psychological therapy. The same argument, however, could be made against the use of monetary compensation, the current default method of addressing loss. In any case individuals do not always fully adapt and even if they did resources should be used in the most efficient manner to relieve psychological

distress in the interim. Oswald and Powdthavee (2008b) address the issue of adaptation and as such suggest that annual compensatory amounts should be reduced each year. Similarly, psychological therapy 45 could be proportionally reduced to help with the lower levels of distress in later years after an event. However, it may turn out that psychological therapy, focusing directly on psychological distress, speeds up the process of adaptation and may even mean therapy is unnecessary in later years. 3.6 Practical Implications of our Argument 3.61 For Judges In tort law an individual who has suffered should, as nearly as possible, be restored to the same position had they not sustained some wrong. The loss of future earnings must undoubtedly be compensated financially. The evidence suggests that following a devastating life event an individual is likely to experience an adverse psychological reaction and our concern is with the efficiency of compensating such an intangible and fairly

normal psychological reaction financially. Currently monetary compensation seems to be unquestionably taken in law courts as the only way of helping an individual overcome psychological distress after a traumatic event. The values currently offered as compensation are arbitrary (Mackay et al., 2006) and, according to economists’ subjective well-being equations, should actually be much higher (Oswald & Powdthavee, 2008a, 2008b). Rather than giving individuals more income to cope with distress it seems sensible to consider other alternatives such as psychological therapy. Can bestowing an individual with money really be expected to help an individual with psychological distress after a traumatic life event? As a compensatory device, money, like most things, can never truly fulfil such a role. The purpose of financial compensation, however, is to alleviate an individual’s psychological distress by helping them to find enjoyment elsewhere. Thus, if a tool is judged by its ability

to alleviate an individual’s psychological distress then the answer may be found in medical research. We have shown that psychological therapy could be 46 much more cost effective than financial compensation. We are not claiming that psychological therapy will entirely prevent what could be considered as a normal adverse psychological reaction but therapy may provide some short term relief. Moreover such devastating life events if not adequately dealt with may lead to maladaptive thoughts and result in undue distress. It is unlikely that financial compensation will protect against such maladaptive thinking. On punitive grounds we are not necessarily suggesting that large court payouts are not justified6. However, we are suggesting that the sums currently offered may not be the best way to help the injured party overcome any psychological distress unless it is decreed, in the best interests of the injured party, that the money gets spent on some form of psychological therapy.

There is currently no legal obligation for individuals to undertake steps to alleviate their psychological distress. However, there is some legal support in New Zealand for an increased use of psychological therapy to help individuals overcome psychological distress that occurs due to the actions of a third party. The Injury Prevention, Rehabilitation and Compensation Act of 2001 requires that the cost of psychological therapy be borne by the state. Financial compensation may not even have the causal effect on a traumatized individual in the way that economists suggest. Additionally, individuals are likely to be unequally affected by financial compensation, for example due to the diminishing marginal utility of income wealthier individuals may require even more income to replenish lost well-being. Financial compensation seems like a poor device for alleviating psychological distress. In contrast psychological therapy does not attempt to act as compensation but instead focuses directly

on 6 There are several theories concerning the purpose of tort, these include; deterrence, corrective justice, risk allocation and distribution of loss. Some, depending on the legal system, would argue that retribution also plays an important part 47 helping individuals to overcome their loss. Psychological therapy acknowledges that trauma is person dependent and is therefore effective, inexpensive and compassionate. 3.62 For Policy Makers and Society We believe our argument has important implications for public health. The high levels of financial compensation that economists suggest help to highlight how inefficient money is at alleviating psychological distress and generally improving individual well-being. Economists are puzzled as to why developed societies are becoming no happier in spite of large income gains (Easterlin, 1995). However, in 1999 unipolar major depression was the fifth leading cause of the disease burden and by 2020 major depression is expected to rise to

the second biggest burden (Michaud et al., 2001) These conflicting findings, along with the evidence presented here, indicate that although income growth may provide some benefit to well-being, the greatest benefit to the health and happiness of our nations could come from improving access to mental health care. Our argument, although clearly comparing across studies and extending from the law courts to wider society, adds a new perspective to public health debate on mental health. Regarding the UK’s National Health Service, Richard Layard (2006b) has suggested that the cost of helping individuals overcome mental health issues using psychological therapy more than outweighs the money saved from reducing the individuals on benefits who are incapacitated by their mental health. Our argument adds further support for increasing the availability of mental health resources by instead suggesting that mental health in its own right is something to be valued alongside economic progress. The

importance of improving mental health for national well-being needs to be further recognized and policy makers must consider improving mental health care further. Individuals are also probably not fully aware of the powerful effects that 48 good psychological therapy can have on their mental health and general well-being. It needs to be understood that aspiring to good mental health can often be more important than aspiring to high income for well-being. Since individuals are unlikely to unilaterally invest in their own mental health there is a strong case for public provision. 49 CHAPTER 4 4 UNDERSTANDING FIXED EFFECTS IN HUMAN WELL-BEING 4.1 Abstract In studies of subjective well-being, economists and other researchers typically use a fixed or random effect estimation to control for unobservable heterogeneity across individuals. Such individual heterogeneity, although substantially reducing the estimated effect of many characteristics, is little understood. This paper

shows that personality measures can account for 20% of this heterogeneity and a further 13% can be accounted for by other observable betweenperson information. This paper then demonstrates that the use of personality measures, in a new technique developed by Plumper and Troeger (2007), can help researchers obtain improved estimates for important characteristics such as marital status, disability and income. The paper argues that this has important practical implications. Previously published as: Boyce, C. J (in press) Understanding Fixed Effects in Human WellBeing Journal of Economic Psychology 50 4.2 Introduction Economists wishing to evaluate how economic circumstances benefit an individual’s life are increasingly turning to subjective well-being data. There are now numerous studies by economists that reveal the benefits of, for example, more income (Blanchflower & Oswald, 2004; Clark & Oswald, 1996; Ferrer-i-Carbonell, 2005; Ferrer-i-Carbonell & Frijters, 2004;

Frijters et al., 2004; Luttmer, 2005; Senik, 2004) and sustained employment (Clark & Oswald, 1994; Di Tella, MacCulloch, & Oswald, 2001; Winkelmann & Winkelmann, 1998). An important concern in subjective well-being studies is how to deal with heterogeneity between individuals that is largely considered to be unobservable. There is some uncertainty as to what individual heterogeneity consists of but the term fundamentally represents fixed factors unique to each individual that drive the individual to earn a higher income or remain in employment yet also enable them to have higher levels of well-being over the course of their life. An example would be the individual’s personality. Any researcher interested in the independent effects of increasing an individual’s income must somehow control for these correlated but largely fixed and unobservable heterogeneous factors. A typical approach to overcome issues of heterogeneity is to exploit panel data and perform either a

random or fixed effect estimation. Since individual heterogeneity is generally viewed as fixed across time, the observation of individuals at several time points allows researchers to statistically control for the heterogeneous factors without having to directly observe or quantify them. Inevitably, when important explanatory variables are unavailable estimation by ordinary least squares (OLS) will result in biased estimates. Ferrer-i-Carbonell and Frijters (2004) document this bias from not appropriately controlling for individual heterogeneity and observe that the positive coefficient on income reduces by about 2/3 when moving from a 51 pooled OLS to a fixed effect estimator. The bias is large and illustrates the necessity of controlling for important yet largely unobservable and unknown characteristics. Ferrer-iCarbonell and Frijters (2004) further suggest that individual heterogeneity, which appears to be an important source of information as to why some individuals have higher

levels of well-being than others, needs to be better understood. This paper aims to elicit an understanding of individual heterogeneity. Aside from controlling for its presence there has been little work directed at understanding what is truly included within the set of fixed heterogeneous factors. Within the well-being literature there is no real consensus on what individual heterogeneity is and the term is often used to reflect aspects of an individual’s character that researchers have difficulty measuring. Some researchers have suggested that in part there is some bias in individual responses to subjective well-being questions due to processes such as anchoring or whether the individual has an optimistic or pessimistic view of life (Clark et al, 2005; Ferrer-i-Carbonell, 2005; Winkelmann & Winkelmann, 1998). It has also been argued that an individual’s health (Winkelmann & Winkelmann, 1998), their capacity to deal with adversities (Ferrer-i-Carbonell, 2005) and their

ability or family back ground (Di Tella & MacCulloch, 2006) are important components of unobservable heterogeneity. Perhaps the most widely cited and most important component of individual heterogeneity is an individual’s personality. Many subjective well-being researchers have in fact made the explicit assumption that the unobservable individual heterogeneity is mainly personality traits (Booth & van Ours, 2008; Ferrer-i-Carbonell & Frijters, 2004; Frijters et al., 2004; Senik, 2004; Vendrik & Woltjer, 2007). It is unclear what is truly contained within the all encompassing term individual heterogeneity yet the assumption that personality is the main component has received 52 little scrutiny. Perhaps unfamiliar to many economists is the fact that personality can be reliably measured and that personality research has a long history in psychology (Winter & Barenbaum, 1999). The use of such personality measures would enable researchers to improve their

understanding of individual heterogeneity and determine how important personality is compared to other factors, such as the individual’s health or background, as a component of individual heterogeneity. Further, an improvement to our understanding of individual heterogeneity may be of benefit in the estimation of subjective well-being equations. The estimation strategy that seems to be favoured in subjective well-being studies to deal with individual heterogeneity is a fixed effect (FE) estimation. Based on the assumption that the unobservable heterogeneity is correlated with explanatory variables the FE model focuses solely on explaining the within-person variation. As a result the individual heterogeneity, which is considered fixed across time, contains no within-person explanatory power. In fact, all of the between-person information is not essential for estimation and is grouped together into what is referred to as the individual fixed effects and mostly ignored. However, this

focus on the withinperson variation is inefficient and the resultant loss of between-person information has been described by Beck and Katz (2001) as like “throwing the baby out with the bath water”. It is therefore not possible to obtain reliable estimates on characteristics that have zero or low withinperson variation using an FE estimation (Plumper & Troeger, 2007). An alternative that circumvents the problem of obtaining reliable estimates on characteristics with low within-person variation is a random effects (RE) estimation. Here, a different assumption is made about individual heterogeneity, in that the heterogeneity is uncorrelated with explanatory variables of interest. This is a strong assumption and, although the RE model is more efficient than the FE model, since it uses both within and between-person 53 information, is likely to produce biased estimates if this core assumption is violated. Mundlak (1978) proposed a solution to this problem by allowing for

correlation between the unobservable heterogeneity and some of the observable characteristics. The random effects model with a Mundlak (1978) transformation (REMT) overcomes the inefficiency problems associated with the FE model but still maintains many of the key FE assumptions. An example of the REMT’s use in subjective well-being research can be seen in Ferrer-i-Carbonell (2005). It is clear that the correlation between the unobservable heterogeneity and observable characteristics is a key factor determining a subjective well-being researcher’s choice of estimation strategy. However, if personality measures can add to our understanding of individual heterogeneity then this correlation problem might not be so critical. The use of personality measures in estimation may allow panel data estimation strategies to be applied to subjective well-being research that are less restrictive than the FE or REMT. It has already been demonstrated that personality measures are a useful

substitute to control for individual heterogeneity when panel data is unavailable (Anand et al., 2009) This paper also exploits personality measures, but instead within a panel data framework, and suggests the fixed effect vector decomposition (FEVD) model, developed by Plumper and Troeger (2007), as an alternative to the FE and REMT models. The FEVD model is based on the standard FE model but also recognises that some of the fixed individual heterogeneity is in fact observable. The FEVD has three stages and, whilst giving the technique efficiency advantages over the FE model by maximising the use of between-person variation, the technique still controls for the truly unobservable component of individual heterogeneity. In the first of the three stages individual fixed effect residuals are estimated using the FE model. Individual fixed effect residuals, which absorb all between-person information, are then decomposed into an observable and 54 unobservable component. Here, available

characteristics that have little or zero within-person variation can be used to predict the fixed effect residual. The final stage then uses the error term from stage two, representing the true unobservable heterogeneity, and all the observable characteristics, as an explanatory variable in a pooled OLS estimation. The FEVD allows the estimation of characteristics that have zero or only small withinperson variations. In studies of subjective well-being the application of FEVD, like the REMT, seems immediately beneficial for obtaining estimates on various demographic characteristics that mostly vary between individuals and not within, for example, age, gender and geographical location, that are unobtainable using the FE model. There are, however, also other important characteristics that are known to change very little over the individual’s life and the use of either the FE or REMT models to estimate the effect of such characteristics can often result in insignificant coefficients. An

example would be the individual’s level of education In some studies, such as Luttmer (2005) and Ferrer-i-Carbonell (2005), the coefficient on education is often found to be indeterminable and invites the conclusion that education does not improve the individual’s life satisfaction. In the face of estimating variables with low or zero within-person variation it might be sensible to opt for either an RE or REMT estimation. However, in addition to proposing the FEVD as an alternative to the FE model for estimating characteristics with low within-person variation, Plumper and Troeger (2007) also conduct Monte Carlo simulations to demonstrate the conditions under which the FEVD provides superior estimates to the FE model. Such specific conditions are not available for models like the RE or REMT. They show that, when a characteristic of interest has a low enough within-person variation, estimation can be preferable using FEVD. They also illustrate that what constitutes a low enough

within-person variation is 55 heavily dependent upon how much that particular variable correlates with the unobservable fixed heterogeneity. However, since the fixed heterogeneity is, by definition, unobservable, no correlation can be obtained. To aid researchers with an application of their technique Plumper and Troeger (2007) suggest that by being able to explain more of the fixed effect residual in stage two reduces the likelihood of a high correlation. In the case of subjective well-being research this would include measures of an individual’s personality. Many characteristics that are typically estimated in subjective well-being equations have fairly low within-person variations. This paper uses subjective well-being data from the German Socio-Economic Panel, which included a number of validated and reliable personality questions in a recent wave. First, it is shown that many of the conventional variables used in subjective well-being research lack within-person variation.

Second, it is shown using valid and reliable personality measures that personality is the main component of individual heterogeneity and that using personality measures to increase our understanding of individual heterogeneity substantially reduces the correlation between the remaining unobservable heterogeneity and important explanatory variables. Collectively these two results make estimation possible using a FEVD. This paper argues that more reliable estimates are obtained on characteristics that have only moderately low within-person variations and this includes the individual’s marital status, disabilities and even income. The next section discusses the measurement of personality and its use within economics. Section 44 gives greater technical detail regarding the FEVD and shows how the technique can incorporate the use of personality measures and be applied to subjective well-being research. Section 45 describes the German Socio-Economic Panel data used in the analysis. The

results are then given in section 46 and section 47 concludes 56 4.3 The Use of Personality Measures in Economics Personality research has a long history in psychology beginning with researchers such as Allport (1937) and Cattell (1946) and has since developed into a systematic analysis of individual differences. Models of personality are generally constructed around natural language and the words used to describe people (for a full development of this lexical approach see John and Srivastava (1999)). The personality literature is dominated by the Big Five Personality Inventory, which suggests at the broadest level of abstraction there are five dimensions of personality. Using factor analysis it has been shown that the large numbers of words used to describe individuals load onto five main themes: openness to experience, conscientiousness, extroversion, agreeableness and neuroticism. Although the model is atheoretical the personality measures such as the Big Five have been shown

to measure what they are supposed to (BenetMartinez & John, 1998; Borkenau & Ostendorf, 1990) making them distinct from indicators of subjective well-being. Models like the Big Five have been used to address some areas that are of economic interest. For example, Mueller and Plug (2006), Nyhus and Pons (2005) and Groves (2005) have all looked at the effect of personality on earnings. Mueller and Plug (2006) show that some personality traits, such as openness and conscientiousness, are rewarded in the market place, whereas other traits, such as agreeableness and neuroticism, are penalised. Nyhus and Pons (2005) draw similar conclusions but also find that the degree of control an individual has is important for earnings. They further find that the financial return to personality varies across educational groups. Groves (2005) investigates the importance of psychological traits, such as autonomy, social withdrawal and aggression in female earnings. Studies such as these may help

explain why even after controlling for many factors, which includes the improved cognitive 57 abilities that come through schooling, there are still large earning gaps. Bowles et al (2001a) have suggested that both school and family pass on many important behavioural traits that enhance the individual’s earning success. However, the use of personality traits in the determination of wages is very much in its infancy (Bowles, Gintis, & Osborne, 2001b). More recently researchers have looked at personality’s relation to an individual’s propensity to share knowledge with work colleagues (Matzler, Renzl, Muller, Herting, & Mooradian, 2008). In fact, a recent discussion paper by Borghans el al (2008) evaluates the integration of personality into economic research more generally. From a theoretical perspective they discuss ample evidence that suggests that personality should be given greater consideration when discussing economic parameters and constraints. Borghans et al

(2008) further suggest that there could be considerable benefit to understanding how economics incentives might influence individuals with different personality traits. In contrast to the approach by economists, a psychologist’s discussion of subjective wellbeing will often centre on personality. Personality enables a categorisation of people and their behaviours and is therefore one of the strongest and most consistent factors predicting the individual’s well-being (Diener & Lucas, 1999). Economists show greater interest in demographic factors, like age, education, income and marital status, which although explaining relatively less of the individual’s well-being (Argyle, 1999) can be influenced by policy. In subjective well-being studies economists only require some way of controlling for personality. By assuming personality is fixed, an assumption that is supported by work in psychology (Costa & McCrae, 1980, 1988), economists are able to control for personality using

the models like the FE and REMT to obtain unbiased causal effects on various demographic factors. The use of personality measures, however, to better understand the fixed effects will help merge subjective 58 well-being research of both psychologists and economists and may help uncover the true causes of high subjective well-being (Gutierrez et al., 2005) 4.4 Methodology At a given time point (t) the individual’s subjective well-being (SWB) is generated as follows: D K M d 1 k 1 m 1 (4.1) SWBit     d  t    k xkit    m zmi  i   it There are some characteristics (δ) which vary across time periods but not individuals, for example, the economic or social conditions that affect everyone equally at a given time point. Other characteristics (x) vary across individuals and time periods and may include aspects such as the individual’s income and employment status. There are other observable characteristics (z) that vary

from individual to individual but not across time, such as gender. Finally, there are other important factors (μ), considered unobservable, that do not change across time periods and are referred to as individual heterogeneity. The key assumption of the FE model is that the unobservable individual heterogeneity is correlated with the observable characteristics. The FE model eliminates the need to worry about any individual heterogeneity (μ) by focusing solely on how much individuals vary from their time-means. This is known as the within-person variation and shown in equation 42 K M k 1 m 1 (4.2) SWBit  SWBi  (   )  ( t   )   k  ( xkit  xki )   m  ( zmi zmi )  (i  i )  ( it   i ) 59 where SWBi  1 T 1 T 1 T 1 T 1 T , , , ,      x z    SWB z x    it  it i T   it i T  i i i it T t 1 T t 1 T t 1 t 1 t 1 By eliminating the individual

heterogeneity (μ) unbiased estimates of the x characteristics can be obtained. However, no estimates of the observable z characteristics are obtainable from such a regression. Inadvertently they will be eliminated alongside the individual heterogeneity and important information will be lost. In contrast the RE model makes better use of the information available. The RE model assumes the unobservable heterogeneity is uncorrelated with observable characteristics. This means that the time-invariant individual heterogeneity, μ, is subsumed by the error term, ε. Reasonable estimates can be obtained as long as the error structure is recognised using an estimator such as generalised least squares (GLS). However, the reliability of these estimates depends on the strength of the assumption that observable characteristics are not correlated with the individual heterogeneity. In studies of subjective well-being it would be difficult to argue convincingly that this was the case. Some

researchers have therefore proposed the use of the REMT. The REMT circumvents this problem by allowing the error structure to take account of the correlation, in a similar fashion to the FE model, by including the time-mean values of the observable characteristics that are thought to be correlated with the unobservable heterogeneity. An issue with such a technique, however, is that there is no clear cut way of choosing which variables are correlated with the unobservable heterogeneity. There are some individual characteristics that it would be difficult to argue weren’t correlated with the unobservable heterogeneity but ultimately the decision is down to a researcher’s discretion. The FEVD is an alternative estimation strategy proposed by Plumper and Troeger (2007) which similarly attempts to overcome the loss of information that occurs using the FE model. 60 The advantage of this technique over the REMT is that Plumper and Troeger (2007) provide clear conditions under which

