Estimating Well-Being in Developing Countries

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Estimating Well-Being in Developing Countries
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Well-Being

• (1) What is well-being?
• (2) Why should economists be interested in
  well-being?
• (3) Estimating well-being equations
• (4) Empirical Findings

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Well-Being

• (1) What is well-being?
• Aristotle sees happiness and living well as
  the same thing and that living well consists of
  doing something.
• Well-Being and Ill-Being Jeremy Bentham in
  19th Century.
• World Health Organisation Quality of Life
  Concerned with measuring physical health,
  psychological health, social relationships, and
  the environment.
• What people have or do not have (material)
  what people do or cannot do with it (relational)
  what people think or feel (subjective).
  Wellbeing in Developing Countries WeD (2009).
•  

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Well-Being

• We focus on subjective well-being (SWB).
• However, SWB will be closely correlated with
  material and relational factors.
• If have a house and car then better-off in
  yourself (SWB) and when compared to others
  (relational).
• It is the relative position of an individual
  that is arguably most interesting in both the
  theoretical and empirical literature.

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Well-Being

• Issue of who to compare your well-being to.
• (i) keeping up with the Jones neighbour or
  village effect.
• (ii) peer group fellow worker, average worker,
  race, gender, age, caste
• (iii) different time periods yesterday, last
  year.
• (iv) different generations parents
• (v) some pre-determined social norm
  sociology.

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Well-Being

• (2) Why should economists be interested in
  well-being?
• Well-being and satisfaction are similar concepts
  hence can directly test utility.
• It is assumed in micro-foundations of
  neo-classical theory that utility is formed based
  on consumption of goods which in itself is
  determined by the budget constraint (income).

A
SatisfactionUtility
B
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Well-Being

• However Easterlin (1974) found that over time
  happiness did not increase with income
  Easterlin paradox
• If increasing income does not increase
  satisfaction or utility then why be obsessed with
  this?

GDP per capita
Average Satisfaction and GDP per capita
Satisfaction with life
Time
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Well-Being

• Richard Layard and others (e.g. Frey and
  Stutzer, 2002), argue that it is relative income
  that explains why happiness does not increase
  significantly beyond
• (i) a certain level of GDP per capita (Macro)
• (ii) a certain individual absolute income level
  (Micro)
• So if your income increases but so does everyone
  elses then your relative position is the same.
• Indeed, if your income increases but at a slower
  rate than the average income increase then your
  relative position worsens income inequality is
  becoming more skewed towards the very highest
  decile in the US and UK..is this why were not
  more satisfied?

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Well-Being

• Lucas et al (2004) argue that while income,
  health and family are correlated with life
  satisfaction that they do not explain much of the
  variance in satisfaction.
• Personality variables account for a much larger
  share of subjective satisfaction use of twin
  studies indicates that 80 of the variance in
  satisfaction is something that comes from within.
• Genetic.
• Any exogenous shocks thus have an impact on
  short-term variation in satisfaction, but in the
  long-run individuals return to some set-point.

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Well-Being
Older people tend to report higher levels of life
satisfaction Why?
Negative Shock e.g. unemployment, death, tragic
news
10

Set Point
SWB
Positive Shock e.g. inheritance, lottery win,
house prices
0
Years
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Well-Being

• Cross-Country Comparisons
• Many studies compare countries (e.g. Stevenson
  and Wolfers, 2008) and suggest that GDP per
  capita is significant in subjective happiness.
• Other factors that are important include health
  and unemployment rates.
• However variations in happiness between
  countries can be criticised.
• Does someone who scores 8 in Sweden really have
  the same level of happiness as someone who scores
  8 in India? reference group.

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Well-Being

• (3) Estimating well-being equations.
• Using the Likert scale for happiness or life
  satisfaction as the dependent variable.
• Economists can test a number of hypotheses.
• (1) Are income, wealth, assets positively
  correlated with happiness?
• In cross-country studies use GDP per capita as
  measure of income.
• In national study use income per adult
  equivalence for household level income, use the
  squared term too to see if happiness increases
  with income at a decreasing rate.
• Same method for information on assets and wealth
  may need to create an index or use factor
  analysis to get a single measure of household
  assets/wealth e.g. pots and pans, knives,
  agricultural tools.

