Structural changes in economic growth and well-being. The case of Italy's parabola

Pugno, Maurizio and Sarracino, Francesco (2019): Structural changes in economic growth and well-being. The case of Italy's parabola.

Abstract

The controversies on the relationship (or `gradient') between GDP and subjective well-being oppose those who claim that the gradient is positive and stable around the world to those who argue that long-run trends of subjective well-being are flat despite economic growth. The possible existence of structural breaks of the gradient within the same country is a challenge to both views. By focusing on the case of Italy, we show that the long-run trends of GDP and of well-being turned from increasing to decreasing, and the gradient exhibits a rise through two structural breaks. Macro and micro analyses explain why the gradient changes, and we find evidence consistent with the `loss aversion' hypothesis. In addition, the gradient changed because the erosion of trust in others, the increase of financial dissatisfaction and worsened health hinder well-being independently from income.

• Item Type: MPRA Paper
• Language: English
• Keywords: structural breaks, subjective well-being, economic growth, Easterlin paradox, trends, loss aversion
• Subjects: D - Microeconomics > D6 - Welfare Economics; I - Health, Education, and Welfare > I3 - Welfare, Well-Being, and Poverty > I31 - General Welfare, Well-Being; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development

References

Bartolini, S., Bilancini, E., and Pugno, M. (2013). Did the decline in social connections depress Americans’ happiness? Social Indicators Research, 110(3):1033–1059.

Bartolini, S. and Bonatti, L. (2008). Endogenous growth, decline in social capital and expansion of market activities. Journal of Economic Behavior & Organization, 67(3):917–926.

Bartolini, S. and Sarracino, F. (2015). The dark side of Chinese growth: declining social capital and well-being in times of economic boom. World Development, 74:333–351.

Becchetti, L., Massari, R., and Naticchioni, P. (2014). The drivers of happiness inequality: suggestions for promoting social cohesion. Oxford Economic Papers, 66(2):419–442.

Blinder, A. (1973). Wage discrimination: reduced-form and structural estimates. Journal of human resources, 8:436 – 455.

Bolt, J., Inklaar, R., de Jong, H., and van Zanden, J. (2018). Maddison project database, version 2018. www.ggdc.net/maddison for documentation and explanation of the data series.

Brockmann, H., Delhey, J., Welzel, C., and Yuan, H. (2009). The China puzzle: falling happiness in a rising economy. Journal of Happiness Studies, 10:387–405.

Clark, A., Frijters, P., and M.A., S. (2008). Relative income, happiness and utility: an explanation for the Easterlin paradox and other puzzles. Journal of Economic Literature, 46(1):pp. 95 – 144.

Clark, A. and Georgellis, Y. (2010). Back to baseline in britain: adaptation in the BHPS. PSE Working Papers.

Clark, A. E., Fléche, S., Layard, R., Powdthavee, N., and Ward, G. (2017). The key determinants of happiness and misery. In World Happiness Report 2017. Sustainable Development Solutions Network, New York.

D’Ambrosio, C. and Frick, J. (2007). Income satisfaction and relative deprivation: an empirical link. Social Indicators Research, 81(3):497–519.

D’Ambrosio, C. and Frick, J. (2012). Individual well-being in a dynamic perspective. Economica, 79:284–302.

De Neve, J.-E., Ward, G., De Keulenaer, F., Van Landeghem, B., Kavetsos, G., and Norton, M. I. (2018). The asymmetric experience of positive and negative economic growth: Global evidence using subjective well-being data. Review of Economics and Statistics, 100(2):362–375.

Diener, E. (2006). Guidelines for national indicators of subjective well-being and ill-being. Journal of Happiness Studies, 7:397 – 404.

Easterlin, R. (1974). Does economic growth improve the human lot? Some empirical evidence. In David, P. and Melvin, W., editors, Nations and households in economic growth, pages 98 – 125. CA: Stanford University Press, Palo Alto.

Easterlin, R. (2017). Paradox lost? Review of Behavioral Economics, 4(4):311–339.

Easterlin, R. A. (1995). Will raising the incomes of all increase the happiness of all? Journal of Economic Behavior & Organization, 27(1):35–47.

Easterlin, R. A., Angelescu, L., Switek, M., Sawangfa, O., and Zweig, J. S. (2010). The happiness-income paradox revisited. Proceedings of the National Academy of Sciences, 107(52):1 – 6.

Easterlin, R. A., Wang, F., and Wang, S. (2017). Growth and happiness in China, 1990-2015. In Helliwell, J. F., Layard, R., and Sachs, J. D., editors, World Happiness Report 2017, pages 48–83. New York.

EVS (2011). European values study 1981-2008, longitudinal data file. Technical report, GESIS Data Archive, Cologne. ZA4804 Data File Version 2.0.0.

Ferrer-i Carbonell, A. and Frijters, P. (2004). How important is methodology for the estimates of the determinants of happiness? The Economic Journal, 114(497):641–659.

Hagerty, M. R. and Veenhoven, R. (2003). Wealth and happiness revisited: Growing national income does go with greater happiness. Social Indicators Research, 64:1-27.

Helliwell, J. and Barrington-Leigh, C. (2010). Viewpoint: measuring and understanding subjective well-being. Canadian Journal of Economics, 43:729–753.

Helliwell, J., Huang, H., and Wang, S. (2017). The social foundations of world happiness. In Helliwell, J., Layard, R., and Sachs, J., editors, World Happiness Report 2017, pages 8 – 47. Sustainable Development Solutions Network, New York.

Jann, B. (2008). A Stata implementation of the Blinder-Oaxaca decomposition. Stata journal, 8:453 – 459.

Kahneman, D. and Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, (47):263–291.

Knack, S. and Keefer, P. (1997). Does social capital have an economic payoff? A cross-country investigation. The Quarterly Journal of Economics, 112(4):1251–1288.

Krueger, A. B. (2008). Comment to stevenson b, wolfers j. economic growth and happiness. Brookings Papers on Economic Activity, pages 95–100.

Layard, R., Mayraz, G., and Nickell, S. (2010). Does relative income matter? Are the critics right? In Diener, E., Kahneman, D., and Helliwell, J., editors, International differences in well-being, chapter 6, pages 139–166. Oxford University Press, New York.

Mikucka, M., Sarracino, F., and Dubrow, J. K. (2017). When does economic growth improve life satisfaction? Multilevel analysis of the roles of social trust and income inequality in 46 countries, 1981–2012. World Development, 93:447–459.

Oaxaca, R. (1973). Male-female wage differentials in urban labor markets. International Economic Review, 14:693 – 709.

Oishi, S. and Kesebir, S. (2015). Income inequality explains why economic growth does not always translate to an increase in happiness. Psychological science, 26(10):1630–1638.

Proto, E. and Rustichini, A. (2013). A reassessment of the relationship between GDP and life satisfaction. PloS one, 8(11):e79358.

Sacks, D. W., Stevenson, B., and Wolfers, J. (2012). Subjective well-being, income, economic development and growth. In Booth, P., editor, The pursuit of happiness, chapter 3, pages pp. 59 – 98. The Institute of Economic Affairs, London.

Solt, F. (2016). The standardized world income inequality database. Social Science Quarterly, 97(5):1267–1281. SWIID Version 7.0, July 2018.

Stevenson, B. and Wolfers, J. (2008). Economic growth and subjective wellbeing: reassessing the Easterlin Paradox. Brookings Papers on Economic Activity, (1):1 – 87.