the FEVD estimation is superior to an FE model. Their technique performs the FE model in its first stage in order to obtain an estimate of the fixed effect residual ( ̂i ). However, they note that the fixed effect residual ( ̂i ) obtained using the FE model is not the same as the true unobservable heterogeneity (μ) outlined in equation 4.1 The fixed effect residual also contains the eliminated information of characteristics contained in z as well as the mean effects of the characteristics contained in x. An estimate of the fixed effect residual ( ̂i ) using the FE model effectively includes all observable and unobservable between-person information. K (4.3) ˆi  SWBi   k xkit   i k 1 Thus, in the second stage of the FEVD technique Plumper and Troeger (2007) suggest decomposing the fixed effect residual into a part that is observable and a part that is not. It is this stage in which greater understanding of the fixed effect can be obtained by

using any available between-person information, which would include personality variables. Here, it would possible to determine what the main contributing factors to individual heterogeneity were. The decomposition takes place using z characteristics to predict the fixed effect residual obtained from stage one. M (4.4) ˆ i    m zmi  i m 1 61 This leaves the true unobservable component of μ, captured in the error term from equation 4.4 and denoted here as η. Next, η is used in a third stage pooled OLS regression as an explanatory variable. D K M d 1 k 1 m 1 (4.5) SWBit     d  t    k xkit    m zmi  i   it Although z variables may have been correlated with μ, they are not correlated with η. Therefore, by including the error term (η) from stage two the FEVD allows researchers to obtain reliable estimates on z characteristics. Plumper and Troeger (2007) discuss the conditions under which

characteristics can be classified as z characteristics and favourably estimated using the FEVD. There are some variables that belong strictly in either the set of x or z variables; they change all the time or not at all. However, there are other variables in which a strict categorisation is not possible For instance, there are some characteristics that simply do not change very much. Obvious examples might include education or marital status. For a huge proportion of a population these types of characteristics may never change, whilst in others they may be changing often. Hence, for part of a given sample, a particular characteristic will behave like a z characteristic, whilst for others, the characteristic will behave like an x characteristic. In the FE model the information from the part of the sample that does not change cannot be used. Similarly, if the characteristic is treated as an x variable in the FEVD then the information is also ignored. However, it is possible to treat some

characteristics as z variables if they have a low within-person variation. If the within-person variation is sufficiently small enough then the trade-off between bias and efficiency favours the efficient estimator. 62 In their Monte Carlo simulations Plumper and Troeger (2007) show using the root mean squared error under what conditions the gain in information at the sacrifice to bias favours estimation by FEVD. Plumper and Troeger (2007) pin-point the ratio of a particular variables between-to-within person variation as a way of distinguishing whether that variable can be better estimated using FEVD. This ratio, however, depends on how well the particular variable in question is correlated with the unobservable heterogeneity (η). For example, when the correlation is 0.5 the between-to-within person ratio must exceed 28 for the FEVD to be the superior estimator. When the correlation drops to 03 the between-to-within person ratio only needs to be 1.7 These between-to-within person

ratios are fairly low and may include many characteristics that economists have so far only estimated using the FE or REMT models. The correlation between unobservable heterogeneity and any potentially low withinperson characteristic is clearly unobservable. However, as Plumper and Troeger (2007) suggest, including additional z variables in stage two of the FEVD and obtaining a better understanding of the fixed effect is likely to decrease the size of the unobservable component (η). If the unobservable component (η) of the individual heterogeneity (μ) is reduced then so too will the likely correlation between any potentially low within-person variables and the true unobservable component. Using the truly unobservable component of individual well-being, the error, η, from stage two of FEVD, it is possible to determine empirically the approximate size of such a correlation. The use of personality measures as additional z variables in stage two of the FEVD increases our understanding

of the fixed effect and therefore reduces this correlation allowing many variables to be favourably estimated using the FEVD model. This reduction in correlation through the use of personality variables may additionally make an RE estimation preferable to REMT. 63 4.5 Data The data used to aid the understanding of the fixed factors that contribute to well-being comes from the German Socio-Economic Panel (GSOEP) survey, a representative longitudinal sample of German households. The survey asks a number of questions about each individual’s life. The list of questions includes a single item life satisfaction question: How satisfied are you with your life, all things considered? Possible responses range from 0, indicating complete dissatisfaction, to 10, indicating complete satisfaction. The response to the life satisfaction question is assumed to be cardinal Other questions in the GSOEP uncover various objective circumstances of an individual’s life. The variables used here

include: demographics, education levels, household income, household size, marital and employment status, the individual’s self-rated health, whether there are children in the household and disabilities.7 In 2005, a series of questions designed to uncover aspects of an individual’s personality were included in the GSOEP. Self-reported personality measures generally have high levels of reliability and validity. Previous research has shown, for example, that self-reported personality measures are highly stable over time (McCrae & Costa, 1990) and relate to peer ratings (McCrae & Costa, 1987). Self report measures also predict both objective behaviour (Epstein, 1979) and occupational success (Hogan, 2005), have biological correlates (Ryff et al., 2006) and relate to changes in objective biological functioning (OCleirigh, Ironson, Weiss, & Costa, 2007). Of the 31 personality questions used here, 15 are a considerably shortened version of the standard Big 7 A description of

all variables and how they were constructed is contained in the Notes to Tables in the Appendix to this chapter 64 Five personality questionnaire, and a further 16 relate to an individual’s reciprocity, locus of control and pessimism. Before being included in GSOEP the short item Big Five scale underwent extensive pre-testing and has been shown to satisfactorily replicate the standard Big five questionnaire (Gerlitz & Schupp, 2005). This scale has been used in studies such as Winkelmann and Winkelmann (2008). There are 6 questions on an individual’s reciprocity The questions on reciprocity can be separated into positive and negative reciprocity and examples of their use can be seen in Dohmen et al. (2008) and Fliessbach et al (2007) There are 9 questions that indicate an individual’s locus of control. This construct can be traced back to the work of Rotter (1966) and the same set of questions has been used in Fliessbach et al. (2007) There is one question that directly

asks the degree to which an individual is pessimistic about the future. Factor analysis confirmed that the 31 personality questions grouped meaningfully into the personality traits outlined above.8 The sole purpose of using the personality measures in this paper, however, is to maximize the explanation of individual heterogeneity. In the main analysis all 31 measures are therefore included as separate predictors, rather than as the grouped personality constructs. The personality questions asked in 2005 are assumed to be reliable proxies for personality across all years of analysis. A key assumption of panel data models is that individual heterogeneity is fixed across time so this seems like a reasonable assumption. However, although innate personality may be relatively stable across time an individual will not necessarily give the same response to a given question each year. It is therefore likely that personality measures will be prone to some measurement error. This represents a

limitation to this study but more accurate personality measures are likely to only add to the explanatory power of individual heterogeneity. It will be interesting to determine how much these available 8 The Appendix to this chapter contains a full list of the personality questions and a description of how the measures combine into meaningful personality constructs 65 measures contribute to the explanation of heterogeneity when compared to other likely sources of heterogeniety, including an individual’s health and background. The panel constructed is unbalanced. All individuals are observed in 2005 and at least one other time point. The period under analysis is 6 years from 2000 to 2005 This time-frame is considerably shorter than the available data in GSOEP and means that the data set is likely to have a lower within-person variation than a longer panel. Estimation by FEVD will therefore be falsely superior according to the conditions set out by Plumper and Troeger (2007).

However, a short data set is needed to ensure that personality measures from 2005 are adequate proxies across the entire period under analysis and can be adequately used to attempt an understanding of the fixed effect. To counter the potential low-within person variation problem the descriptive statistics across a 12 year panel form GSOEP are also shown alongside the 6 year panel in Table 4.1 Across both panels most characteristics have between variations that exceed the within variation. Many important characteristics are also observed to have within-to-between variations exceeding 2 and this suggests that a great deal of observable information will be discarded when using the FE model. Depending on the correlation between the unobservable heterogeneity and any characteristics of interests, as will be empirically approximated later, estimation using FEVD might be the preferable estimation strategy. Concentrating on the 6 year panel used in the main analysis there are 93016

individualyear observations coming from 17210 unique individuals. For ease of interpretation in the later analyses all the variables with intrinsically non-meaningful scales, life satisfaction, self-rated health and all of the personality measures, are standardised with a mean of zero and standard deviation of one. 66 Table 4.1: Summary statistics across the 6 year panel used in analysis and a longer 12 year panel (N = 93016/135486) – non-standardised Variable: Life Satisfaction Mean 6 Year Panel Standard BetweenDeviation to-within Mean 12 Year Panel Standard BetweenDeviation to-within Overall Between Within 7.00 1.74 1.38 1.07 1.29 6.98 1.73 1.32 1.14 1.16 Overall Between Within 2,662 1827.7 1779.9 821.4 2.17 2,511 1644.6 1749.5 801.7 2.18 Age Overall Between Within 47.45 16.09 16.24 1.65 9.84 46.06 15.87 16.15 2.87 5.63 Female Overall Between Within 0.52 0.50 0.50 n/a n/a 0.52 0.50 0.50 n/a n/a Education (years) Overall Between Within 12.07

2.64 2.66 0.30 8.87 11.91 2.61 2.61 0.68 3.84 Household Size Overall Between Within 2.76 1.28 1.21 0.41 2.95 2.83 1.30 1.18 0.56 2.11 Married Overall Between Within 0.65 0.48 0.46 0.14 3.29 0.66 0.48 0.45 0.18 2.5 Separated Overall Between Within 0.02 0.13 0.10 0.09 1.11 0.02 0.13 0.09 0.10 0.90 Divorced Overall Between Within 0.07 0.26 0.24 0.09 2.67 0.07 0.26 0.23 0.11 2.09 Widowed Overall Between Within 0.06 0.23 0.22 0.06 3.67 0.05 0.22 0.21 0.07 3 Self-Rated Health Overall Between Within 2.59 0.93 0.77 0.53 1.45 2.58 0.92 0.74 0.57 1.30 Unemployed Overall Between Within 0.06 0.24 0.17 0.17 1.00 0.07 0.25 0.16 0.20 0.80 Retired Overall Between Within 0.22 0.42 0.38 0.14 2.71 0.20 0.40 0.36 0.17 2.18 Disabled Overall Between Within 0.10 0.30 0.27 0.13 2.08 0.10 0.30 0.25 0.14 1.79 Child dummy Overall Between Within 0.32 0.47 0.43 0.18 2.39 0.34 0.47 0.42 0.24 1.75 Monthly Household Income (Euros)

67 4.6 Results Analysis begins by showing the importance of controlling for individual heterogeneity. In Table 4.2 standardised life satisfaction equations are estimated using pooled OLS, FE and REMT models. All models offer some interesting insights into what makes an individual satisfied with their life. However, there are important differences between the models Both the FE and REMT appropriately control for individual heterogeneity and the FE model has often been interpreted as producing causal effects. The pooled OLS represents a mere association For example, concentrating on the effect size on the log of household income, the FE model has a coefficient of 0.17, whereas the pooled OLS estimator has a coefficient that is nearly twice as large at 033 The coefficient on the FE model suggests that if the individual’s household income were doubled then their life satisfaction could be expected to increase by 0.17 standard deviations The pooled OLS model coefficient would suggest

that, ceteris paribus, if individual x were observed to have a household income twice the size of an individual y, then individual x would be on average more satisfied with their life by 0.33 standard deviations The prediction from the pooled model is after having controlled for all other observable characteristics and presents the main drawback of the pooled OLS model – there are important factors correlated with both income and life satisfaction that are unobservable. Not controlling for these unobservable factors results in biased coefficients. At the sacrifice of efficiency it is sensible to opt for an unbiased estimator such as the FE model. There are, however, other important differences across the pooled OLS and FE models. Some variables do not have enough within-person variation to enable reliable estimation. In Table 4.2 variables with zero within-person variation, such as gender, cannot be included in the fixed effects model. Controlling for age can also be problematic Age

changes within all 68 Table 4.2: Fixed effect, REMT and pooled OLS life satisfaction regressions (1) Dependent Variable: Estimation type Independent Variables: Year Dummies Regional Dummies (2) Life Satisfaction (Standardised) Pooled OLS Fixed Effect (3) REMT Yes Yes Yes Yes Yes Yes Log of Monthly Household Income (Euros) 0.331 (47.40)* 0.170 (15.94)* 0.165 (15.91)* Age -0.021 (16.00)* 0.272 (20.90)* 0.055 (9.62)* 0.007 (5.51)* -0.197 (19.96)* 0.135 (12.47)* -0.255 (10.78)* -0.046 (3.29)* -0.031 (1.83) -0.414 (129.18)* -0.423 (34.72)* 0.061 (5.29)* -0.087 (8.52)* 0.043 (4.90)* -0.003 (0.44) -0.081 (4.81)* 0.041 (1.65) -0.123 (3.46)* 0.101 (2.96)* -0.356 (7.86)* -0.233 (61.62)* -0.297 (23.13)* 0.016 (1.00) -0.087 (5.06)* 0.057 (4.32)* -0.012 (6.31)* 0.207 (10.83)* 0.066 (6.97)* -0.001 (0.27) -0.083 (5.54)* 0.065 (2.75)* -0.137 (4.01)* 0.077 (2.36)* -0.395 (9.15)* -0.240 (63.95)* -0.291 (23.03)* 0.057 (4.38)* -0.037 (2.88)* 0.052 (5.03)* Age squared/1000 Female

Education (years) Log of Household Size Married Separated Divorced Widowed Self-Rated Health (Standardised) Unemployed Retired Disabled Child dummy Mean(Log of Monthly Household Income) 0.192 (12.44)* -0.051 (7.71)* 0.034 (1.17) -0.206 (3.11)* -0.138 (3.39)* 0.423 (8.01)* -0.289 (36.62)* -0.324 (9.72)* Mean(Log of Household Size) Mean(Married) Mean(Separated) Mean(Divorced) Mean(Widowed) Mean(Self-Rated Health) Mean(Unemployed) Constant Observations Number of Never Changing Person ID R-Squared (within) R-Squared (between) R-Squared (overall) -2.006 (32.46)* 93016 0.27 Absolute value of t-statistics in parenthesis * significant at 5%; significant at 1% -1.054 (6.17)* 93016 17210 0.08 0.27 0.19 -2.304 (22.15)* 93016 17210 0.08 0.41 0.29 69 individuals in the same way and when included in the FE model is only interpretable as a linear time trend. As a result when time dummies are included there is little reason to include age as an explanatory variable in the FE model.

Contrastingly, both age and gender can be included in the pooled OLS and the REMT models. These models suggest that women are more satisfied with life and that there is a u-shape relationship between age and life satisfaction (life satisfaction minimises at around 39 in the pooled OLS model). More importantly a closer observation across all the models highlights the difficulty of obtaining reliable estimates on variables that could be termed as slow changing. Table 41 showed that characteristics like education and marital status had very low within-person variations. In both the REMT and FE models in Table 42 the coefficient on education is indeterminable. The coefficients on marital status, on the other hand, vary considerably and in conflicting directions from the estimates given in the pooled OLS model. This leaves some concern over the reliability of the coefficients using both FE and REMT estimations on variables with low within-person variations. The FE model in Table 4.2 is used

to estimate a fixed effect residual for each individual Observable characteristics can then be used to decompose the fixed effect residual in Table 4.3 Column 1 begins by including only observable demographic characteristics; these variables explain 7% of the variation. Column 2 extends the model by further including what could be considered as very slow moving variables; marital status, education and whether the individual is retired. Adding these variables increases the explanation of the fixed effect residual to 10% Column 3 indicates how much personality contributes to an explanation of the fixed effect residual. When grouped into their 9 meaningful constructs the personality measures collectively explain 18% of the fixed effect residual, with most of this explanation coming from an individual’s level of pessimism, locus of control and neuroticism. The explanation of the fixed 70 Table 4.3: Predicting the fixed effects residual (from column 2 of Table 42) using the mean

levels of various objective characteristics and personality variables (1) Dependent Variable: Independent Variables (mean levels): Year Dummies Regional dummies (2) (3) (4) (5) Fixed Effect Residual (from column 2 of table 1) No Yes No Yes No No No Yes No Yes -0.027 (11.16)* 0.326 (12.68)* 0.043 (4.28)* 0.035 (17.40)* -0.015 (2.82)* 0.072 (3.71)* -0.291 (4.85)* -0.213 (7.91)* 0.338 (10.63)* -0.016 (7.42)* 0.234 (10.12)* 0.065 (6.60)* 0.016 (8.29)* -0.006 (1.38) 0.060 (3.45)* -0.263 (4.92)* -0.229 (9.49)* 0.307 (10.80)* 0.144 (12.18)* -0.010 (4.79)* 0.183 (8.05)* 0.072 (7.51)* 0.001 (0.30) -0.022 (3.73)* 0.069 (3.87)* -0.199 (3.78)* -0.178 (7.35)* 0.360 (12.53)* -0.195 (27.08)* -0.029 (1.09) 0.015 (0.63) 0.101 (4.23)* 0.106 (5.36)* -0.051 (3.09)* -0.003 (0.57) 0.014 (2.80)* 0.002 (0.38) -0.003 (0.49) 0.012 (2.33)* 0.004 (0.75) 0.005 (0.99) 0.008 (1.49) 0.021 (3.69)* 0.002 (0.39) 0.011 (2.27)* 0.016 (2.94)* 0.011 (1.84) 0.026 (4.40)* 0.024 (4.75)* 0.008 (1.36) 0.021

(3.72)* 0.019 (3.89)* Log of Monthly Household Income (Euros) Age Age squared/1000 Female Education (years) Log of Household Size Married Separated Divorced Widowed -0.023 (13.21)* 0.309 (16.91)* 0.041 (4.03)* Self-Rated Health (Standardised) Unemployed Retired Disabled Child dummy Standardised Personality Variables: Constructs of the “Big Five” Openness 0.019 (3.59)* Original Values artistic experiences Active imagination Conscientiousness -0.002 (0.45) Thorough worker Lazy Effective and efficient Extrovert Communicative Sociable Reserved Table 4.3 continues on the next page 0.021 (3.75)* 71 Table 4.3 continued Agreeable 0.045 (8.20)* Rude to others 0.002 (0.38) 0.028 (5.62)* 0.015 (2.74)* 0.002 (0.34) 0.027 (5.50)* 0.019 (3.52)* -0.078 (14.99)* 0.012 (2.31)* 0.034 (6.31)* -0.050 (9.65)* 0.012 (2.26)* 0.017 (3.28)* 0.077 (15.22)* 0.007 (1.42) 0.028 (6.09)* -0.054 (10.37)* -0.020 (4.05)* -0.017 (3.18)* -0.016 (3.27)* 0.006 (1.34) -0.044 (8.20)* 0.069 (14.00)*