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Well-Being

• Endogeneity Issues
• It could well be that someone of a happier
  disposition will earn more in the labour market
  (Ruut Veenhoven).
• This could be picking up social network effects
  and being more sociable. It could also be
  picking up unobservable characteristics of
  individuals not traditionally found in earnings
  functions, e.g. optimism, positive attitude, work
  ethic?

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Well-Being

• (2) Employment and Satisfaction
• Well known in the labour economics literature
  that the unemployed are scarred we would expect
  that the unemployed would, ceteris paribus,
  report lower levels of satisfaction than the
  employed.
• As well as this basic test the applied
  literature has used the satisfaction data to test
  whether the searching and non-searching
  unemployed report different satisfaction rates.
• This tests the neo-classical hypothesis that via
  maximising utility the non-searching unemployed
  are voluntarily unemployed as they choose not to
  search.
• If it is found that the non-searching are as
  satisfied as the searching unemployed or even
  less satisfied then this is consistent with the
  discouraged worker hypothesis.

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Well-Being

• (3) Satisfaction and Relative Consumption
• Evidence from Hinks and Davies for Malawi
  (2008), Copestake et al (2009) for Peru indicates
  that even amongst very poor communities, as
  average consumption increases so satisfaction
  declines.
• Suggests that relative economic position in the
  community is important to satisfaction.
• This can be tested further by calculating
  whether your household consumption (or income) is
  above the community average or not.
• Studies on job satisfaction have found that
  relative earnings are important findings tend
  to confirm that as the average earnings of
  someone with your skill set increases then,
  ceteris paribus, job satisfaction declines.

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Well-Being

• Other Hypotheses of interest-
• Satisfaction and Crime Powdthavee (2008),
  Hinks and Davies (2010).
• Satisfaction and Race or Gender Hinks Gruen
  (2007), Hinks and Davies (2008).
• Satisfaction and Social Networks Hinks and
  Davies (2008), Polygamy, Religion and
  Satisfaction.

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Well-Being

• (4) Empirical Evidence
• (i) Well-Being, Income and Relative Income
• Evidence is conclusive with a positive
  relationship within country well-being or
  happiness and income level. For both developing
  and developed countries.
• E.g. Powdthavee (2005), Hinks and Gruen (2007),
  Hinks and Davies (2008, 2010) work using
  cross-sectional data sets for developing
  countries.

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Well-Being

• (ii) The Case of Employment Status and
  Well-Being
• Lucas et al (2004, pp.11) find that (i)
  satisfaction begins to decline before the worker
  is unemployed (ii) life satisfaction is reduced
  massively when unemployed and (iii) satisfaction
  increases but not back to pre-unemployment level.

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Well-Being

• Case Study of South Africa Kingdon and Knight
  (2006).
• First issue is that of endogeneity are the
  unhappiest people more likely to be unemployed?
• Evidence from longitudinal studies by
  psychologists is that this reverse causality is
  doubtful Veenhoven suggests that happier
  people are more likely to be employed first than
  unhappier people.
• Happiness is on a 5-point scale, 0 is very
  dissatisfied and 5 is very satisfied.
• Only collected for head of households so not
  individual level.
• The searching unemployment rate (No. of
  searching unemployed in HH/No. of broad labour
  force participants).
• The non-searching unemployment rate (No of
  non-searching unemployed in HH/No. of broad
  labour force participants).

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Well-Being

• No significant difference in life satisfaction
  between the searching and non-searching
  unemployed.
• Implication is to reject the hypothesis that the
  non-searching unemployed are happier than the
  searching and accept that worker discouragement
  is at work in South Africa.
• Given the strict rate of unemployment is high
  (still officially 24 in 2nd quarter of 2009)
  this is perhaps unsurprising but importantly adds
  to the evidence against voluntary unemployment.