0.011 (2.25)* 0.023 (5.20)* -0.048 (9.56)* -0.019 (3.93)* -0.018 (3.52)* -0.012 (2.52)* 0.008 (1.68) -0.036 (6.77)* -0.149 (28.74)* -0.150 (29.82)* -0.127 (25.62)* 0.004 (0.79) 17210 0.18 -0.071 (0.96) 17210 0.29 -1.136 (11.13)* 17210 0.33 Forgiving nature Considerate -0.053 (10.24)* Neuroticism Worries a lot Nervous Deals well with stress 0.140 (25.25)* Locus of control Control over life Belief in luck Influencing social conditions Others control their life Success comes from hard work Doubts own abilities Opportunities depend on social conditions Ability is more important than effort Little control in life Pessimism Constant Observations R-squared 0.444 (6.03)* 17210 0.07 0.144 (1.76) 17210 0.10 Absolute value of t-statistics in parenthesis * significant at 5%; significant at 1% 72 effect residual rises to 20% when personality is included as 31 separate scores. Maximising the explanation of the fixed effect residual is most important here so all 31 measures are

used in the subsequent analysis. In column 4 these personality variables are appended to the explanatory variables considered to be slow moving. The overall explanation of the fixed effect residual rises to 29%. Finally column 5 includes the between-person information about the household’s income, whether there are children in the house and an individual’s health and disabilities. The explanation rises to 33%. Table 4.3 illustrates that personality provides the greatest explanation of individual heterogeneity when compared to other observable characteristics. Pessimism, locus of control, agreeableness and neuroticism are particularly important components of individual heterogeneity. The individual’s health is also observed to be an important component This suggests that individual heterogeneity is mostly, although not exclusively, personality. Since a large proportion of individual heterogeneity is in fact observable it may be sensible to consider alternative estimation

strategies. As has been discussed, many of the favoured models are based on an assumed correlation between unobservable heterogeneity and the observable characteristics. The fixed effect residual can also be used to empirically approximate the likely correlation between individual heterogeneity and other observable characteristics. The first column in Table 4.4 shows that there is only low to moderate correlation between observable characteristics and the fixed effect residual. All variables are below 02 The second column controls for demographic characteristics with the correlation rising across many characteristics. However, as personality and other characteristics with very low within-person variation are included in Columns 3 and 4 respectively the correlations substantial reduce. As Plumper and 73 Troeger (2007) show when an observable characteristic is correlated with the unobservable component of individual heterogeneity by just 0.3 the between-to-within person ratio only

needs to be 1.7 to make estimation by FEVD superior to the FE model Focusing specifically on income, the correlation is just 0.09 and has a between-to-within ratio of 217, suggesting that estimation may be preferable using FEVD. Table 4.4: Correlations between observable characteristics and the unobservable component of the fixed effect residual errors Fixed Effect Residual controlling for: Error from predicting the fixed effect residual in: Log of Monthly Household Income (Euros) Age Female Education (years) Log of Household Size Married Separated Divorced Widowed Self-Rated Health (Standardised) Unemployed Retired Disabled Child dummy (1) No controls (2) Demographics (3) Demographics and personality (4) Demographics, personality and characteristics with low withinperson variation Table 4.3 Column 2 0.10* -0.01* 0.00 0.05* 0.02* 0.05* -0.05* -0.12* 0.07* 0.10* -0.06* -0.00 -0.04* -0.01 0.09* -0.01 0.00 0.00 0.03* 0.03* -0.03* -0.02* -0.01 0.09* -0.05* -0.00 -0.04* -0.01 Table

4.3 Column 1 0.13* 0.14* 0.03* 0.08* -0.07* 0.04* -0.05* -0.11* 0.15* 0.20* -0.13* 0.13* -0.03* -0.08* 0.16* -0.01* -0.00 0.12* 0.01* 0.04* -0.05* -0.10* 0.07* 0.26* -0.10* -0.01* -0.08* -0.01* * significant at 5%; significant at 1% The estimations carried out in Table 4.3 represent the second stage of the FEVD technique. Table 45 therefore displays the third stage FEVD results by including the error terms from Table 4.3 as explanatory variables in a pooled OLS estimation In column 1 the error term from the second column in Table 4.3, where only demographic and slow moving variables were used to predict the fixed effect residual in the second stage, is used in estimation. Although efficiency of estimation has been increased it is important to note that the coefficients on variables not used in stage two are similar to those using the standard FE model seen in Table 74 Table 4.5: Introducing personality into life satisfaction regressions using the fixed effect vector

decomposition technique (3rd stage) and the random effects model (1) Dependent variable: Independent variables: Year dummies Regional dummies 31 Personality Variables Log of Monthly Household Income (Euros) Age Age squared/1000 Female Education (years) Log of Household Size Married Separated Divorced Widowed Self-Rated Health (Standardised) Unemployed Retired Disabled Child dummy Error from predicting the fixed effect residual in: Constant (2) (3) Life Satisfaction (Standardised) (4) Yes Yes No Yes Yes Yes Yes Yes No Yes Yes Yes 0.178 (36.53)* -0.025 (28.17)* 0.305 (33.78)* 0.044 (11.09)* 0.030 (34.98)* -0.109 (15.94)* 0.100 (13.30)* -0.270 (16.46)* -0.089 (9.15)* -0.069 (5.95)* -0.235 (102.62)* -0.296 (35.00)* -0.001 (0.19) -0.091 (12.87)* 0.058 (9.62)* Table 4.3 Column 2 0.999 (316.84)* -0.968 (22.53)* 93016 0.288 (57.76)* -0.015 (16.06)* 0.221 (24.04)* 0.067 (15.31)* 0.001 (1.65) -0.129 (18.61)* 0.101 (13.24)* -0.223 (13.43)* -0.064 (6.49)* -0.060 (5.07)* -0.332 (141.91)*

-0.295 (34.42)* 0.059 (7.38)* -0.070 (9.69)* 0.019 (3.13)* Table 4.3 Column 5 1.001 (283.39)* -2.220 (42.41)* 93016 0.276 (33.41)* -0.021 (11.41)* 0.274 (14.59)* 0.051 (5.40)* 0.016 (8.66)* -0.148 (12.13)* 0.098 (6.55)* -0.198 (7.63)* -0.029 (1.49) -0.110 (4.50)* -0.308 (92.25)* -0.345 (29.12)* 0.026 (1.99)* -0.134 (10.51)* 0.043 (4.13)* 0.238 (29.45)* -0.015 (8.33)* 0.221 (12.42)* 0.066 (6.89)* 0.006 (3.14)* -0.109 (9.24)* 0.094 (6.65)* -0.203 (8.06)* -0.045 (2.39)* -0.118 (5.10)* -0.279 (83.99)* -0.326 (27.99)* 0.031 (2.44)* -0.102 (8.29)* 0.032 (3.20)* -1.681 (20.03)* 93016 0.08 0.40 0.26 -1.852 (19.40)* 93016 0.08 0.48 0.33 Observations R-Squared (within) R-Squared (between) R-Squared (overall) 0.65 0.64 Absolute value of t-statistics in parenthesis * significant at 5%; significant at 1% 75 4.2 On the other characteristics used in stage 2, however, some interesting changes occur The estimation in the first column of Table 4.5 suggests that education has a positive effect

on life satisfaction, contrasting the negative and insignificant coefficient seen in the FE and REMT models in Table 4.2 Here, it is useful to comment on the coefficients on marital status in the third stage of the FEVD when compared with the FE model in Table 4.2 The change in the coefficients across the models is not consistent. Married has a coefficient that is nearly three times larger in the FEVD model. In contrast, the coefficient on widowhood is at least three times smaller using FEVD, and the variable divorced reverts from a positive to a negative coefficient. These changes across marital status are inconsistent and this highlights an important issue with the FE model. When comparing the FE and FEVD models it is important to consider the difference between a change in circumstance and maintaining a permanent situation. In marital status, for example, only the changes to the individual’s marital status are important in the FE model. Thus, if there is no change to the

individual’s marital status then the individual will yield no useful information for the FE estimation. However, that same individual may have greater life satisfaction simply from sustaining a particular marital situation for a considerable period of time. For example, it is likely that getting married will increase the individual’s life satisfaction but additionally there are also likely to be well-being benefits from sustaining a healthy marriage for an extended period of time. Similarly, getting divorced may bring immediate life satisfaction benefits as seems to be supported in work by Gardner and Oswald (2006). However, if the individual were to remain in a divorced state for a sustained period then it would seem plausible that there could eventually be adverse consequences for their well-being. The coefficients on widowed invite a similar argument – becoming a widow initially has a large negative impact on the individual’s life. Over 76 time, however, the impact

reduces as the individual adapts to their loss, supporting conclusions in both Clark et al (2008) and Gardner and Oswald (2006). The issue associated with marital status generalises to other variables and highlights a practical concern with the FE model. Column 2 of Table 4.5 shows a further estimation using FEVD using the error term from column 5 of Table 4.3 Since the use of personality measures substantially reduce the correlation between unobservable heterogeneity and important characteristics it enables many of the observable variables to be classified as slow moving enough to be preferably estimated using FEVD. The coefficients are different to the pooled OLS, FE and REMT models seen in Table 42 and, given the core model assumptions, possibly reflect more accurate estimates. Another way of using personality variables, given that the correlation with unobservable heterogeneity and observable characteristics is substantially reduced, could be by using a standard RE model. Columns 3

and 4 show the results from an RE estimation both without and with personality variables respectively. The coefficients are fairly similar to the FEVD coefficients with the personality variables attenuating many of the coefficients in comparison to the pooled OLS model. The FEVD, however, is the preferred model since it satisfies the specific conditions set out by Plumper and Troeger (2007). The pooled OLS model, by not appropriately dealing with unobservable correlated factors, has a tendency to produce biased coefficients. The FE model, on the other hand, discards all between-person information and without a true understanding of individual heterogeneity underestimates the effect on life satisfaction of various individual characteristics. The FEVD by offering an alternative way to deal with individual heterogeneity combines elements of both techniques to enable efficient yet unbiased estimates. The results from column 2 in Table 45 suggest that doubling the individual’s household

income will actually increase their life 77 satisfaction by 0.29 standard deviations The discrepancy with the FE model arises due to the well-being benefits that come about from having a permanently high level of household income as well as increases to household income. Additionally the FEVD provides more reliable coefficients on the effect of age, education, marital status, disabilities and having children. 4.7 Conclusion This paper attempts to understand individual heterogeneity, which has been shown to substantially attenuate estimates of effects when moving from a pooled OLS to an FE model in subjective well-being studies. Here, personality measures are used to increase the understanding of individual heterogeneity and help confirm that personality is one of the main components of individual heterogeneity. Health and other demographic characteristics also provide some explanation of heterogeneity. A greater understanding of individual heterogeneity reduces the correlation

between the remaining unobservable heterogeneity. Reducing this correlation is key, since it allows alternative techniques to be explored, and enables more reliable estimates on variables that have low within-person variations, such as income, education, marital status, disabilities and having children. The use of a FEVD model with personality variables has a tendency to produce estimates that lie someway between estimates on the pooled OLS and FE estimations. For example, using the FEVD the individual’s household income is estimated to be more than 1.6 times more beneficial for the individual’s well-being than is suggested by the FE and REMT models, but around 0.85 that of a pooled OLS model One potential explanation is that there are still other important unobservable components not controlled for using the FEVD. However, another reason could be that the FE and REMT models, by making strong assumptions about the correlation with the unobservable heterogeneity, are simply too

restrictive. Specifically, the FE model leaves 78 no room for uncovering improvements to the individual’s subjective well-being that may simply arise, for example, from having a permanently high income or being in a permanently healthy relationship. Only focusing on changes detracts from the benefits to well-being that may accrue from sustaining a high level or state. The observable between-person information is shown to predict 13% of the fixed effect residual. This decomposition of the fixed effect residual suggests that the fixed effect residual should not be completely termed as unobservable individual heterogeneity and simply disregarded. It contains valuable observable information The fixed effect residual is potentially an untapped source in providing answers as to why some individuals have higher subjective wellbeing than others. The personality measures used here alone explain 20% of the fixed effect residual. Compared to the explanation given by other characteristics,

such as health and other demographic characteristics, this contribution is large. However, there still remains a substantial unexplained component. There are three possible explanations The unexplained component could be due individual heterogeneity that is still largely unknown, for example an individual’s ability. Alternatively, the measures used, particularly the one-item life satisfaction scale, are imperfect and are likely to be measured with some error. Lastly, the FE model, focusing on only changes as discussed earlier, may underestimate the importance of permanent state effects. It is likely that there is some combination of the three but simply terming the individual heterogeneity simply as personality traits and discarding the information seems inappropriate. An important consideration for the future is the availability of personality measures in the large data sets commonly used by economists. Currently many representative national surveys like the GSOEP do not include

questions on an individual’s personality. Such unavailability may prove problematic for the approach outlined in this paper. Economists are relatively unfamiliar 79 with the idea that personality can be measured and this has no doubt influenced the demand for inclusion of such measures in their data sets – this needs to change. Personality has already been shown to be an important determinant of wages (Bowles et al., 2001a) but further work is needed around this area. More generally Borghans et al (2008) have convincingly argued that economic research has much to gain from using reliable and valid personality measures that are used extensively by psychologists. Personality appears to be one of the biggest and most consistent predictors of well-being (Diener & Lucas, 1999) and as shown here is important for understanding both fixed and variable components of well-being. This paper adds to the support for the increased use of personality measures in subjective well-being

research (Anand et al., 2009). A wider inclusion of personality measures in data sets like GSOEP would be of enormous benefit to both personality and economic research. This paper has gone some way in understanding the important fixed effect and shown the importance of exploiting between person information. The use of personality in this context is novel and may allow researchers to relax the statistical technique used to estimate subjective well-being equations. The use of personality measures combined with the FEVD technique may therefore provide an important methodological advance for subjective well-being research. 80 4.8 Appendix 4.81 Note to Tables Variable Description Life Satisfaction A self reported measure of how satisfied the individual is with their life, all things considered, where 0=completely dissatisfied and 10=completely satisfied Monthly Household Income The household’s income in which the individual resides (Euros) Age Individual’s age Female

Individual is female (excluded dummy: male) Education (years) Number of years of education Household Size The number of members in the individual’s household Married, Separated, Divorced, Individual is married, separated, divorced or widowed (excluded Widowed dummy: single) Self-Rated Health Individuals are asked to give a self rating of their current health where 1=Very Good, 2=Good, 3=Satisfactory, 4=Poor and 5=Bad Unemployed Individual is unemployed (excluded dummies: any other responses to occupation position except retired) Retired Individual is retired (excluded dummies: any other responses to occupation position except unemployed) Disabled Disability status of the individual Child dummy Whether there is at least one child in the household (excluded dummy: no children in the household) Personality variables 31 personality variables that measured 8 underlying constructs; openness-to-experience, conscientiousness, extroversion, agreeableness, neuroticism,

individual autonomy, social responsibility and pessimism. See section 482 for a full description of the personality questions and how questions grouped into constructs. 81 4.82 Personality Variables in GSOEP In the questionnaire section entitled “What kind of personality do you have?” individuals are asked 30 questions. 15 of these relate to the “Big five” personality inventory, whilst a further 15 cover aspects of the individual’s reciprocity and control in life. A further question, on pessimism, comes from the “Attitudes and opinions” section. Using factor analysis the measures were found to load onto 9 different personality constructs: openness to experience, conscientiousness, extroversion, agreeableness, neuroticism, positive and negative reciprocity, locus of control and pessimism. 4.821 Big Five Personality Inventory Individuals are asked whether they see themselves as someone who 1. does a thorough job 2. is communicative, talkative 3. is sometimes somewhat

rude to others 4. is original, comes up with new ideas 5. worries a lot 6. has a forgiving nature 7. tends to be lazy 8. is outgoing, sociable 9. values artistic experiences 10. gets nervous easily 11. does things effectively and efficiently 12. is reserved 13. is considerate and kind to others 82 14. has an active imagination 15. is relaxed, handles stress well Individuals are asked whether the statement applies to them on a 1 to 7 scale, with 1 meaning the statement does not apply to them at all and 7 that it applies perfectly. These 15 variables load onto five personality dimensions: Openness to experience, conscientiousness, extroversion, agreeableness and neuroticism. Questions 4, 9 and 14 relate to an individuals openness to experience; questions 1, 7 & 11 relate to conscientiousness, questions 2, 8 & 12 relate to extroversion; questions 3, 6 & 13 relate to agreeableness; questions 5, 10 & 15 relate to neuroticism. These groups of questions can be reverse

coded (as appropriate) and combined to give an underlying score of the personality dimension. 4.822 Positive and Negative Reciprocity Individuals are asked to what extent the following apply to them 16. If someone does me a favour, I am prepared to return it 17. If I suffer a serious wrong, I will take revenge as soon as possible, no matter what the cost 18. If somebody puts me in a difficult position, I will do the same to him/her 19. I go out of my way to help somebody who has been kind to me before 20. If somebody offends me, I will offend him/her back 21. I am ready to undergo personal costs to help somebody who helped me before Individuals are asked whether the statement applies to them on a 1 to 7 scale, with 1 meaning the statement does not apply to them at all and 7 that it applies perfectly. Questions 16, 19 & 21 load 83 onto a construct termed positive reciprocity and questions 17, 18 & 20 load onto the individual’s negative reciprocity. 4.823 Locus of Control

Individuals are asked their attitudes towards their life and future. 22. How my life goes depends on me 23. What a person achieves in life is above all a question of fate or luck 24. If a person is socially or politically active, he/she can have an effect on social conditions 25. I frequently have the experience that other people have a controlling influence over my life 26. One has to work hard in order to succeed 27. If I run up against difficulties in life, I often doubt my own abilities 28. The opportunities that I have in life are determined by the social conditions 29. Inborn abilities are more important than any efforts one can make 30. I have little control over the things that happen in my life Individuals are asked whether they agree with the statements on a 1 to 7 scale, with 1 representing complete disagreement and 7 that they completely agree. These measures reflect an individual’s locus of control and factor analysis show that questions 22, 25, 27 & 30 can be

grouped together to give an indication of this trait. 4.824 Pessimism This is a one item scale. Individuals are asked 31. When you think about the future, are youoptimistic, more optimistic than pessimistic, more pessimistic than optimistic, pessimistic? 84 This variable is treated as cardinal. 85 CHAPTER 5 5 WHICH PERSONALITY TYPES HAVE THE HIGHEST MARGINAL UTILITIES OF INCOME? 5.1 Abstract Economics implicitly assumes that the marginal utility of income is independent of an individual’s personality. We show that this is wrong This is the first demonstration that there are strong personality-income interactions. Individuals who are conscientious, have pessimistic tendencies or feel they have low control over their life get substantially higher marginal utility from their income. Our findings are highly robust and have important implications for the use of financial incentives to influence behaviour. In the future, public policy may benefit from being

personality-specific. Under review at Journal of Economic Behavior and Organization 86 5.2 Introduction Will more money improve an individual’s satisfaction with life, and if so, by how much? The use of subjective well-being data has helped researchers evaluate the role of income in an individual’s life. For example, it has been shown that there are large well-being differences between low and high income earners (Lucas & Schimmack, 2009) and that an exogenous increase to an individual’s income can raise their well-being (Frijters et al., 2004; Gardner & Oswald, 2007). Researchers have also revealed that individuals are mainly concerned with their income relative to others (Ferrer-i-Carbonell, 2005; Luttmer, 2005) and that this relative income effect is thought to explain why economic growth in developed countries has not always increased national well-being (Blanchflower & Oswald, 2004; Easterlin, 1995). The literature on income and well-being is extensive

(Clark, Frijters et al., 2008; Howell & Howell, 2008) but the relationship is far from fully understood. Current research into income and well-being almost always focuses on average effects across a sample (for example, Layard et al. (2008) estimate the average elasticity of income across various samples) Researchers have shown, however, that the benefit from income can vary according to an individual’s health (Finkelstein, Luttmer, & Notowidigdo, 2008; D. M Smith, Langa, Kabeto, & Ubel, 2005) Individuals are also likely to have heterogeneous preferences (Barsky, Juster, Kimball, & Shapiro, 1997), yet very little is known about how the marginal utility of income might vary across a population. How an individual spends their money can be important for well-being and recent research has shown, for example, that engaging in pro-social spending has a strong positive effect on well-being (Dunn, Aknin, & Norton, 2008). Such a finding could indicate that individuals with

particular types of preferences could extract more utility from a given increase to their income. Some researchers have suggested that the role of emotions are hugely 87 understated in economic theory, even though emotions are likely to influence an individual’s enjoyment of particular economic activities (Elster, 1998; Loewenstein, 2000). The experience of emotions habitually is closely linked to an individual’s personality (Revelle & Scherer, 2008), hence it is likely that an individual’s marginal utility of income could be dependent upon their personality. Personality measures are used extensively in psychology (Pervin & John, 1999) and selfreported personality judgments have impressive levels of reliability and validity. For example, self-reported traits are highly stable over time (McCrae & Costa, 1990), are related to peer ratings (McCrae & Costa, 1987), predict objective behaviour (Epstein, 1979) and occupational success (Hogan, 2005), have biological

correlates (Ryff et al., 2006), and prospectively predict changes in objective biological functioning over time (OCleirigh et al., 2007) Such findings have led to personality psychology being studied and applied in many contexts, including health, clinical, psychiatric, educational, and occupational settings. Measures of personality enable a categorization of people and their behaviours but, mostly due to a lack of familiarity, such measures have not yet been fully integrated into economic research (Borghans et al., 2008) In relation to well-being research, it is fairly clear that personality is one of the biggest and most consistent predictors of well-being (Diener & Lucas, 1999). Some authors estimate that between 44% and 52% of the variation in well-being is attributable to individual differences (Lykken & Tellegen, 1996). Economists will also be familiar with the importance of controlling for individual heterogeneity when trying to determine the causal effects of income on

well-being (Ferrer-i-Carbonell & Frijters, 2004). We are concerned, however, that aspects of individual heterogeneity may interact with an individual’s income. For example, the relationship between a change in income and well-being may be 88 dependent on an individual’s personality type. To test this hypothesis we use a well-known longitudinal data set that recently included standard psychological measures of personality to determine whether there are any systematic personality differences between those that gain more utility from their income than others and those that get less. Theoretically the case for the use of personality measures in economics seems strong. Borghans et al. (2008) have argued that personality should be given greater consideration when discussing economic parameters and constraints. They suggest that there could be considerable benefit to understanding how economic incentives might influence individuals with different personality traits. From a

psychologist’s perspective personality research has a long history (see Winter & Barenbaum, 1999) and has developed into a systematic understanding of individual differences. Nevertheless, it is relatively uncommon to find empirical studies that use personality measures within economics. This is beginning to change; with a number of recent studies investigating an area of economic importance – the determination of an individual’s wages. Mueller & Plug (2006), Nyhus & Pons (2005), Groves (2005) and Semykina & Linz (2007) have all used personality measures to predict an individual’s wages. Mueller & Plug (2006) show that some personality traits, such as openness and conscientiousness, are rewarded in the market place, whereas other traits, such as agreeableness and neuroticism, are penalized. Nyhus & Pons (2005) draw similar conclusions but also find that the degree of autonomy an individual has is also important. They further find that the financial

return to personality varies across educational groups. Groves (2005) investigates the importance of psychological traits, such as autonomy, social withdrawal and aggression in female earnings. Semykina & Linz (2007) find that personality traits explain as much as 8% of the gender wage gap. 89 These types of empirical study may help explain why, after controlling for many factors, including the improved cognitive abilities that come through schooling, there are still large earning gaps. Although the use of personality traits in the determination of wages is very much in its infancy (Bowles et al., 2001b), the findings indicate that personality is an important determinant. Bowles et al (2001a) have suggested that both school and family pass on many important behavioural traits that enhance the individual’s earning success. Other very recent empirical contributions have assessed personality’s relation to performance in ultimatum games (Schmitt, Shupp, Swope, & Mayer,

2008; Swope, Cadigan, Schmitt, & Shupp, 2008), the propensity for an individual to share knowledge with work colleagues (Matzler et al., 2008) and job matching (Winkelmann & Winkelmann, 2008). Researchers have also shown the importance of conscientiousness and self control in the individual’s accumulation of wealth (Ameriks, Caplin, & Leahy, 2003; Ameriks, Caplin, Leahy, & Tyler, 2007). In income and well-being research personality measures have rarely been used. Due to important policy consequences researchers are concerned with determining causal effects of income on well-being. Hence, researchers are mostly concerned with controlling for personality – not its independent effect. It is argued that personality is most convincingly controlled for by using panel data and trying to explain the within-person variation in subjective well-being (Ferrer-i-Carbonell & Frijters, 2004). Personality, being largely thought of as fixed (Costa & McCrae, 1980, 1988;

Srivastava, John, Gosling, & Potter, 2003), is considered to offer no explanation to the within-person variation in subjective well-being. Within this statistical framework personality measures are, therefore, not directly needed. However, if personality were thought to interact with income then personality measures would aid an investigation. Here, we use personality measures to show that there are substantial income-personality interaction effects. 90 Individuals with high levels of conscientiousness, pessimism or lack of control seem to gain more utility from income than others. Our results stand up to a number of alternative explanations. Such a finding poses new questions on the links between income and well-being and may have important implications for the use of financial incentives to influence behaviour. In the future, public policy may benefit from being personality-specific in a similar way as has been suggested for gender (Alesina & Ichino, 2007). This paper is

structured as follows. Section 2 details the methodology, section 3 describes the data, section 4 discusses the results, including robustness tests, and section 5 concludes. 5.3 Methodology The standard approach within economics to determine causal effects of income on subjective well-being (SWB) is the fixed effects estimator. A fixed effect analysis is easily performed by observing multiple individuals across several time-points. (5.1) SWBit    Dit   log yit  k it  i   it The subjective well-being of a given individual, i, at a given time period, t, is dependent upon a number of factors other than income; specific regional and time period factors, D, a series of observable time varying characteristics, X, and individual heterogeneity that, although varying across individuals, does not vary across time, μ. A causal effect of income can only be obtained provided all these correlated factors are controlled for. Heterogeneous factors, although

often unavailable, immeasurable or simply unknown, are captured by the parameter μ. Assuming that the factors contained within μ have zero within-person variation then any changes to an individual’s SWB must have arisen from changes to the individual’s circumstances. 91 It is fairly common for researchers to assume that individual heterogeneity is mostly personality (for explicit illustrations of this assumption see Booth & van Ours (2008), Ferrer-iCarbonell & Frijters (2004), Frijters, Haisken-DeNew & Shields (2004), Senik (2004) and Vendrik & Woltjer (2007)). However, although personality measures may be available, the fixed effect estimator may still be the best way to control for individual heterogeneity, which may include much more than simply personality. Our estimation strategy is therefore based on the premise that the measures of personality, P, are a subset of μ. A fixed effect estimator is therefore used on equation 5.2 to determine whether the

well-being effects from a change to an individual’s income is dependent upon a vector of personality characteristics, P. (5.2) SWBit    Dit   log yit   Pi  log yit  k it  i   it Such an estimation strategy must assume that the vector of personality measures, P, is appropriately controlled for using the fixed effect estimator which eliminates μ. Given the widespread use of the fixed effect analysis to control for personality factors, and individual heterogeniety more generally, this assumption seems appropriate. It is possible that this assumption is too strong, but later we present an alternative estimation strategy that relaxes this assumption. Our interest in the main analysis therefore lies simply with whether the personality measures P, a subset of μ and therefore already controlled for, interact with income. A well determined coefficient on any of the personality-income interaction terms would signify that the degree to which

an individual benefits from income is dependent upon personality. 92 5.4 Data It is relatively unusual to find a representative longitudinal data set typically used in economic analysis that contains reliable personality measures frequently used by psychologists. The lack of availability of such measures has probably not helped personality’s integration into economic research. However, in a recent wave of the German Socio-Economic Panel (GSOEP) a set of personality questions were asked. These included questions that related to the Big Five model of personality. The Big Five model suggests that there are five overarching dimensions to personality, that of an individual’s openness-to-experience, conscientiousness, extroversion, agreeableness and neuroticism. The hierarchical organization of the Big Five model suggests that there are also lower order personality facets (Wood, Joseph, & Maltby, 2008). Such facets can include an individual’s level of autonomy over their

life, and pessimism, which were also measured in the GSOEP. Factor analysis confirmed that autonomy and pessimism had unique variation from the Big Five9. Such self-reported personality judgments have impressive levels of reliability and validity. For example, self-reported traits are highly stable over time (McCrae & Costa, 1990), are related to peer ratings (McCrae & Costa, 1987), predict objective behaviour (Epstein, 1979) and occupational success (Hogan, 2005), have biological correlates (Ryff et al., 2006), and prospectively predict changes in objective biological functioning over time (OCleirigh et al., 2007) The personality variables contained in the GSOEP have also been used by Winkelmann and Winkelmann (2008) to investigate job matching. Here, to aid an interpretation of the results the personality scores used are standardized. The personality variables were asked only in 2005. Personality is generally regarded as fixed across time (Costa & McCrae, 1980, 1988,

Srivastava et al., 2003) so we assume that these 9 A full description of the personality questions and how the personality dimensions were constructed using factor analysis can be found in the Appendix to this chapter 93 personality measures can be used as an acceptable proxy for personality across all years of analysis. Although an individual’s innate personality may be fixed across time it is possible that an individual would not have answered the same every single year. For example, an individual’s response to a given personality question could be highly dependent on an individual’s circumstances at the time of questioning. Answers across years would be expected to correlate but this potential problem may lead to the conclusion that there are interaction effects when there are none. A robustness test is offered later to counter this possibility In all other respects the GSOEP is a representative longitudinal sample of German households. The survey has been used in a

number of important subjective well-being studies (for example Clark, Diener et al., 2008; Ferrer-i-Carbonell, 2005; Ferrer-i-Carbonell & Frijters, 2004; Frijters et al., 2004) and alongside the standard objective characteristics10 contains a single item life satisfaction question: How satisfied are you with your life, all things considered? Individuals are asked to respond to this question on an 11-point scale, where 0 indicates complete dissatisfaction and 10 indicates complete satisfaction. Since it has been shown that there is little difference between estimating effects using cardinal or ordinal models (Ferrer-i-Carbonell & Frijters, 2004) the life satisfaction measure is treated as cardinal. We use the household income per month as the income variable but we include within our standard set of controls the size of the individual’s household. 10 A full description of these variables is contained in the Notes to Tables in the Appendix to this chapter 94 The panel

used to determine whether there is an income-personality interaction effect on well-being is unbalanced and limited to just six years, from 2000 to 2005. The only requirement Table 5.1: Summary statistics (N = 93256) – non-standardized Variable: Mean Standard Deviation Life Satisfaction (non-standardized) Monthly Household Income (Euros) Age Female Education (years) Household Size Married Separated Divorced Widowed Unemployed Retired Disabled Child dummy 7.00 2,662 47.45 0.52 12.07 2.76 0.65 0.02 0.07 0.06 0.06 0.22 0.10 0.32 1.74 1827.4 16.08 0.50 2.64 1.28 0.48 0.13 0.26 0.23 0.24 0.42 0.30 0.47 we make is that individuals answer the personality questions in 2005 and also completed the questionnaire in at least one other time point. The chosen time frame is considerably shorter than the available data in the German panel but this is necessary to ensure that the personality measures answered in 2005 are realistic proxies across the entire period under analysis. Although there

is no reason to expect innate personality to change the use of a large time lag has the potential to be problematic and is not necessary for the analysis. The 6 year unbalanced panel used in the main analysis contains 17241 individuals, producing 93256 individual time-point observations with the descriptive statistics shown in Table 5.1 Life satisfaction is presented in its raw form but for the main analysis life satisfaction scores have been standardized to give a meaningful interpretation. 95 5.5 Results The analysis begins in Table 5.2 by estimating the average effect of income on a standardized life satisfaction variable. The pooled OLS and fixed effect models show that income has a positive effect on individual well-being. As is typical the coefficients attached to the pooled model in column 1 are much larger than those of the fixed effect model in column 2. The difference reflects the importance of controlling for heterogeneous factors between individuals. In the pooled OLS

model there are factors that cannot be controlled for that drive an individual to be both more satisfied and earn higher levels of income. The fixed effect model, on the other hand, by focusing only on the changes that occur within individuals, successfully controls for such factors. Each individual, once controlling for all other changes to their life, will have a unique slope that represents how changes to their income across the panel related to changes in their life satisfaction. The fixed effect estimates represent the average of all these individual slopes and could be interpreted as the average causal effect on individual well-being. From a practical perspective there would naturally be more interest in the results from the fixed effect model, helping the understanding of how an increase to an individual’s income might raise wellbeing. There would be far less concern for the cross-sectional association reflected in the pooled OLS model. The pooled model does not control for

the fixed individual heterogeneity that drives a large proportion of the association between income and well-being. In column 3 of Table 5.2 personality variables are introduced into the pooled OLS model Like the fixed effects estimates in column 2, although not nearly as much, the coefficients are attenuated downwards compared with the pooled OLS model in column 1. In the final column of Table 5.2 the individual fixed effect residuals from the fixed effect regression are predicted using personality. It is observed that at least 20% of the individual heterogeneity can be explained 96 Table 5.2: Fixed effect and pooled OLS life satisfaction regressions Dependent Variable: Independent Variables: Log of Monthly Household Income (Euros) Age Age squared/1000 Female Education (years) Log of Household Size Married Separated Divorced Widowed Unemployed Retired Disabled Child dummy (1) (2) (3) Life Satisfaction (Standardized) Pooled OLS 0.410 (54.57)* -0.034 (24.35)* 0.333 (23.69)* 0.020

(3.25)* 0.018 (13.45)* -0.237 (22.28)* 0.119 (10.18)* -0.281 (11.00)* -0.050 (3.32)* -0.049 (2.69)* -0.490 (37.31)* 0.033 (2.65)* -0.442 (41.53)* 0.060 (6.37)* Fixed Effect 0.178 (16.34)* -0.002 (0.22) -0.085 (4.99)* 0.042 (1.67) -0.122 (3.37)* 0.106 (3.05)* -0.360 (7.81)* -0.309 (23.59)* 0.031 (1.92) -0.148 (8.48)* 0.057 (4.24)* Standardized Personality Variables: Pessimism Individual Autonomy Openness-to-Experience Conscientiousness Extroversion Agreeableness Neuroticism Year Dummies Regional Dummies Constant Yes Yes -2.102 (33.59)* 93256 Yes Yes -1.080 (6.20)* Observations 93256 Number of Never Changing Person ID 17241 R-squared 0.14 0.04 Absolute value of t-statistics in parenthesis * significant at 5%; significant at 1% Pooled OLS 0.324 (45.37)* -0.023 (17.56)* 0.250 (18.83)* 0.051 (8.28)* 0.008 (6.29)* -0.153 (15.27)* 0.095 (8.64)* -0.285 (11.85)* -0.092 (6.49)* -0.097 (5.69)* -0.409 (33.07)* 0.043 (3.67)* -0.347 (34.45)* 0.027 (3.09)* (4) Individual’s Residual

(estimated from column 2) Pooled OLS -0.179 (56.08)* 0.136 (41.00)* 0.020 (5.94)* 0.017 (5.17)* 0.030 (9.03)* 0.039 (12.52)* -0.086 (26.76)* Yes Yes 0.709 (16.79)* 93256 -0.191 (34.86)* 0.156 (26.80)* 0.030 (5.28)* 0.006 (1.09) 0.028 (4.73)* 0.048 (8.90)* -0.092 (16.60)* No No 0.010 (2.06)* 17241 0.24 0.23 97 using the personality measures. This shows that personality measures explain much of the variation between individuals and confirms that personality is one of the single biggest predictors of well-being. However, for those interested in causality the use of personality measures at this stage may be unconvincing. To uncover causal effects of income on well-being heterogeneous factors must be fully controlled for in the most convincing way. It is unlikely that the available personality measures will completely control for individual heterogeneity. Individual heterogeneity is most convincingly controlled for using the fixed effect model. Although personality measures are time

invariant and cannot be used directly in the standard fixed effect model, it is still possible to use them to interact with an individual’s income that does vary across time. Table 5.3 begins the analysis of whether individuals with different personality traits have different well-being reactions to changes in their income. For example, do individuals that score high on neurotic indicators enjoy changes to their income more or less than individuals that score low on neuroticism? Are extroverted individuals more adversely affected by a decrease in their income? To test such hypotheses the personality measures, openness-to-experience, conscientiousness, extroversion, agreeableness, neuroticism, degree of autonomy and pessimism are interacted with the income variable. After controlling for all other changes to an individual’s circumstances Table 5.3 displays the results of the income-personality interactions The coefficients on the demographic controls, since they are very similar to

those in Table 5.2, are not reported. For completeness the results of both the pooled OLS and fixed effects models are included. In columns 1 and 3 we test for simple linear interactions whilst columns 2 and 4 explore quadratic interactions. There is strong evidence that individuals with high levels of conscientiousness or pessimism are likely to gain more satisfaction with their lives as a result of 98 an increase to their income. The same is true for individuals that have low levels of control over their lives. These results are consistent across estimation types Neuroticism, however, is found to have a negative and significant association with subjective well-being in the pooled model but a positive coefficient on the edge of significance in the fixed effect model. However, the models measure fundamentally different things; one model concerns the estimation of an association and the other the variation within individuals. Although there may be larger differences in well-being

across the income distribution for neurotic individuals this finding is not incompatible with the result that neurotic individuals benefit less from an increase to their income. The effects presented in Table 5.3 are substantial For example, concentrating on the results from the fixed effect model in column 3; if the income of a typical individual were doubled, then life satisfaction is estimated to increase by around 0.19 standard deviations Since the personality variables have been standardized the estimates suggest that the life satisfaction of an individual with moderately high levels of conscientious (i.e one standard deviation above the mean) would increase by around 0.23 standard deviations if their income were doubled Alternatively, moderately conscientious individuals could be viewed as benefiting from income by around 20% more than those with average conscientiousness levels. Therefore, holding everything else constant, a typical individual would need to receive 20% more

income than someone with moderate levels of conscientiousness to reach the same level of satisfaction with life. The effect is even more dramatic were we to consider doubling the income of individuals at the extremes. An individual with very high levels of conscientiousness (two standard deviations above the mean) would receive a life satisfaction rise of around 0.28 standard deviations In contrast, an individual with extremely low levels of conscientiousness (two standard deviations 99 Table 5.3: Fixed effects and pooled OLS analysis of income interactions with personality (1) Dependent Variable: Independent Variables: Log of Monthly Household Income (Euros) (2) (3) (4) Life Satisfaction (Standardized) Pooled OLS Fixed Effect 0.323 (45.08)* 0.309 (28.75)* 0.185 (16.82)* 0.139 (7.33)* 0.034 (5.98)* 0.023 (3.94)* -0.001 (0.22) -0.009 (1.40) -0.002 (0.48) 0.000 (0.05) -0.003 (0.83) 0.035 (5.13)* 0.014 (3.70)* 0.003 (0.43) 0.011 (2.55)* 0.003 (0.59) -0.005 (1.05) 0.016 (2.80)*

-0.004 (0.92) 0.054 (5.25)* 0.051 (4.92)* 0.009 (1.09) -0.041 (3.62)* 0.001 (0.19) -0.009 (0.84) 0.002 (0.31) 0.062 (4.85)* 0.017 (2.43)* 0.010 (0.85) -0.003 (0.34) 0.010 (0.91) 0.011 (1.40) -0.021 (1.94) 0.007 (0.90) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 0.278 (8.59)* 93256 0.329 (10.04)* 93256 0.274 (1.72) 93256 17241 0.274 (1.72) 93256 17241 0.24 0.04 0.04 Personality Interactions: Pessimism (Pessimism)2 Individual Autonomy -0.012 (2.04)* (Individual Autonomy)2 Openness-to-Experience 0.002 (0.32) (Openness-to-Experience)2 Conscientiousness 0.016 (3.03)* (Conscientiousness)2 Extroversion -0.002 (0.36) (Extroversion)2 Agreeableness 0.006 (1.16) (Agreeableness)2 Neuroticism 0.014 (2.50)* (Neuroticism)2 Year Dummies Regional Dummies Demographic Variables Constant Observations Number of Never Changing Person ID R-squared 0.24 Absolute value of t-statistics in parenthesis * significant at 5%; significant at 1% -0.040 (3.67)* -0.008 (0.78) 0.045