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Well-Being

• An abridged version of an estimated happiness
  equation taken from Hinks and Davies (2008).
• Analysis of some findings
• (i) Find that larger consumption raises life
  satisfaction. In developing countries there is
  still a great need to increase economic growth to
  raise income levels.
• (ii) If relatively better off in terms of
  consumption then more satisfied. The importance
  of relative position is confirmed.
• (iii) The perceptions of your neighbours wealth
  positively predicts more satisfaction for you.
  Capturing some of the log consumption variable as
  this coefficient decreases in size.
• (iv) Wealthier households (assets) are more
  satisfied
• (vi) The salaried employed and self-employed are
  more satisfied than farmers.

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Dependent Variable Overall, how satisfied
(content, happy) are you with your life?.
Responses from 1 (very unsatisfied) to 5 (very
satisfied)
  Model 1 Model 2 Model 3 Model 4 Model 5
           
           
ln(Per Capita Consumption) 0.338 0.173 0.184 0.138 0.072
  (13.905) (6.115) (7.044) (4.811) (2.322)
ln(Mean Community Consumption) -0.193
  (-5.267)
Relative Household Consumption 1   0.152 0.174 0.164
    (4.910) (5.586) (5.212)
Relative Household Consumption 2   0.061
    (5.671)
Neighbours' Subjective Wealth   0.108 0.101
    (8.627) (7.996)
Asset Score   0.096
    (5.564)
Salaried Employment Dummy 0.144 0.136 0.135 0.124 0.091
  (4.442) (4.234) (4.199) (3.848) (2.737)
Self-Employed Dummy 0.151 0.145 0.146 0.137 0.130
  (4.417) (4.244) (4.266) (4.002) (3.797)
N 11264 11264 11264 11248 11205
Pseudo R-Squared 0.068 0.068 0.068 0.070 0.071
Chi2 1802.312 1793.891 1812.681 1850.342 1869.723

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Some Useful Websites for Economics of Wellbeing,
Quality of Life and Happiness

• (1) World Health Organisation Quality of Life,
• http//www.who.int/substance_abuse/research_tools
  /whoqolbref/en/
• (2) Wellbeing in Developing Countries WeD,
• http//www.welldev.org.uk/
• (3) World Values Survey
• http//www.worldvaluessurvey.org
• (4) World data base of Happiness Ruut
  Veenhoven
• http//worlddatabaseofhappiness.eur.nl/
• (5) International Society for Quality of Life
  Studies
• http//www.isqols.org/

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References

• Easterlin, R., (1974), Does Economic Growth
  Improve the Human Lot?, in Nations and
  Households in Economic Growth Essays in Honor of
  Moses Abramovitz, ed. by P. A. David, and M. W.
  Reder. New York Academic Press.
• Stevenson, B, and Wolfers, J., (2008), Economic
  Growth and Subjective Well-Being Reassessing the
  Easterlin Paradox, NBER Working Paper Series,
  No. 14282
• Layard. R., (2005), Happiness Lessons from a
  new science, Penguin, London.
• Frey, B., and Stutzer, A., (2002), Happiness and
  Economics How the Economy and Institutions
  Affect Human Well-Being, Princeton University
  Press, NJ.
• Lucas, R., Clark, A., Georgellis, Y., and
  Diener, E., (2004), Unemployment Alters the Set
  Point for Life Satisfaction, Psychological
  Science, 15(1) 8-13.
• Powdthavee, N. (2005). Unhappiness and crime
  Evidence from South Africa. Economica, 72,
  531547.),
• Hinks, T., Gruen, C. (2007). What is the
  structure of South African happiness equations?
  Evidence from quality of life surveys. Social
  Indicators Research, 82(2), 311336.
• Hinks, T., Davies, S. (2008). Life satisfaction
  in Malawi. Journal of International Development,
  20, 888904.
• Davies, S., and Hinks, T., (2010), Crime and
  Happiness amongst heads of households in Malawi,
  Journal of Happiness Studies, 11 457-476.
• Copestake, J., Guillen-Royo, M., Chou, W. J.,
  Hinks, T., Velazco, J., (2009). The relationship
  between economic and subjective wellbeing
  indicators in Peru. Applied Research in Quality
  of Life, 4 (2), pp. 155-177.