(4.43)* 0.013 (1.19) 0.008 (0.77) -0.020 (1.88) 100 below the mean) is predicted to gain just 0.10 standard deviations in life satisfaction The differences between individuals at the extremes are huge and similar effect sizes are exhibited across individual autonomy and pessimism. Individuals with combinations of these personality traits are also predicted to have marginal utilities of income that differ greatly to a typical individual. The evidence for any quadratic interaction effects seems limited 5.51 Robustness Tests Overall the estimates from Table 5.3 clearly indicate that aspects of an individual’s personality interact with income. It is possible, however, that the results could be explained in a number of alternative ways. The alternative explanations are explored here It is possible that how an individual answers a given personality question could be heavily biased by their current circumstances. Factors such as pessimism and individual autonomy may be particularly

affected if, for example, an individual had just received a large pay rise in that year. The interaction effects could be driven primarily by the wave in which personality variables were answered. This possibility is tested by excluding from a fixed effect analysis the wave in which personality was measured and also the year previous to that. This minimizes any bias in personality responses that may come from an individual’s present situation and essentially becomes a test of whether there is still an income-personality interaction with personality measures that individuals will answer in the future. The results are shown in the first column of Table 5.4 Other than neuroticism now being significant there are no substantive differences. A further potential issue with the main analysis is that an investigation into interactions will typically include at least three effects related to the interaction; the independent level effects of both characteristics and an interaction effect (Aiken

& West, 1991). Since personality does not 101 Table 5.4: Robustness of the personality-income interactions (1) Dependent Variable: Independent Variables: Log of Monthly Household Income (Euros) (2) (3) Life Satisfaction (Standardized) FE (excl. 2004 Fixed Effect Vector Pooled & 2005) Decomposition OLS (4) (5) Fixed Effect Fixed Effect 0.169 0.177 0.339 0.244 0.172 (11.22)* (34.91)* (18.36)* (10.09)* (4.33)* -0.000 (0.09) -0.000 -0.000 (2.19)* 0.000 (1.34) 0.000 (0.74) -0.000 (1.14) (0.50) Monthly Household Income Monthly Household Income-Squared Monthly Household Income-Cubed Interactions with Aspects of Openness: Values artistic experiences -0.013 (2.20)* 0.014 Original/Comes up with new ideas (1.75) Personality Interactions: Pessimism Individual Autonomy Openness-to-Experience Conscientiousness Extroversion Agreeableness Neuroticism Year Dummies Regional Dummies Demographic Variables Constant Observations Number of Never Changing Person ID

R-squared 0.056 (3.84)* -0.040 (2.59)* 0.022 (1.48) 0.053 (3.50)* 0.007 (0.45) -0.008 (0.57) -0.030 (2.03)* 0.009 (2.29)* -0.007 (1.69) -0.002 (0.46) 0.008 (2.04)* 0.002 (0.58) 0.002 (0.43) -0.003 (0.79) 0.033 (5.79)* -0.009 (1.54) 0.004 (0.74) 0.017 (3.06)* -0.002 (0.41) 0.004 (0.72) 0.014 (2.49)* 0.053 (5.08)* -0.038 (3.42)* -0.006 (0.56) 0.046 (4.52)* 0.013 (1.17) 0.006 (0.57) -0.023 (2.14)* 0.056 (5.37)* -0.042 (3.80)* Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 0.321 (1.59) 59418 16790 0.879 (30.00)* 93256 0.290 (7.72)* 93256 0.363 (2.23)* 93256 17241 0.275 (1.73) 93256 17241 0.03 0.63 0.24 0.04 0.04 Absolute value of t-statistics in parenthesis * significant at 5%; significant at 1% 0.043 (4.17)* 0.008 (0.75) 0.012 (1.12) -0.019 (1.75) 102 change across time the independent effect of a particular personality characteristic cannot be determined within the standard fixed effect framework. An assumption in the main analysis is that the

fixed effect model fully controls for the level of personality. Although this is a reasonable assumption and shouldn’t cause too much concern, personality effects not fully eliminated using the fixed effect technique may surface in an investigation of interactions. This assumption is relaxed by exploring interactions within the recently developed fixed effect vector decomposition (FEVD) technique (Plumper & Troeger, 2007). This technique allows independent effects of the personality variables to be obtained and has three stages. In the first stage a standard fixed effect regression is performed as seen earlier in Table 2 with no personality interactions. Each individual’s fixed effect residual is then predicted and saved In the second stage all variables with zero within person variation, such as age, gender and personality are used to estimate this saved fixed effect residual. (5.3) ˆi   Pi  1agei  2 genderi  i The error from equation 5.3,

η, which represents the true unobservable error, is then used in a final stage pooled OLS regression with all explanatory variables, including the incomepersonality interaction terms. As demonstrated in the previous chapter the FEVD model has been shown to allow independent effects of variables with zero or low within person variation to be obtained (Plumper & Troeger, 2007). The results using the FEVD model are shown in the second column of Table 5.4 Although the coefficients are not as large, they suggest that, even using a technique that effectively controls for personality twice, there is still significant evidence that 103 individuals who are conscientious, lack control in their life and are pessimistic gain more utility from a change to their income. The final robustness test checks that the strong interaction effects are not being driven by non-linearities in income. In columns 3 and 4 of Table 54 we show that introducing the level of income up to its cubed root does

not alter the interaction effects. In the final column we also show that there are components of openness-to-experience that also interact with income. Whether an individual values artistic experiences has a negative and significant coefficient as might be expected intuitively; yet there is a positive coefficient, although only on the border of significance, on whether an individual sees themselves as original or good at coming up with new ideas. Due to the counteractive effects this explains why there is no overall significance on the openness-to-experience measure. The results in column 5 add support for our general personality-income interactions model; confirming an intuitive result that valuing artistic experiences means money has less of an impact on an individual’s life and that being original may mean the individual is good at spending their money in new and innovative ways to produce greater well-being. 5.6 Conclusion The overall conclusion is that the extra utility gained

from an increase in income is heavily dependent upon an individual’s personality. Economists normally concentrate on the average effect of an increase in income across an entire population. We show that individuals who are conscientious, have low control in their life or are pessimistic actually get more utility from a given change in income. For example, individuals that are moderately un-conscientious are predicted to need around a 20% greater increase to their income than those moderately conscientious to achieve the same increase in well-being. Our results are robust to a number of 104 alternative explanations. This could be an important finding for policy makers in two respects Firstly, with regards to increasing national welfare and which individuals might benefit the most from rises to their income and secondly, in understanding how individuals might react to economic incentives. We provide some insights into the complex relationship between income and well-being showing

that individuals have heterogeneous preferences. Not everyone appears to benefit from changes to their income in the same way and it could be problematic to assume that they do. If the marginal utility from income is different across individuals then individuals will behave differently towards a given financial incentive. This is an important policy concern and suggests tailoring policy according to an individual’s personality may make policy more effective. A similar argument has been made with regards to gender-specific taxation (Alesina & Ichino, 2007). Our results generate some more important questions. There may be strong evidence that an individual who is either conscientious, has low control in life or pessimistic has a higher marginal utility of income than others but this leaves the question as to why? On this we can only speculate. Perhaps individuals with certain personalities have a habitual spending pattern that increases their well-being more than others. If so then

it is important to establish what these spending patterns are. It would seem plausible that conscientious individuals might be better planners enabling them to make wiser purchases with their income. The positive well-being link between conscientiousness and income may relate to recent work by Ameriks et al. (2007) They found that individuals with high levels of conscientiousness accumulate more wealth. However, is this because they simply enjoy their income more and are therefore driven to accumulate wealth or do non-conscientious individuals simply make bad decisions? Perhaps income is not as important to everybody. Some people may gain more utility from non-monetary areas of life, 105 such as social relationships, cultural or physical activity, linking in with our result that someone who values artistic experiences is less responsive to extra income. These are many important questions that still need answering but we have shown how exploiting standard psychological measures of

personality can help to do this. The findings presented here perhaps produce many more questions than are solved but could shed new light on future directions in which income and well-being research might take. 106 5.7 Appendix 5.71 Note to Tables Variable Description Life Satisfaction A self reported measure of how satisfied the individual is with their life, all things considered, where 0=completely dissatisfied and 10=completely satisfied Monthly Household Income The household’s income in which the individual resides (Euros) Age Individual’s age Female Individual is female (excluded dummy: male) Education (years) Number of years of education Household Size The number of members in the individual’s household Married, Separated, Divorced, Individual is married, separated, divorced or widowed (excluded Widowed dummy: single) Unemployed Individual is unemployed (excluded dummies: any other responses to occupation position except retired) Retired

Individual is retired (excluded dummies: any other responses to occupation position except unemployed) Disabled Disability status of the individual Child dummy Whether there is at least one child in the household (excluded dummy: no children in the household) Personality variables See section 5.72 for full description of the personality variables 5.72 Personality Variables in GSOEP There were a number of questions asked in the 2005 wave of the GSOEP that attempt to quantify aspects of an individual’s personality. In the questionnaire section entitled “What kind of personality do you have?” there were 15 questions related to the “Big five” personality inventory, and a further 9 that covered aspects of an individual’s autonomy. A further question, on pessimism, comes from the “Attitudes and opinions” section. These questions were as follows: 107 5.721 Big Five Personality Inventory Individuals are asked whether they see themselves as someone who 1. does a

thorough job 2. is communicative, talkative 3. is sometimes somewhat rude to others 4. is original, comes up with new ideas 5. worries a lot 6. has a forgiving nature 7. tends to be lazy 8. is outgoing, sociable 9. values artistic experiences 10. gets nervous easily 11. does things effectively and efficiently 12. is reserved 13. is considerate and kind to others 14. has an active imagination 15. is relaxed, handles stress well Individuals are asked whether the statement applies to them on a 1 to 7 scale, with 1 meaning the statement does not apply to them at all and 7 that it applies perfectly. 5.722 Individual Autonomy Individuals are asked their attitudes towards their life and future. 108 16. How my life goes depends on me 17. What a person achieves in life is above all a question of fate or luck 18. If a person is socially or politically active, he/she can have an effect on social conditions 19. I frequently have the experience that other people have a controlling influence

over my life 20. One has to work hard in order to succeed 21. If I run up against difficulties in life, I often doubt my own abilities 22. The opportunities that I have in life are determined by the social conditions 23. Inborn abilities are more important than any efforts one can make 24. I have little control over the things that happen in my life Individuals are asked whether they agree with the statements on a 1 to 7 scale, with 1 representing complete disagreement and 7 that they completely agree. 5.723 Pessimism This is a one item scale. Individuals are asked 25. When you think about the future, are youoptimistic, more optimistic than pessimistic, more pessimistic than optimistic, pessimistic? This variable is treated as cardinal. 5.724 The Construction of Personality Measures Factor analysis was used to check whether these variables were measuring the same underlying trait and suggested that the questions related to Big Five personality model of openness to experience,

conscientiousness, extroversion, agreeableness and neuroticism, with individual autonomy and pessimism explaining additional variance. 109 Not all 25 personality questions were used to construct the 7 personality measures, as some were poorly defined and appeared to measure no underlying trait. The remaining questions were used to construct the personality measures in the following ways: Openness to experience used questions 4, 9 and 14. Conscientiousness used questions 1, 7 and 11 (question 7 was reverse coded) Extroversion used questions 2 and 8 (question 12 was not used as factor analysis showed it did not measure the same thing as the other two questions) Agreeableness used questions 3, 6 and 13 (question 3 was reverse coded) Neuroticism used questions 5, 10 and 15 (question 15 was reverse coded) Individual Autonomy used questions 16, 19, 21 and 24 (questions 19, 21 and 24 were reverse coded) Pessimism used question 25 and factor analysis showed it was unique 110 CHAPTER

6 6 THE DARK SIDE OF CONSCIENTIOUSNESS: CONSCIENTIOUS PEOPLE SUFFER MORE FROM UNEMPLOYMENT 6.1 Abstract Conscientious individuals tend to achieve more and have higher well-being. This has led to a view that conscientiousness is always positive for well-being. We hypothesize that conscientiousness may actually be detrimental to well-being when failure is experienced, such as when individuals become unemployed. In a longitudinal study of 9,530 individuals we show that the drop in an individual’s life satisfaction following unemployment is significantly moderated by their conscientiousness. An individual with a high level of conscientiousness (ie a person one standard deviation above the mean) experiences a 200% higher drop in life satisfaction than someone at low levels. The difference is not temporary and is sustained through to the second year of unemployment. Thus the positive relationship typically seen between conscientiousness and well-being is completely reversed:

Conscientiousness is therefore not always good for wellbeing. 111 6.2 Introduction Conscientiousness has a strong positive effect on an individual’s well-being (DeNeve & Cooper, 1998; Hayes & Joseph, 2003). Conscientious individuals are orientated towards life situations that are beneficial for well-being (Mccrae & Costa, 1991), they set themselves higher goals (Barrick, Mount, & Strauss, 1993; DeNeve & Cooper, 1998), and have high levels of motivation (Judge & Ilies, 2002). Conscientious individuals are therefore more likely to achieve highly (McGregor & Little, 1998) and obtain higher levels of well-being (DeNeve & Cooper, 1998). Overall, this body of literature has lead conscientiousness to be conceptualized as a positive, adaptive personality trait that is important for well-being, employment, and personal functioning (DeNeve & Cooper, 1998). Despite the evidence that conscientiousness is generally positively related to well-being and

functioning, it is also possible that there are situations where this pattern is reversed, and where being more conscientiousness forms a risk factor for increased suffering and less productivity. These situations have not previously been studied, leading to a perhaps erroneous view that being more conscientious is better all of the time. Given the strong links between conscientiousness and goal setting, motivation, and achievement, we hypothesize that under conditions of failure conscientious people may suffer more, having sharper decreases in wellbeing. We use a nationally representative dataset of around 10,000 people to investigate the causal role of conscientiousness on well-being following a life event that represents a severe and chronic failure. Specifically, we examine how prospectively measured conscientiousness may interact with unemployment to affect well-being. Unemployment is an ever present aspect of our societies. As of July 2009 there were 145 million unemployed

individuals in the United States representing an unemployment rate of 9.4%; 112 a rate not seen since 198311. Many individuals face the prospect of unemployment at some point in their lives and the experience can be devastating. The loss of work generally represents a failure in life and can be extremely harmful to well-being (e.g Frey & Stutzer, 2002; Oswald, 1997). In addition to the loss of earnings, unemployment represents a loss of purpose and can erode an individual’s identity and sense of self-worth (Ashforth, 2001; Turner, 1995). It is not the case that less happier people are selected in unemployment (Diener et al., 1999), and a metaanalysis of longitudinal studies shows that unemployment has an average causal effect size of 38 on mental health (McKee-Ryan et al., 2005) Additionally it can be difficult to fully recover psychologically from unemployment (Clark et al., 2001; Lucas et al, 2004) Although conscientious people may potentially suffer more following failure,

there are three additional reasons to suggest conscientious people may suffer more from unemployment. First, conscientious people tend to accumulate more wealth (Ameriks et al., 2003; Ameriks et al, 2007) and obtain larger well-being increases when their incomes rise (as demonstrated in Chapter 5). To the extent that accumulating wealth is a goal of conscientious people, unemployment will represent a chronic blocking of a goal, which is known to lead to decreased well-being (Emmons, 1992). Second, employment may be more important to conscientious people, as it offers opportunities for conscientious people to pursue goals and use their particular strengths (c.f Barrick et al., 1993; DeNeve & Cooper, 1998) Both the increased importance of employment and the use of strengths have been related to well-being (McKee-Ryan et al., 2005; Seligman, Steen, Park, & Peterson, 2005), and becoming unemployed would remove the opportunities for conscientious people to gain emotional benefits in

this way. Third, being conscientious may lead to different appraisals of the reasons for unemployment. Specifically, un-conscientious people 11 Figures from the Current Population Survey, July 2009 -http://www.blsgov/web/cpseea1pdf 113 may be able to attribute unemployment to a lack of effort whilst working in the previous job (a temporary and specific cause for failure). In contrast, conscientious people who worked to their ability would not be able interpret the situation in this way, and would be more likely to attribute their failure to their own lack of ability (a stable and general cause of failure). This attribution style has been related to both clinical depression (Alloy, Abramson, Whitehouse, & Hogan, 2006; Mongrain & Blackburn, 2005), anxiety (Ralph & Mineka, 1998), and negative affect (Sanjuan, Perez, Rueda, & Ruiz, 2008). As conscientious people are theoretically more likely to (a) suffer from failure, (b) have accumulating wealth as a goal, (c) value

their workplace more, and (d) appraise unemployment differently, we suggest that conscientious people would suffer more from unemployment. It is not the purpose of this study to examine which of these mechanisms is responsible for the effect, but rather to demonstrate that the usually observed positive relationship between conscientiousness and well-being can be in some situations reversed. In doing so, we aim to encourage a broader study of conscientiousness, which considers both the situations in which conscientiousness is adaptive, and when it becomes a risk factor. Additionally, this will provide the first study to suggest that the effects of unemployment on well-being depend on any personality characteristic. This observation may have applied implications for the support given to people post-employment. 6.3 Method 6.31 Participants and Procedure The sample comprised a nationally representative sample of 9530 people (4538 males, 4992 females), all of whom were in employment, and

who completed measures at three time points, each one year apart. Ages ranged from 17 to 83 years (M = 4175, SD = 1167) Income 114 varied from €200 to €30,000 each month (M = 3112.44, SD = 178978, Mdn = 280000) Participation was part of the German Socio-Economic Panel Study (GSOEP), a longitudinal sample of German households, with questions relevant for this analysis only included during the 2005, 2006 and 2007 waves. All members of the household were invited to participate with questionnaires being administered through yearly face-to-face interviews. Further data on sampling is available in Haisken-De New and Frick (1998). All participants completed the measures of conscientiousness and well being in 2005, and were employed at this time. For analysis purposes, participants were separated into two groups according to their employment status in 2005, 2006 and 2007. The first group included those that were employed in 2005, 2006 and 2007 (n = 9361) and the second group included

those that were employed in 2005 but became unemployed in 2006 and were still unemployed in 2007 (n = 169). The GSOEP also contained participants who were not employed or were retired in 2005; these people were not included in this sample. 6.32 Measures Life Satisfaction: Life satisfaction was measured using a one-item scale. Participants were asked “how satisfied are you with your life, all things considered?” and responded to this question on an 11-point scale, from 0 (complete dissatisfaction) to 10 (complete satisfaction). The life satisfaction measure was standardized. The single item scale, although fairly typical in large data sets, is a limitation of the study and could result in an underestimation of the true effect size. Conscientiousness: A 3 item scale was used to uncover participants’ pre-unemployment levels of conscientiousness. The questionnaire asked individuals to rate each of the three statements, which concerned whether they saw themselves as someone who

“does a thorough 115 job”, “tends to be lazy” or “does things effectively and efficiently”, on 7-point scales, from 1 (does not apply to them) to 7 (applies perfectly to them). The individual’s answer to “tends to be lazy” was reverse coded and then all three scores were aggregated to obtain the conscientiousness scale. The scale was then standardized across individuals This short scale was developed specifically for the GSOEP to enable individual conscientious levels to be determined where limited space for questions was available. Gerlitz and Schupp (2005) document the extensive pre-testing that took place to ensure the 3-item scale replicated established longer conscientiousness scales. Demographic controls: Each participant’s age, gender, education level (years), marital status, disability status, household income, household size and whether they had children in their household were used as control factors. Regional dummy variables were also included 6.4

Results Two hierarchical multiple regressions were performed to predict life satisfaction at one (T2) and two years (T3) after unemployment. All baseline measures were taken at T1 prior to unemployment. For both regressions, in the first step, T1 conscientiousness, T1 life satisfaction, and T1 demographic controls were entered. In the second step, a dummy variable was entered, representing whether the person had become unemployed between T1 and T2 (coded 0 = Individual was employed in 2005, 2006 and 2007, 1 = Individual is employed in 2005 but unemployed in 2006 and 2007). This tested the unique impact of unemployment on individuals’ well-being. In the third step, an interaction was entered between T1 conscientiousness and the unemployment dummy variable. This tested whether baseline levels of conscientiousness changed the impact of unemployment on well-being. The analysis followed Aiken and West’s (1991) recommendations for moderation analysis; conscientiousness was standardized

prior to 116 Table 6.1: Two hierarchical regression analyses predicting the life satisfaction of individuals in the years following unemployment Regression 1: Regression 2: Predicting life satisfaction at T2 Predicting life satisfaction at T3 b SE β b SE β Life satisfaction at T1 0.54 0.01 .54* 0.51 0.01 .05* Conscientiousness at T1 0.04 0.01 .04* 0.03 0.01 .03* Life satisfaction at T1 0.54 0.01 .54* 0.50 0.01 .50* Conscientiousness at T1 0.04 0.01 .04* 0.03 0.01 .03* Employed at T1 but unemployed in T2 and T3 -0.34 0.06 -.05* -0.54 0.07 -.07* Life satisfaction at T1 0.54 0.01 .54* 0.50 0.01 .50* Conscientiousness at T1 0.04 0.01 .04* 0.03 0.01 .03* Employed at T1 but unemployed in T2 and T3 -0.34 0.06 -.05* -0.54 0.07 -.07* -0.17 0.05 -.03* -0.19 0.06 -.03* Variables Step 1 Step 2 Step 3 Conscientiousness at T1 x employed at T1 but unemployed in T2 and T3 2 2 Notes: Year 1 - For Step 1, F(29, 9500) =

195.37, R = 03736 (p < 001); for Step 2, F(30, 9499) = 19043; R = 03756 (p < 001); for Step 3, F(31, 9498) = 18479; R2 = 0.3762 (p < 001); Year 2 - For Step 1, F(29, 9500) = 15749; R2 = 03247 (p < 001); for Step 2, F(30, 9499) = 15571; R2 = 03297 (p < 001); for Step 3, F(31, 9498) = 151.22; R2 = 03305 (p < 001) *p < .01 *p < .001 All regressions include demographic controls; age, gender, education level (years), marital status, disability status, household income, household size, a child in their household dummy and regional dummies. 117 analysis, and the interaction term was a product of the standardized conscientiousness variable and the unemployed dummy. Table 6.1 shows the results from both multiple regressions Controlling for baseline variables, the effect of becoming unemployed on life satisfaction was d = -.34 at one year post unemployment, which rose to d = - .54 at two years However, this effect was significantly moderated by conscientiousness.

Adding the interaction term in Step 3 significantly improved the prediction for both regressions12. The moderation is plotted in Figure 61 The moderation was substantial: At the first year of unemployment, people high in conscientiousness (defined as 1 SD above the mean) had life satisfaction decreases of d = .51 from their pre-unemployment levels In contrast, people low in conscientiousness (defined as 1 SD below the mean) only had decreases of d = .17 These differences persisted into the second year of unemployment, where highly conscientious people had decreases in life satisfaction of d = .73 from pre-unemployment levels, compared to individuals with low conscientiousness who only had decreases of d = .35 In relative terms these results suggest that highly conscientious people suffer from unemployment approximately three times as much as people low in conscientious people in the first year of unemployment, and more than twice as much in the second year. As a robustness check, we

further tested whether our result was driven by conscientious individuals being more or less likely to face a period of unemployment. We conducted a logistical regression to predict the probability of an individual in our sample being employed at T but unemployed in T+1 and T+2. Conscientiousness did not predict unemployment (β = 001, p > 0.9) 12 Note that the increment in R-squared is not readily interpretable, as given that 98.2% of the sample did not become unemployed, the moderation would not explain a large amount of variance in life satisfaction for the whole sample. A more representative indication of effect sizes is provided by Figure 1 118 Figure 6.1: The life satisfaction change following unemployment as moderated by conscientiousness - 1 SD Conscientiousness Mean Conscientiousness + 1 SD Conscientiousness 0.9 0.8 Change in life satisfaction 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1 2 Years following unemployment Error bars denote standard errors calculated

according to Aiken and West (1991) at the appropriate levels of conscientiousness. 6.5 Discussion We show that the personality trait conscientiousness is not always beneficial for individual well-being. Whilst individuals high on levels of conscientiousness may achieve more throughout their lives (Barrick et al., 1993), leading to higher levels of well-being, we show that during times of failure being conscientious can actually be detrimental. In longitudinal study of around 10,000 individuals we first show that those entering unemployment suffer severe psychological consequences. We then show, using an individual’s level of conscientious before they became unemployed, that the psychological consequences are significantly greater for those that are conscientious. This difference continues into the second year of unemployment Thus, 119 the normal positive relationship between conscientiousness and well-being is completely reversed. We propose a number of possible explanations

as to why this might take place. Firstly, unemployment represents a failure to achieve. Conscientious individuals care more about achieving their goals and so any failure could be more detrimental to their well-being. Secondly, conscientious individuals tend to value wealth accumulation as demonstrated in Chapter 5 (Ameriks et al., 2003; Ameriks et al, 2007) and unemployment prevents them from achieving this goal. Third, the work environment allows conscientious individuals to work to their strengths and they are more likely to see work as a central part of their identity. The loss of a job may therefore erode a conscientious individual’s core sense of meaning and purpose in life to a much greater extent than someone with low levels of conscientiousness. It is also possible that a conscientious individual will attribute their job loss to their lack of ability as opposed to a lack of effort. Lastly, conscientious individuals may carry out a more efficient job search and, although they

may find re-employment quicker, there is some evidence to suggest that individuals that are more motivated to find work also have higher levels of depressive affect (Feather & Davenport, 1981). In accordance with this it had has been demonstrated that job search effort during unemployment is negatively related to well-being (McKee-Ryan et al., 2005) Our analysis can not unpick the extent to which these mechanisms drive conscientious individuals to suffer more during unemployment. However, we provide strong evidence to suggest that conscientiousness is not always beneficial for well-being. Whilst conscientious individuals may on the whole have higher well-being, there are some circumstances that cause them to have lower well-being. More research is needed around this area 120 The psychological consequences of unemployment have been researched extensively. However, previous research into unemployment has not been looked at in relation to individual differences. Our research

provides further evidence that personality traits should be considered when trying to understand economic behaviour (Ameriks et al., 2003; Ameriks et al, 2007; Borghans et al., 2008; Bowles et al, 2001b) Our study also has important practical implications Conscientious individuals are a risk group psychologically during unemployment and these individuals may benefit the most from extra support during unemployment. 121 CHAPTER 7 7 DO PEOPLE BECOME HEALTHIER AFTER BEING PROMOTED? 7.1 Abstract This paper explores the hypothesis that greater job status makes a person healthier. It first replicates the well-known cross-section gradient in health across different levels of job seniority. Then -- following a large sample of randomly selected individuals through time -- it turns to longitudinal patterns. When it does so, the paper can find little evidence that promotees exhibit a health improvement. In the private sector, promotion worsens people’s psychological health (on a standard

GHQ mental-strain measure). The data suggest that it is people who start with good health who are promoted. Revise and resubmit for Health Economics 122 7.2 Introduction Human beings with high occupational status have good health and low rates of premature mortality. Cross-section evidence for this correlation has been found many times (Johnson, Sorlie, & Backlund, 1999; Macleod, Smith, Metcalfe, & Hart, 2005; Marmot et al., 1984) The difficulty, however, is to know how to interpret the association. Is it causal in the sense that job status somehow leads to a later boost in a person’s health? Surprisingly, there appears to be no published truly longitudinal test of this hypothesis – one in which the investigator is able to observe individuals’ health both before and after they are promoted. This paper attempts to design such a test The focus is on individuals’ job rank and thus their degree of control within the workplace. We draw upon a panel data set, collected

annually between 1991 and 2006, with information on approximately 1000 individual promotions. We follow what happens to the health of those who gain seniority when compared to the health of those who do not. With one exception, our longitudinal study does not find compelling evidence in favour of a status-causes-health theory. Moreover, job promotion in many instances brings about a worsening of mental health. Nevertheless, after being promoted to the position of manager, people do go on to reduce the number of times that they visit a doctor (by up to 20%). 7.3 Earlier Work Researchers such as Marmot (2004) and Wilkinson (2001) have argued that there may be a cause-and-effect connection between status and health. According to this account, high status can itself boost health: psychosocial stressors are detrimental to the human condition, especially to cardiovascular health and the auto-immune system, and they can explain much of the social 123 health gradient. Griffin et al

(2002) and others have suggested that greater control at work improves mental health. Our paper also relates to a stream of work on the connections between mental well-being, health and economics, such as Van Praag et al (2003) and Graham et al (2004). Here one possibility is that greater psychological well-being, which in principle might be thought to stem from job seniority, can lead to economic success. Whilst there may be a causal chain running from status to health, one may also operate in the opposite direction, with the healthiest individuals going on to obtain the highest status (Deaton, 2003; J. P Smith, 1999; West, 1991) Alternatively, a third unobservable influence, such as genetic factors, could cause both good health and job success (Adams, Hurd, McFadden, Merrill, & Ribeiro, 2003; Cutler, Deaton, & Lleras-Muney, 2006). Using various socio-economic status (SES) indicators, attempts have been made to address the problem of causality. For example, Adams et al (2003)

for the US, and Adda, Chandola and Marmot (2003) for Sweden and the UK, use longitudinal data and control for initial health. No clear causal effects from SES to health are found Similarly, Gardner and Oswald (2004) control for initial health at T in an annual panel on individuals and find that income does not influence survival probability at T+10. Whilst they adjust for pre-existing health conditions, these studies cannot discount the possibility that individuals’ early health led to their SES. Using instrumental variables, however, Ettner (1996) argues that more income appears to result in significantly better physical and mental health. Lorgelly and Lindley (2008) also find, using fixed effects regressions, that although absolute income influences health there are no independent effects of either relative income or income inequality. Wilkinson (1986) 124 examines the link between changes to both occupational mortality and occupational incomes over a twenty year period.

Sapolsky (2004) experimentally documents the fact that health consequences emerge relatively quickly after rank is established across groups of animals. Sapolsky (2004) further suggests that this pattern extends to humans. However, the social context has been shown to differ across species. For example, subordinate animals that embark in cooperative breeding (Abbott, Saltzman, Schultz-Darken, & Tannenbaum, 1998) generally do not suffer from elevated release of glucocorticoids, a classic negative stress response documented in Sapolsky, Romero and Munck (2000). Similarly, this stress response within species is dependent on whether the subordinate animals are subjected to high levels of harassment by dominant individuals and whether they have social support networks (Abbott et al., 2003) Exogenous manipulation of a human individual’s status is not possible, but nearexperiments potentially provide a way in which one might try to uncover causal effects. Rablen and Oswald (2008) offer

support for a causal effect, running from social status to health, among Nobel Prize winners. Their results are similar to, though use different statistical methods than, that on Academy Award winners carried out by Redelmeier and Singh (2001). Snyder and Evans (2006) focus on a quasi-experiment in the realm of income. They find, counter-intuitively, that those with higher incomes as a result of changes to social security payments also have greater mortality rates. This result is somewhat consistent with the finding by Ruhm (2000) that temporary upturns in the economy are bad for people’s health. The simple correlation between health and income is strong (recent econometric evidence includes Cantarero and Pascual (2005), Duleep (1986), Frijters, Haisken-DeNew and Shileds (2005), McDonough et al. (1997), Menchik (1993) and Wolfson et al (1993)), and similarly so 125 for education (Feldman, Makuc, Kleinman, & Cornonihuntley, 1989; Lahelma & Valkonen, 1990). Income,

education and occupation all give fairly good indications of an individual’s SES Duncan et al (2002) argue that economic measures, such as pay, are preferable over other measures of SES. Yet income correlates well with psychosocial aspects and therefore with health. It is therefore necessary to isolate independent SES effects; exclusion of correlated variables will bias the estimates (Fuchs, 2004). There are several studies that centre around occupation as an indicator of SES. Ala-Mursula et al (2005) conclude that women with less work-time control have an increased risk of health problems. Fischer and Sousa-Poza (2009) show that increased job satisfaction improves the individual’s health. Anderson and Marmot (2007) try to exploit differences in promotion rates across departments in the British civil service as an instrument for individual promotion. 7.4 Methodology Consider an individual who is promoted at time T. If causality runs solely from occupational status to health,

then, after controlling for other factors correlated with health and promotion (such as age, education and gender), there should be no significant differences, at T-1, in the health of those who are promoted and those who are not promoted. At T+1 there should begin to be a difference. If there is only reverse causality -- that is, causality running from health to occupational status -- then promoted individuals should exhibit significantly better health to the same degree at both T-1 and after T+1. Were two-way causality to exist, a promoted group would exhibit a combination of these two effects. Using longitudinal data, on a large sample of British workers, here cross-sectional and difference-in-difference methods are used to explore these three hypotheses. Our promoted 126 group includes those who improve their occupational status internally and those who gain extra seniority after a move to a different employer. 7.5 Data and Estimation Issues Seniority and job status come in

myriad forms. An empirical inquiry has to make some taxonomic assumption. In this study, an individual’s role in the workplace is assumed to be captured by whether they report in the British Household Panel Survey that : their job is one of manager, supervisor, or neither of these. In the data set, these are uniquely different classifications13, which are similar to those used by Macleod et al. (2005) While this approach necessarily aggregates across sectors in a way that may produce some measurement error, it offers an indication of the seniority and hence the degree of control each individual can be expected to have in the job. This taxonomy of seniority assumes away complex role overlaps, and assumes too that an individual is employed, which means that any association between unemployment and poor health will be largely ignored in our main analysis. We return later to this issue Data come from the British Household Panel Survey (BHPS), a representative longitudinal sample of

British households. Running from 1991-2006, the Survey tracks over 10,000 adults in each of 16 years. Our analysis concentrates on a particular proportion of this sample, namely, those who worked for at least five consecutive years, from, in our notation, T-1 up to T+3. We observe who is promoted14 at T This gives us approximately 1000 individual promotions. There is some loss to this research design, because we are unable to say whether those who left work entirely, or subsequently changed role again, went on as a result to have 13 Those indicating neither of these are termed here as non-supervisors. 14 See the Appendix to this chapter for sample construction notes. 127 better or worse health15. But it allows a simple focus upon longitudinal health within an individual’s work setting. Health typically declines as people age. For our test, simple within-promoted group comparisons are therefore likely to be insufficient; we cannot merely measure the same individual’s health

across periods T-1 to T+3. It would be difficult to discern whether declining health across time is due to extraneous factors, or, perhaps more plausibly, to the natural process of ageing. We overcome this by comparing particular individuals’ health levels with those among a control group. The sample is separated into treatment and control groups -- those promoted at T and those never promoted -- and comparisons made between them. Our study examines three possible types of promotions: workers promoted from (1) non-supervisor to supervisor, (2) supervisor to manager and (3) those going directly from non-supervisor to manager. The final promotion type represents the largest gain in occupational status. Each promotion case has individuals’ health and changes to health contrasted to that of an appropriate control group, namely, individuals who remain as non-supervisors for promotion types 1 and 3 and supervisors for the 2nd promotion category. The comparison, in the analysis, takes

place across the entire 5-year period. This gives us a total sample size of up to 18,000 individual fiveyear observations The BHPS contains several indicators of an individual’s health. Here, we make use of three: (i) 15 subjective ill-health, Section 7.7 attempts to deal with this issue 128 (ii) number of visits to the doctor, (iii) mental strain. We do so to allow a degree of corroboration of the regression results on any single health variable. These three variables are coded such that a higher value indicates worsening health The paper therefore estimates ill-health16 regression equations (we use cardinal methods but ordered estimators give the same results). Subjective ill health is a self rating of one’s health on a cardinal 5-point scale, where 5=very poor through to 1=excellent. The number of visits to the doctor -- available in BHPS data as a grouped variable -- is another simple measure of how healthy an individual might be. The final dependent variable is that

of psychological ill-health. It is captured here using a General Health Questionnaire (GHQ) measure of mental strain, on a 0 to 36 scale. The same variable -defined more fully in the Appendix -- has been used in a large medical and psychiatric literature such as Cardozo et al (2000) and Pevalin and Ermisch (2004), and in health-economics research by, for example, Shields and Wheatley Price (2005) and Gardner and Oswald (2004). All three variables have positive skew; most individuals mark themselves in surveys as relatively healthy. Individuals’ mean rating of their subjective ill-health is 2.02 They visit their doctor (ie, their General Practitioner, or GP, in British jargon) on average 1.78 times each year This is on a numerical 0-10 scale. They have mean mental strain of 1076 on a 0-36 scale A simple correlation matrix is shown in Table 7.1 As might be expected, people who are less healthy on one criterion are more likely to be recorded as less healthy on the other two. The health

measures across the entire sample from T-1 to T+3 are shown in Table 7.2, which shows that subjective ill health, visits to the GP, and mental strain all deteriorate over a 16 A fuller description of the variables is given in the section Notes to Tables at the end of this chapter. 129 five-year period of aging. Subjective ill-health worsens in Table 2 by 006 points; visits to the doctor by 0.10 points; mental health by 037 points The observed health deterioration highlights the importance of not relying merely on a within-promoted group comparison. Table 7.1: Pearson correlation coefficients for the three ill-health measures Subjective Ill-health Visits to the Doctor Mental Strain Subjective Ill Health Visits to the Doctor Mental Strain 1 0.40 (n=18218) 0.27 (n=17169) 1 0.20 (n=17126) 1 All coefficients are statistically significantly different from zero at the 0.01 level Table 7.2: Ill-health over time within the whole sample Subjective Ill Health Standard N Mean

Deviation T-1 T T+1 T+2 T+3 18282 18282 18282 18282 18282 2.01 2.02 2.05 2.06 2.07 0.80 0.80 0.81 0.81 0.82 Visits to the Doctor Standard N Mean Deviation 18233 18233 18233 18233 18233 1.78 1.78 1.81 1.82 1.88 7.6 2.27 2.30 2.34 2.36 2.44 Mental Strain (GHQ) Standard N Mean Deviation 17184 17184 17184 17184 17184 10.66 10.76 10.85 10.92 11.03 4.77 4.78 4.85 4.90 4.97 Results We begin by depicting the cross-sectional differences in health across levels of seniority. This is demonstrated, with gradual inclusion of a set of control variables, in Table 7.3 Table 7.3’s evidence reveals the positive association commonly seen in empirical studies of socio-economic status and health. The strongest correlation with occupational grade in the table is observed for subjective ill-health. Managers in column 1 of Table 73 report themselves 0.185 points healthier than non-supervisors; supervisors are 0047 points healthier than nonsupervisors Here, managers’ health remains

significantly different from both of the other occupational grades even when other socio-economic variables, such as income and education, 130 Table 7.3: Cross-section regression equations for subjective ill-health, visits to the doctor, and mental strain 1 Explanatory Variables Manager Supervisor Year Dummies Age Age-squared Female Married Smoker Education Level College Graduate Logarithm of Income (at 2005 living costs) Logarithm of work hours Constant -0.185 (6.24)* -0.047 (2.22)* 2 Subjective Ill Health 3 4 -0.164 (5.59)* -0.040 (1.92) -0.130 (4.32)* -0.031 (1.50) -0.288 (3.39)* -0.064 (1.06) Jointly Significant 0.006 (1.79) -0.000 (1.17) 0.039 (3.32)* -0.024 (1.79) 0.163 (12.34)* Jointly Significant 0.012 (3.39)* -0.000 (2.73)* 0.020 (1.46) -0.028 (2.04)* 0.155 (11.65)* 0.004 (0.27) -0.055 (2.47)* -0.030 (5.04)* 0.033 (1.99)* 5 Visits to the Doctor 6 7 -0.155 (1.84) 0.075 (1.25) -0.139 (1.61) 0.056 (0.93) -0.761 (4.21)* -0.264 (2.06)* Jointly Significant

-0.053 (5.58)* 0.001 (5.25)* 0.874 (25.81)* 0.036 (0.93) 0.066 (1.76) Jointly Significant -0.058 (5.73)* 0.001 (5.40)* 0.904 (22.86)* 0.036 (0.91) 0.060 (1.56) 8 Mental Strain (GHQ) -0.648 (3.62)* -0.164 (1.29) -0.697 (3.80)* -0.152 (1.18) Jointly Significant 0.258 (12.57)* -0.003 (11.92)* 1.328 (18.27)* -0.499 (5.91)* 0.079 (0.97) Jointly Significant 0.254 (11.76)* -0.003 (11.22)* 1.277 (15.02)* -0.504 (5.94)* 0.112 (1.36) 0.042 (1.04) -0.201 (3.13)* 0.032 (1.85) -0.020 (0.41) 2.035 1.766 1.693 1.799 2.319 2.317 10.815 (320.17)* (26.86)* (20.21)* (98.60)* (12.33)* (9.66)* (276.67)* Observations 18282 18282 18282 18233 18233 18233 17184 R-squared 0.0023 0.03 0.04 0.0012 0.04 0.04 0.0012 Absolute value of t-statistics in parentheses; * significant at 5% level; significant at 1% level This is a full-sample regression that combines all promoted control and treatment group samples. Subsequent analysis separates these 9 0.045 (0.53) 0.271 (1.98)* 0.035 (0.96) -0.207 (2.04)* 5.186

(12.86)* 17184 0.03 5.806 (11.29)* 17184 0.03 131 are added to the regression equation. For the number-of-visits-to-the-GP variable, the evidence in Table 7.3 is not as clear The coefficients, although beginning with some significance for managers, only border on the 10% level of significance once controls are added. Mental strain follows a similar, and slightly stronger, pattern. Managers have lower levels of mental strain and the coefficients are well-defined. In Table 7.3, smoking appears to have the negative consequences that might be expected Ceteris paribus, women rate their own health worse. Moreover, they go to their doctor more often, and have higher mental strain. Education appears to contribute an important effect across all measures of an individual’s health. Income is only significant for subjective ill-health Interestingly, the least-educated and the married individuals have significantly lower levels of mental strain. Concentrating on subjective health, we can

evaluate the importance of a position of control in the workplace in light of other variables. Being a manager, for instance, appears to have a similar health impact to smoking and has over twice the benefit of being educated to degree level. Even once we control for the individual’s access to resources and his or her education level, large benefits from job seniority still remain. Although consistent with decades of previous evidence on the positive association between health and socio-economic status, Table 7.3 should not be viewed as proof of causality Later tables move to longitudinal patterns. They draw upon samples of up to 18,000 person-year observations and approximately 1000 promotions. The sub-tables in Table 74, for example, report both the raw means and the differences between groups - both with and without controls17 - for subjective ill-health, visits to the doctor, and GHQ mental strain. The data here run from T-1 to T+3. In other words, the job promotion itself occurs

at time period T, and data 17 The regressions with controls are available upon request 132 Table 7.4: Ill-health among the non-promoted non-supervisors and those promoted to manager (at time T) Subjective Ill Health Non-Promoted Group Promoted Group Time Period T-1 T T+1 T+2 T+3 Change Over Time (T)-(T-1) (T+3)-(T-1) (T+1)-(T) (T+3)-(T) N 15911 15911 15911 15911 15911 Mean 2.02 2.03 2.06 2.07 2.08 Standard Deviation 0.80 0.80 0.81 0.81 0.83 N 331 331 331 331 331 Mean 1.86 1.81 1.82 1.87 1.84 Standard Deviation 0.81 0.74 0.72 0.80 0.76 15911 15911 15911 15911 0.01 0.06 0.02 0.05 0.82 0.90 0.82 0.89 331 331 331 331 -0.05 -0.02 0.01 0.03 0.82 0.87 0.72 0.81 Difference in Mean across Groups -0.16* -0.23* -0.24* -0.20* -0.24* Difference in Mean across Groups (with controlsa) -0.13* -0.16* -0.17* -0.13* -0.15* -0.06 -0.08 -0.01 -0.01 -0.04 -0.05 -0.02 -0.02 Difference in Mean across Groups -0.10 -0.32* -0.43* -0.37* -0.44* Difference in Mean across Groups (with

controlsa) 0.08 -0.15 -0.25^ -0.16 -0.16 -0.22^ -0.34* -0.11 -0.12 -0.22^ -0.30* -0.10 -0.08 Difference in Mean across Groups -0.42 -1.07* -0.19 0.05 0.10 Difference in Mean across Groups (with controlsa) -0.33 -0.96* -0.10 0.15 0.19 -0.64* 0.52^ 0.88* 1.16* -0.66* 0.42 0.86* 1.08* Visits to the Doctor Non-Promoted Group Promoted Group Time Period T-1 T T+1 T+2 T+3 Change Over Time (T)-(T-1) (T+3)-(T-1) (T+1)-(T) (T+3)-(T) N 15869 15869 15869 15869 15869 Mean 1.79 1.80 1.83 1.84 1.89 Standard Deviation 2.27 2.30 2.36 2.36 2.44 N 332 332 332 332 332 Mean 1.69 1.48 1.40 1.47 1.45 Standard Deviation 2.21 1.80 1.66 2.00 2.00 15869 15869 15869 15869 0.01 0.10 0.03 0.09 2.33 2.70 2.36 2.66 332 332 332 332 -0.21 -0.24 -0.08 -0.03 2.03 2.51 2.03 2.17 Mental Strain (GHQ) Non-Promoted Group Promoted Group Time Period T-1 T T+1 T+2 T+3 Change Over Time (T)-(T-1) (T+3)-(T-1) (T+1)-(T) (T+3)-(T) Numbers subject to rounding N 14925 14925 14925 14925 14925 Mean 10.70

10.81 10.88 10.95 11.04 Standard Deviation 4.79 4.83 4.88 4.91 4.99 N 321 321 321 321 321 Mean 10.27 9.75 10.69 11.00 11.14 Standard Deviation 5.59 4.54 4.80 5.58 5.16 14925 14925 14925 14925 0.12 0.35 0.07 0.23 4.99 5.57 5.00 5.47 321 321 321 321 -0.52 0.87 0.95 1.39 5.59 6.96 4.37 5.92 ^ significant at 10% level; * significant at 5% level; significant at 1% level a. For the time-period regressions, time dummies, age, gender, smoking and marital status, education, income and hours of work are used as controls at the appropriate time point. For the change over time regressions, controls are time dummies, age, gender, smoking and marital status, education at T and also the appropriate changes that took place in income and hours of work. 133 are also given on the person the year before that promotion, and for each of three years after that. 18 Table 7.4 studies ‘large’ promotions These are for people who become managers The case is particularly interesting because

these people initially begin in a non-supervisory role: this group of individuals, it might be said, are given the greatest boost to their status. Importantly, in Table 7.4 there is evidence that the (future) promotees begin with much better health. Subjective ill-health is significantly better -- compare the mean of 202 with the mean of 1.86 -- to begin with than among those who will not be promoted At period T, the promoted group even visit the doctor significantly fewer times and have lower mental strain. These health differences persist but do not significantly improve for the subjective ill-health variable up until T+3. However, recently promoted managers go on to visit their doctor less often in both the short and medium term. The effect is large As the mean of Visits in the combined sample is 1.78, the estimates imply approximately a 20% fall in visits to the doctor after promotion to manager. Moreover, there is consistency in this evidence for an improvement from time T. This

appears to be more encouraging for the claim that taking a promotion improves health, although a critic might potentially raise an alternative explanation, namely, that managers simply become short of time. Contrastingly, mental stress actually worsens after promotion. This can be seen in the bottom panel of Table 7.4 The null of zero on the key difference-in-difference can be rejected There appear to be some benefits to psychological health in the run up to promotion at T. The promoted group have significantly better psychological health at T and the value -0.64* from 18 It is possible to start and end the analysis at different time points, but that greatly reduces the sample size without affecting our principal findings. The results of extending the analysis up until T+5, for example, is shown in table 7.6 134 T to T-1 indicates that this improvement is significant. However, as soon as the promoted group reach T+1, any health improvements in the lead up to promotion have

dissipated. By T+3 they have the same mental strain levels as those not promoted and when compared to T there is strong evidence that the promoted group suffer a relative worsening in their mental strain. See, for instance, the difference in Table 7.4 of 116 points on a GHQ mental strain score by period T+3 This is a substantial deterioration compared to the non-promoted controls who remain at their original level of seniority. This result runs counter to the hypothesis that promotion improves health: those who obtain the largest boost to status here show the clearest deterioration in mental health. Other factors are associated with health and promotion. The second-last column in Table 7.4 shows the differences once the time period, age, education, gender, marital status, income, hours worked and smoking status at T are held constant. Similar results are found -- though sometimes less sharply as would be expected -- in the full sample of all job-promotions (many of which are

‘smaller’ promotions, such as from nonsupervisor to supervisor19). These results are depicted in Table 75 Here psychological health among promotees has worsened in T+3 by 0.62 GHQ points A possible conclusion from these results is that causality does not run from status to health. In part, it seems that the healthiest individuals get promoted, but this result alone does not fully explain the social health gradient initially observed in Table 7.3 Arguably the crosssectional association is driven by a third unobservable factor, such as behavioural or genetic factors. If there is a large benefit from being promoted, as potentially suggested by the Whitehall studies, then it is undetectable across our observed time frame. Good health, at least in the long 19 When the smaller promotion groups are analysed separately there is no support for the status-causes-health theory 135 Table 7.5: Ill-health among the non-promoted and those promoted to any category (at time T) Subjective Ill

Health Non-Promoted Group Promoted Group Time Period T-1 T T+1 T+2 T+3 Change Over Time (T)-(T-1) (T+3)-(T-1) (T+1)-(T) (T+3)-(T) N 17169 17169 17169 17169 17169 Mean 2.02 2.03 2.06 2.07 2.08 Standard Deviation 0.80 0.80 0.82 0.81 0.83 17169 17169 17169 17169 0.01 0.06 0.02 0.05 0.82 0.90 0.82 0.88 N 1113 1113 1113 1113 1113 1113 1113 1113 1113 Mean 1.90 1.88 1.90 1.96 1.95 Standard Deviation 0.81 0.77 0.75 0.80 0.79 Difference in Mean across Groups -0.12* -0.15* -0.15* -0.11* -0.13* Difference in Mean across Groups (with controlsa) -0.09* -0.11* -0.11* -0.06* -0.07* Instrumental Variables Estimation -0.43* -0.28^ 0.12 0.05 0.02 -0.02 0.05 0.02 0.07 0.82 0.91 0.76 0.86 -0.03 -0.01 0.00 0.02 -0.02 -0.00 -0.00 0.02 0.06 -0.00 0.20 -0.07 Difference in Mean across Groups -0.13^ -0.28* -0.32* -0.16* -0.23* Difference in Mean across Groups (with controlsa) -0.01 -0.16* -0.17* -0.01 -0.03 Instrumental Variables Estimation -0.65^ -0.11 0.05 0.48 1.18* -0.15* -0.10

-0.04 0.06 -0.15* -0.07 -0.02 0.08 0.16 0.68^ -0.03 0.30 Difference in Mean across Groups -0.33* -0.68* -0.17 -0.06 -0.05 Difference in Mean across Groups (with controlsa) -0.22 -0.57* -0.08 0.03 0.03 Instrumental Variables Estimation -2.35* 0.03 1.03 1.07 1.38^ -0.34* 0.17 0.27 0.28 0.51* 0.62* -0.37* 0.11 0.19 0.19 0.48* 0.55* 1.14 1.85* 1.76* 2.09* 0.60 0.80 Visits to the Doctor Non-Promoted Group Promoted Group Time Period T-1 T T+1 T+2 T+3 Change Over Time (T)-(T-1) (T+3)-(T-1) (T+1)-(T) (T+3)-(T) N 17120 17120 17120 17120 17120 Mean 1.78 1.80 1.83 1.83 1.89 Standard Deviation 2.28 2.32 2.36 2.37 2.45 17120 17120 17120 17120 0.01 0.11 0.03 0.09 2.32 2.70 2.35 2.66 N 1113 1113 1113 1113 1113 Mean 1.66 1.52 1.51 1.67 1.66 Standard Deviation 2.13 2.00 1.98 2.16 2.18 1113 1113 1113 1113 -0.14 0.01 -0.01 0.15 2.13 2.58 2.14 2.38 Mental Strain (GHQ) Non-Promoted Group Promoted Group Time Period T-1 T T+1 T+2 T+3 Change Over Time (T)-(T-1) (T+1)-(T-1)

(T+2)-(T-1) (T+3)-(T-1) (T+1)-(T) (T+3)-(T) N 16127 16127 16127 16127 16127 Mean 10.68 10.80 10.86 10.92 11.03 Standard Deviation 4.75 4.80 4.86 4.89 4.97 16127 16127 16127 16127 16127 16127 0.12 0.19 0.25 0.35 0.06 0.23 4.95 5.20 5.40 5.54 4.97 5.44 Numbers subject to rounding N 1057 1057 1057 1057 1057 Mean 10.34 10.12 10.69 10.86 10.98 Standard Deviation 5.06 4.40 4.68 5.10 5.02 1057 1057 1057 1057 1057 1057 -0.22 0.35 0.52 0.63 0.57 0.85 5.17 5.42 5.91 6.11 4.55 5.49 ^ significant at 10% level; * significant at 5% level; significant at 1% level a. For the time-period regressions, time dummies, age, gender, smoking and marital status, education, income and hours of work are used as controls at the appropriate time point. For the change over time regressions, controls are time dummies, age, gender, smoking and marital status, education at T and also the appropriate changes that took place in income and hours of work. 136 Table 7.6: Difference-in-Difference

((T+3)-(T-1)) estimates (with controls) for individuals working in the public sector and in the manufacturing industry, those individuals who stay at the same address across all 5 years and those who stay in the promoted position up until T+5 Promoted Group Public Sector1 Health Measure Manufacturing Industry Difference-in- a Same address across all 5 years Remain in promoted a position until T+5a ((T+3)-(T-1)) ((T+3)-(T-1)) ((T+3)-(T-1)) ((T+5)-(T-1)) Difference Promoted to Subjective Ill-Health 0.29 (17/839) -0.31^ (36/2379) -0.06 (165/10420) -0.03 (150/8622) Manager (from Visits to the Doctor -1.06 (17/855) -0.49 (36/2378) -0.48* (166/10397) -0.33 (150/8584) Non-supervisor) Mental Strain 1.91 (17/812) 0.26 (35/2246) 0.11 (160/9710) -0.10 (142/8048) Any Promotion Subjective Ill-Health 0.08 (69/1040) -0.09 (158/2931) -0.02 (636/12268) -0.04 (499/8972) at T Visits to the Doctor -0.39 (65/995) -0.12 (154/2807) -0.10 (635/12218) -0.14 (498/8928)

Mental Strain -0.41 (64/949) -0.19 (144/2653) 0.17 (598/11437) -0.18 (468/8380) ^ significant at 10% level; * significant at 5% level; significant at 1% level a. The numbers in brackets refer to the numbers in treatment/sample group As an aid to reading this table, the top left number of 0.29 (17/839) means that in the public sector a promotion to manager increases subjective ill-health by 0.29 points, and there are 17 people in this category, with 839 in the whole sample term, apparently does not follow from job promotion. The decline in visits to the doctor of the promoted group in the third column of Table 7.6 is the closest to evidence for the contrary 7.7 Objections and Counter Arguments There is inevitably some noise in the data. Hence (Issue #1) the findings might in principle be the result of a Type II error. Moreover, promotion may be non-random in influential ways (Issue #2). These include the possibility that (Issue #3) the promoted groups endured substantial health

deterioration relative to the control group in the years leading up to the promotion, with promotion merely restoring it. Alternatively (Issue #4) the individuals who really improve in health might somehow be missed from our sub-sample. This could occur if an individual promoted at T went on to then get demoted or promoted within the three years, or even left the work-force altogether. We probe these possible explanations. 137 7.71 Issue #1: Noise A simple check on the possibility that our negative conclusions stem from sheer noise and Type II errors is temporarily to ignore the standard errors and to focus on coefficient signs. But, when this is done, even the coefficient signs do not support a status-causes-health theory. Our data set necessarily aggregates across different kinds of work and different sectors. Therefore a further argument could be made against the occupational status variable. Whilst we expect the individual’s answer to the status variable to have a large

degree of internal consistency, there may be variation across industries. We test this possibility by carrying out the same analysis on individuals who work and remain in the manufacturing industry and again separately for the public sector. As shown in Table 76 the treatment group declines substantially in size, which make it difficult to pick up significant differences. However, if again we focus only on the coefficient signs for this relatively homogenous set of individuals, there are, consistently with the null of randomness, 9 instances out of 18 in which there is a negative value. Table 7.6 further shows the difference-in-difference estimates for those that stayed at the same address for the full period and separately for those that stayed in the promoted position until T+5. We examine these groups of individuals since those that stay at the same address are more likely to have gained a promotion within the same company than those who moved and the period of analysis in our main

analysis may have been too small to observe health benefits. The sample sizes remain reasonably large but there are no significant differences, other than individuals visiting the doctor less, in either of these tests. 7.72 Issue #2: Endogeneity An important issue is that promotion is potentially non-random and endogenous. We try an overcome this issue by using the variation in promotion rates in each year across industries as 138 an instrument for promotion. It is assumed that promotion varies across industries but that ability of the individuals within the industry does not. A similar approach is taken by Anderson and Marmot (2007). The results of using instrumental variables are shown for the any promotion group in the final column of Table 7.5 Generally the coefficients are larger than the previous estimates and are consistent with the paper’s previous findings; healthy individuals get promoted and promotion brings on substantial mental strain. It is perhaps also worth noting

that the published literature on the cross-section association, which argues promotion has a causal effect, ignores possible endogeneity bias. 7.73 Issue #3: Poor Health as a Predictor To deal with the second objection, it is necessary to determine whether, prior to promotion, poor health predicts promotion at T. Table 77’s evidence suggests not The reverse holds. Table 7.7: Probit equations using health at T-1 as a predictor of promotion Dependent Variable: Explanatory Variables at T Ill-Health at T-1 Age Female Married Smoker Education Level College Graduate 1 Any Promotion at T Subjective Ill Health 2 3 Visits to the GP Mental Strain -0.070 (3.64)* -0.001 (0.08) -0.003 (0.98) -0.006 (4.25)* -0.216 (7.12)* -0.007 (4.34)* -0.216 (6.96)* -0.006 (3.87)* -0.214 (6.80)* 0.106 (3.08)* 0.032 (0.89) 0.109 (3.17)* 0.021 (0.61) 0.104 (2.94)* 0.023 (0.64) 0.308 (8.83)* 0.788 (17.96)* 0.312 (8.96)* 0.799 (18.22)* 0.301 (8.42)* 0.777 (17.26)* -1.325 -1.459 -1.436 (18.58)*

(23.09)* (20.50)* 18282 18233 17184 Observations Absolute value of t-statistics in parentheses; * significant at 5% level; significant at 1% level Constant 139 7.74 Issue #4: Sample Changes Promoted individuals are lost from the sample on three accounts: they get further promoted or demoted within the three years; they leave the workforce; or they exit the BHPS completely. On the last point, not a great deal can be done However, it is hard to see, intuitively, why the particularly healthy people should exhibit high attrition from the panel. The first two can be tracked with comparisons against control and treatment groups. Table 78 mirrors the previous estimation of health changes from T-1 to T+3. A separate comparison is made for those who stay in employment, and those who leave the workforce. There is no evidence that those who subsequently change roles become healthier. The only clear outcomes arise for those who leave the workforce completely, but the coefficients indicate a

worsening of health. Similar effects are found in the changes in health across other time periods. 140 Table 7.8: Regressions showing health differences across promoted groups, and those who subsequently left the workforce or changed role 1 Dependent Variable: Explanatory Variables at T Promoted at T 2 3 Promoted to Manager at T (from Non-Supervisor) Subjective Visits to Mental Ill Health the GP Strain 4 5 6 Any Promotion at T Subjective Ill Visits to Mental Health the GP Strain -0.069 (1.37) -0.057 (0.06) -0.295 (1.95) 2.732 (1.01) 0.407 (1.27) 8.863 (1.58) -0.006 (0.21) 0.451 (1.58) -0.073 (0.86) 1.540 (1.79) 0.201 (1.12) 3.415 (1.92) Promoted at T but subsequently changed role -0.035 (0.90) -0.123 (1.08) 0.073 (0.30) -0.006 (0.34) -0.090 (1.68) 0.076 (0.67) Age 0.001 (1.87) 0.005 (0.32) 0.009 (4.49)* 0.039 (0.91) -0.024 (5.38)* -0.061 (0.68) 0.001 (1.96)* 0.006 (0.47) 0.008 (4.23)* 0.036 (0.94) -0.021 (5.37)* -0.063 (0.78) 0.028 (1.80) 0.018 (1.13)

-0.100 (2.12)* 0.063 (1.33) 0.553 (5.44)* -0.015 (0.15) 0.022 (1.59) 0.023 (1.62) -0.070 (1.66) 0.108 (2.53)* 0.525 (5.86)* -0.057 (0.63) 0.012 (0.69) -0.012 (0.48) 0.001 (0.03) -0.034 (0.44) -0.053 (0.50) 0.019 (0.12) 0.013 (0.86) -0.014 (0.64) -0.014 (0.33) -0.012 (0.18) -0.004 (0.04) 0.018 (0.13) -0.021 -0.194 -0.161 -0.017 -0.191 -0.155 (1.10) -0.003 (0.51) (3.46)* 0.039 (2.19)* (1.34) 0.141 (3.72)* (0.97) -0.006 (1.10) (3.65)* 0.027 (1.66) (1.39) 0.133 (3.82)* -0.014 -0.244 0.909 -0.008 -0.210 (0.46) (2.73)* (4.75)* (0.30) (2.58)* 16831 16789 15801 21457 21401 Observations 0.0012 0.0026 0.0043 0.0011 0.0023 Pseudo R-squared Absolute value of t-statistics in parentheses; * significant at 5% level; significant at 1% level 0.840 (4.87)* 20181 0.0038 Promoted at T but left workforce Female Married Smoker Education Level College Graduate Logarithm of work hours Logarithm of Income (at 2005 living costs) Constant 141 7.8 Conclusion This paper is one

of the first fully longitudinal inquiries into the hypothesis that status makes people healthy. It draws upon data from a nationally representative sample of employees The paper finds little evidence that promotion improves a person’s health.20 In fact, after they are promoted, the GHQ mental health of managers typically deteriorates, and in a way that goes beyond a short-term change. This result is a new one in the literature Workers promoted in time period T alter in one other way. From that point, they visit their doctor approximately 20% less frequently, although this may simply be because new managers have less time for everything. 21 Further research will be needed before we have a complete understanding of the links between human status and human health. 20 Our negative findings have one interpretive advantage: the likely bias goes in the other direction. If promotion really improves people’s health, then to make sense of our results using a status-causes-health theory it

would be necessary to believe, against common intuition, that individuals with a high probability of deteriorating health are the ones most likely to gain an increase in workplace seniority. 21 We are not sure how to reconcile these results with the more supportive ones that have been found, using data on Oscar and Nobel Prize winners and nominees, in the work of Redelmeier and Singh (2001) and Rablen and Oswald (2007). One conjecture might be that it takes a major change in status to make a difference to physical and mental health; perhaps health does not respond in a linear dose-response way, but rather is a strongly convex function of status. 142 7.9 Appendix 7.91 Notes to Tables Regressions include observations across all years separated by promoted to manager/supervisor groups where specified. Description of Variables Subjective Ill-health Visits to the doctor Mental strain The individual’s rating of their health status over the last twelve months, where 1=excellent,

2=good, 3=fair, 4=poor, 5=very poor The number of visits to their General Practitioner in the past year. This is a categorical variable. None, one or two, three to five, six to ten, or ten plus are the available options. These are recoded to be the minimum value in each category (0, 1, 3, 6 and 10). This is an underestimation, but ensures consistency across categories and individuals. This variable is a 1 to 36 scale of the level of mental strain obtained from the General Health Questionnaire (GHQ). There are 12, zero to 3 point questions that include; among others, the individuals ability to overcome problems, their decision capabilities, sleep, concentration and general feelings of depression. Non-supervisor Individual’s managerial duties are neither manager or supervisory, yet they are still in employment Supervisor Individual’s managerial duties are that of a supervisor or foreman Manager Individual’s managerial duties are that of a manager Promoted at T Individuals

promoted at T (to supervisor or manager) and remained until T+3 Promoted at T but left workforce Individuals promoted at T (to supervisor or manager) but did not remain until T+3 as they left the workforce at some point Promoted at T but subsequently changed role Individuals promoted at T (to supervisor or manager) but did not remain until T+3 as they subsequently changed role through further promotion or demotion Age Individual’s age Female Individual is female (excluded dummy: male) Married Individual is married (excluded dummy: all non married individuals including single, widow, divorced and separated) Smoker Individual is a smoker (excluded dummy: all non-smoking individuals) Education level Specifies the individual’s highest level of education obtained.(College and Graduate dummies used with excluded dummy for those who either left after high school or dropped out) Logarithm of work hours The logarithm of the number of hours an individual works in a typical

week, including overtime Logarithm of income (at 2005 living costs) The logarithm of an individual’s own annual income, with all years, deflated to 2005 living costs 143 7.92 Sample Construction All three promoted groups are of interest in the analysis: those promoted from nonsupervisor to both supervisor and manager, and those promoted from supervisor to manager. Individuals in employment and indicating their position at T were sourced from every wave of the BHPS. Each observation at T was tracked from T-1 through to T+3, and where available, the health measures taken. Occupational position changes were then analyzed and two groups, both control and treatment, created. 7.921 Control Groups A control group of those not promoted is required. Those who maintained the same position (non-supervisor or supervisor) for the full five years were a control group for the relevant promoted group. 7.922 Treatment Groups Those who were initially in the control group at T-1 but promoted at

T, and maintained this until at least T+3, made up the treatment group. Inevitably, since requiring a full five years of data, waves 1, 13, 14 and 15 could not be included. This makes an overall sample size of approximately 18,000 observations. It is a balanced panel: individuals give answers to the health question for each of the five years. Thus the sample size varies depending on the health variable under analysis. Those promoted at T but who did not remain in the promoted position for all three years were separately coded -- depending on whether observed as still working, changing roles, or leaving work entirely. These groups are used in the analysis in Section 77 144 By the nature of our sample construction, some individuals appear as multiple observations. This occurs in two circumstances First, an individual may maintain a role for longer than 5 years. Second, a single individual may enter on a number of occasions if they experience a break in employment of which at least

five years of employment exist either side. In both scenarios it is difficult to know which observation should be included as all spells contain valuable information. Both are kept as observations in the analysis 7.93 Definition of GHQ Mental Ill-health A GHQ score, defined to lie between zero and 36, is a psychiatric screening instrument that is as an amalgamation of answers to the questions: Have you recently: 1. Been able to concentrate on whatever you are doing? 2. Lost much sleep over worry? 3. Felt that you are playing a useful part in things? 4. Felt capable of making decisions about things? 5. Felt constantly under strain? 6. Felt you could not overcome your difficulties? 7. Been able to enjoy your normal day-to-day activities? 8. Been able to face up to your problems? 9. Been feeling unhappy and depressed? 10. Been losing confidence in yourself? 11. Been thinking of yourself as a worthless person? 12. Been feeling reasonably happy all things considered? 145 CHAPTER 8 8

CONCLUSION This thesis has argued that, although there is still much to learn about human happiness, our understanding can be enhanced by taking a multi-disciplinary approach. This thesis merged psychological concepts with economic methodology to provide answers to questions that have economic and social interest. Specifically, (a) an individual’s rank income was shown to be a stronger predictor of life satisfaction than either absolute income or an individual’s income relative to those around them; (b) it was argued that income is an inefficient way of helping individuals overcome psychological distress and that we should consider channelling more resources into achieving mental health; (c) personality was shown to be a useful tool for understanding the influence of demographic circumstances on subjective well-being; and (d) improvements to an individual’s occupational status do not feed through to better health. This chapter summarises these findings, addresses the limitations

to the research and highlights areas in which subjective well-being research can develop. 8.1 Summary One of the dominant questions in economic subjective well-being research is: Does money buy happiness? Money is of course central to economic thinking so this question is essential. However, the evidence seems to suggest that, whilst money may bring some extra wellbeing, this extra well-being seems to be quite small relative to that produced by other potentially more important factors such as social relationships, mental health and personality. Although money seems to be less important than one typically might expect it is nevertheless a central topic of subjective well-being research. It is important that research seeks to understand why there is such a huge gap between how much happiness money is believed to bring and how much 146 it actually does. Such a puzzle can be in part put down to relative effects and the process of adaptation (Clark, Frijters et al., 2008) However, the

nature of such comparisons, to others and past selves, need to be better understood. Chapter 2 presented a rank-based model of social comparisons. In this model, individuals, instead of comparing to the mean income of those around them, make simple binary comparisons, distinguishing whether another individual is in either a better or worse position than themselves. This simple, and more cognitively realistic, model of comparison (Stewart et al., 2006) results in a rank based income model This relative judgment model has support from psychology (Parducci, 1995) and we showed that rank income significantly predicts satisfaction with life and explained more variation than either absolute or mean reference income accounts. Chapter 3 highlighted how relatively unimportant and inefficient money is at helping individuals overcome psychological distress. This chapter began by pointing out that monetary equivalences can be given to various life events using subjective well-being equations. The

chapter then showed that the use of such valuations have been suggested to be appropriate for compensating individuals after traumatic life events. However, the amount of money needed to compensate an individual would be high and Chapter 3 argued that this reflects the relative unimportance and inefficiency of money at restoring lost well-being. The chapter proposed a more efficient alternative, psychological therapy, referring to evidence from medicine to support this claim. In the face of rising mental illness (Michaud et al, 2001) and stagnating well-being levels in developed countries (Easterlin, 1995), the argument was extended to suggest that societies may be better off by channelling resources into mental health as opposed to solely focusing on income growth. 147 Individual differences and personality are treated very differently in psychology and economics and much of the work in this thesis sought to highlight this divide. Psychologists have spent considerable resources on

developing reliable and valid measures of individual personality. In spite of personality being one of the largest and most consistent predictors of well-being (Diener & Lucas, 1999) personality measures have not typically been embraced by economists in their subjective well-being research. Chapters 4, 5 and 6 sought, first and foremost, to highlight to economic subjective well-being researchers the fact that personality can be reliably measured. These chapters then illustrated useful ways in which personality measures can be used to answer questions that are of interest to economists. Chapter 4 specifically suggested an estimation technique that incorporated fixed personality measures as an alternative to the current dominant estimation technique that seeks to explain only the within-person variation in well-being. The benefit of the within-person approach is that such an approach allows researchers to indirectly control for fixed and assumed unobservable personality

characteristics. The alternative estimation technique proposed in Chapter 4 is argued to produce superior estimates on the effect on well-being of variables that have low within-person variations, and this includes characteristics of economic interest, such as income, marital status and retirement. Chapters 5 and 6 further highlighted the usefulness of personality measures by presenting evidence that personality interacted with important economic variables. Chapter 5 showed how different personality types get different marginal utilities out of a given income rise and Chapter 6 showed that being conscientious can be a serious risk factor during unemployment. Psychologists have generally been sceptical about researching the effect of demographic factors on well-being since they often explain only a very small proportion of well-being (Argyle, 1999). However, the work presented here illustrates to psychologists that 148 understanding the causes and correlates of high well-being might

be better understood by combining demographic and personality characteristics (Gutierrez et al., 2005) Finally, Chapter 7 applied methodological rigour to a topic that, despite the wide claims of causality, has so far only relied on cross-sectional data. It is often argued that improvements to job status lead directly to improvements in health, explaining why people with high job status generally have better health (Marmot, 2004; R. Wilkinson, 2001) This chapter showed, using a difference-in-difference technique on longitudinal data, that the strong cross-sectional association typically seen between occupational status and health does not appear to have a causal explanation running from status to health. This chapter highlighted the importance of analysing longitudinal data and showed that an improvement to occupational status – a promotion – may in fact increase mental strain and allow less time to visit the doctor. This suggested promotion may in fact be detrimental to health and

not, as conventional wisdom might suggest, unequivocally good. 8.2 Implications for Economic-Psychology Subjective Well-Being Research 8.21 The Use of Large Data Sets in Psychology Economists routinely make use of publicly available datasets that survey large portions of the population. Such data sets are normally representative and are carried out over a number of years. Such data sets have not only allowed economists to answer important economic questions, but have also enabled the routine use of more advanced statistical techniques that help uncover causal links to higher well-being. However, the use of these data sets also represents one of the biggest limitations to the research carried out in this thesis. All the chapters, baring Chapter 3, relied on nationally representative longitudinal data sets. Such data sets are used by a wide range of researchers across very broad topics and therefore have extremely limited space available for 149 questions. The thesis was therefore

limited by the availability of questions For example, singleitem scales had to be relied on and such scales are known to sometimes lead to an underestimation of true effect sizes. Sometimes the most valid and reliable scales are not always chosen by the compilers of nationally representative data sets and this is an important topic for the future. Psychologists, on the other hand, are often unaware that such data sets even exist. The use of such data sets by psychologists has the potential to drastically improve their research. Psychologists also have greater concern for using the best possible measures so it is likely that if psychologists become familiar users of these large data sets then better quality measures will be included. For example, the well validated satisfaction with life scale (Pavot & Diener, 1993b) would be a useful addition. It is also likely that more psychological questions would then be included and this has the potential to then benefit economic research.

8.22 Improved Understanding of Social Comparisons It seems clear that individuals compare with one another but the empirical evidence in economic subjective well-being research seems to suggest that this is a mainly negative process. On the whole having higher earning others around is detrimental for individual well-being (e.g Luttmer, 2005). However, it seems unlikely that this is a one way process There is some evidence to suggest that being surrounded by individuals that earn higher incomes can actually be positive for well-being (Clark, Kristensen, & Westergard-Nielsen, 2009b; Senik, 2004). It is likely that being around higher earning others can be in some ways positive; whilst at the same time can also be negative. The coefficient on the average income of those in one’s comparison group, therefore, reflects the process that is most dominant. We need a much clearer 150 understanding of social comparison and to do this it would be worth drawing on ideas from the social

comparison literature in psychology. The social comparison literature seeks to understand how and why individuals socially compare to one another. For example, individuals may compare with one another in order to gain information about how well one is doing in life (Festinger, 1954), or to learn how one’s performance can be improved (S. R Wilson & Benner, 1971) Comparisons undertaken for either reason can be both beneficial and detrimental to the individual’s life (Buunk et al., 1990) However, it now seems clear that, with the addition of evidence presented in Chapter 2, individuals generally engage in upward comparison. But why would individuals engage in upward comparison if it were detrimental to well-being? Such a comparison is also likely to bring benefits by demonstrating ways in which the individual could improve their life (Buunk et al., 1990) It has been suggested, however, that upward comparison can take place to indicate how to improve life without necessarily

damaging the individual’s well-being (Taylor & Lobel, 1989). It seems important to understand the reasons behind upward comparison, which current relative income studies can not quite yet offer. The idea of positive upward comparison has been interestingly modelled in the economic literature by Falk and Knell (2004) and has been looked at theoretically in an evolutionary context (L. Samuelson, 2004) The thesis was unable to explore these issues but further exploration is needed. A greater understanding of the social comparison literature would help advance the relative income studies. It may be, for example, that individuals compare negatively with some groups but positively with others. It would be useful to determine who these groups are and how we can encourage more positive upward comparisons. 151 Social comparison may also benefit by incorporating the range aspect of RFT. The range aspect of RFT is the cardinal position of an individual’s income relative to the highest

and lowest incomes of those in their comparison group. Since no data on comparison groups is available it is not possible to know what low and high earners an individual holds in their mind and deriving such figures based on the data set was not practical. Chapter 2 was therefore unable to address this issue but future research may benefit if comparison groups are explicitly determined. 8.23 Rank Based Comparisons Income rank was found to dominate an explanation of life satisfaction. Rank offers a very simple way of comparing to others and it is likely that there could be other areas in which a rank based explanation dominates. It has already been shown theoretically that rank can account for much economic behaviour (Stewart et al., 2006) so rank based comparisons need greater exploration within economics. 8.24 Subjective Well-Being Research and Policy Subjective well-being research has been developing at a rapid rate and uses the scientific method to understand what causes humans to

be happy. One of the key findings of subjective well-being research is that average well-being levels have not increased in the developed world in spite of large increases in GDP. This should be an enormous concern for policy Affluence has brought a new set of problems, for instance obesity, materialistic attitudes and impatience (Offer, 2006), which need addressing. Subjective well-being research has the potential to inform the policy debate and help the public understand which actions are more likely to bring the greatest improvements to well-being. As argued in this thesis the use of psychological therapy could be one such approach. Subjective well-being researchers need to explore other ways in which health 152 and happiness can be improved. It has been argued that a society targeting well-being indices would be radically different politically (Marks & Shah, 2005). The utilitarianists’ original conception of utility argued that the morally correct action was the one that

brought the greatest amount of pleasure. What does this say about countries that chase economic growth when it appears to bring no increases to well-being? The income rank explanation to well-being as addressed in Chapter 2 explains why growth is still pursued in spite of no gains to happiness. Such an explanation suggests that although it is rational for an individual to try to do better than others, ultimately obtaining status is a zero-sum game. Improvements to one individual’s status necessarily come at the expense of some else’s status. If this were so then societies might be better off not engaging in the race for status. The problems of pursuing status have been extensively discussed (Frank, 1999; Layard, 2006a) but as yet these powerful ideas have not yet been embraced by policymakers. However, a solution doesn’t necessarily need to be imposed by an outside body and informing individuals about subjective well-being research may prevent people from becoming locked in the

race for status and enable them to take action to unilaterally improve the their lives. Currently, however, many remain sceptical of subjective well-being research (Johns & Ormerod, 2007; W. Wilkinson, 2007) and this needs to be countered by spending more time validating well-being scales in economics, encouraging more research with direct applications to policy and fostering public debate around some of the central issues. 8.25 The Link between Health and Occupational Status Chapter 7 is one of the first studies to show that improved occupational status does not result in better health. However, in part, the results rely on null effects and this gives rise to the possibility of a Type 2 error. It could be that our sample sizes were not large enough to uncover 153 an effect, our occupational status measure was measured with considerable error or that the health measures used were poor. The research was again limited by the data but even if future researchers do find better

measures they must ensure they use longitudinal data. 8.26 Personality within Economics As has been highlighted personality is an area that has gone unexplored within economics. Personality will almost undoubtedly influence our economic decisions and could explain and help in our understanding of why there is heterogeneity in individual preferences and behaviour. It seems difficult to ignore personality research However, economists are relatively unfamiliar with the idea that personality is a measurable construct. Part of this thesis’ intention is to draw economists’ attention to the reliable and valid personality measures that are available. Future research needs to explore the use of personality measures and further highlight ways in which personality can answer important economic questions. As has been suggested in Chapter 5 individuals with different personalities may be differently motivated by money. This finding brings up many questions that need answering. For instance, why

do some people value money more than others? How can this be used to influence behaviour of individuals with different personality types? Further, it also seems to be the case that conscientiousness is important for an individual’s economic behaviour and greater understanding of exactly how and why is needed. The exploration of personality was hampered by the quality of personality measures available. Not only were they only 3-item scales but they have so far been measured at just one time point. Improved measures would only add to the quality of the findings already presented and also enable more interesting questions to be asked. Borghans et al (2008) have stressed the importance of using personality to understand behaviour and incentives and there is a small but burgeoning literature that has begun to do take up this task (Ameriks et al., 2003; Ameriks et al, 154 2007; Bowles et al., 2001a, 2001b; Groves, 2005; Nyhus & Pons, 2005) This is an important area of research to

develop. 8.3 Conclusion The use of subjective well-being data has enabled researchers to get closer to understanding what makes us happy. Psychologists have been using subjective well-being data for a considerable amount of time and the research area is well developed. Economists have only relatively recently begun to explore the use of subjective well-being data but the progress has been rapid. Both disciplines are concerned with a different set of questions and are equipped with specific methods by which to answer their own set of questions. The main theme of this thesis has been to merge the subjective well-being research of economists and psychologists by using psychological concepts and ideas to answer questions of economic importance. This thesis concluded that (1) rank income, and not absolute income, influenced life satisfaction; (2) psychological therapy is undervalued and could be better for well-being than aspiring to ever higher incomes; (3) personality is useful for

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