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7/29/2019 The connection between life satisfaction and material aspirations
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Tams Keller
The connection between life satisfaction and material aspirations
A theoretical dilemma and some solutions
In seeking to answer the question of whether income brings happiness, Richard Easterlin
(1974, 1995) found a paradox. Within a given country, higher-income respondents usually
reported greater happiness; however in cross-country comparison if aggregate income in a
country rises, happiness does not necessarily follow.
Both theoretical and empirical social research provides a number of explanations for this
paradox (see Ferrer-i-Carbonell, 2005: 9889). Of these, it is indisputably relative income
theory that has evoked the most attention. According to this argument, happiness depends not
on absolute, but on relative income. If the level of income rises against that of a specific
reference group, that creates happiness; however, if everybodys income rises and the relative
income differentials between individuals stay constant, that does not lead to happiness. Inother words, the positive effect of income on happiness is counterbalanced by the negative
effect of relative income (Easterlin, 1995: 36). The results of empirical research, however, are
somewhat ambiguous. Senik (2004) found a positive connection between relative income and
happiness. She argued that, in uncertain economies like Russias, the rise in income in the
reference group might be associated with a forecast rise in the individuals own income,
which may be understood as a kind of tunnel effect, as posited by Hirschman (1973).
Testing the same question on German data, Ferrer-i-Carbonell (2005) estimated the impact of
relative income to be negative: its impact in western Germany was greater than that of
income; however, this did not hold in eastern Germany. A negative relationship between
satisfaction and relative income has been found by other scholars as well (McBride: 2001;
Hajdu and Hajdu: 2011).
Another solution to the Easterlin paradox is that if income rises, so do income
aspirations, and rising aspirations counterbalance the positive income effect (Easterlin, 1995:
41). This logic has received much less attention in the social research; however, theoretically
it is also well founded. Brickman and Campbell (1971) developed the concept of the hedonic
treadmill, according to which humans adapt very quickly to change in their objective
circumstances, so that any gain in satisfaction lasts only for a while. The impact of income
aspirations on life satisfaction seems to have been tested only once by Stutzer (2004), using
Swiss data. According to his findings, income aspirations decrease life satisfaction by about
the same magnitude as income increases it. According to the authors argument, the extent of
income aspirations may be influenced by the income-comparison effect (i.e. relative income):people living in richer regions usually have higher aspirations, and this continues even after
controlling for the difference in living standards between rich and poor regions. In this article
we will shed light on the negative relationship between income aspirations and life
satisfaction.
Data
The data come from the Special Eurobarometer survey, which is a harmonized survey carried
out in the 27 Member States of the European Union. In this analysis we use the merged
dataset for two surveys carried out in 2009 (reference number: 321, wave number: EB.72.2)
and 2010 (reference number: 355, wave number: EB.74.1).
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To measure life satisfaction, we used the following question:All things considered, how
satisfied would you say you are with your life these days? Please tell me on a scale of 1 to 10,
where 1 means you are very dissatisfied and 10 means you are very satisfied. The
literature is not totally agreed either on whether subjective well-being should be measured by
life satisfaction (Hajdu and Hajdu: 2011) or by happiness (McBride: 2001), or on whether
ordinal or cardinal utility function should be used. In this article we focus on life satisfactionand do not seek to link this concept to subjective well-being by formulating any specific
assumptions, like Ferrer-i-Carbonell (2005: 103).
Income aspiration was measured using a question about minimum income: In your
opinion, what would be the very lowest net monthly income that your household would need
in order to have a minimum acceptable standard of living, given the present circumstances
and composition of your household? This is net income (in Euros) after tax and social security
contributions have been deducted, and once any social benefit entitlements are included. This
income was converted to equivalized income by dividing minimum income by the square root
of the size of the family. All figures were converted to 2010 prices using the inflation rate for
each country. Stutzer (2004) used a similar question, and he found that the minimum income
considered necessary was lower than the actual disposable income, and hence was only animperfect proxy for income aspirations (basically the same result as in our analysis, see
Figure 1). However, higher disposable income is paralleled by a higher aspiration for
minimum income; this means that minimum income is viewed as relative, which makes it
appropriate to measure aspirations.
Unfortunately, there is no information about actual household income in the
Eurobarometer survey. The only available question asks the respondent to place him or
herself on a scale of 1 to 10, where 10 represents a very high standard of living. With this
subjective scale, the impact of income cannot be distinguished from the impact of satisfaction
with the income. Using this question as a proxy for the material circumstances of the
household means overestimating its impact: for example, those who are not satisfied with
their income will probably rate the material circumstances of the household lower than those
who are satisfied. Though nothing can be done about it, we need to acknowledge the problem.
The dataset contains information about satisfaction with the standard of living, but it would be
wrong to control for that, since we cannot be sure whether income or satisfaction with income
enhances life satisfaction (in other words the impact of income very likely incorporates the
impact of the satisfaction with it). If we controlled for satisfaction with the standard of living,
the impact of household material circumstances would be underestimated; moreover we could
not be sure that the dependent variable (life satisfaction) is independent of that (it may well be
that these two variables are strongly interrelated).
The empirical analysis
The aim of this paper is to find out whether the negative relationship between income
aspirations and life satisfaction is common across European countries. The answer to this
question isyes or more precisely, yes, but... To arrive at an appropriate answer, we need to
clarify other questions as well: Are income aspirations connected to the material
circumstances of the household in other words, do people adapt to a given standard of
living? If people do adapt (for example, if higher material circumstances go together with
higher aspirations), how frequently do the aspirations exceed the level of material resources?
Furthermore, what is the impact of such excessive aspirations (and indeed of income
aspirations generally) on life satisfaction? And finally, what differences are to be found in the
impact of income aspirations?
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Let us answer these questions one by one. In Figure 1, equivalized net household
income (data from EU-SILC) is plotted against income aspirations (equivalized net minimum
income). One can see a relatively strong positive relationship: in better-off countries (x-axis)
people require a higher minimum income (y-axis). However, it is also noticeable that in richer
countries (where disposable income is more than EUR 1,000 a month) a one-unit increase in
disposable income translates to a smaller gain in income aspirations than is the case incountries with lower disposable income. There are only three countries (Romania, Bulgaria
and Hungary) where the level of aspiration exceeds the level of disposable income. These
countries are above the x=y line.
Figure 1 The connection between income aspirations and disposable income in the EU
Member States
BE
DKGR
ES
FI
FR
IT
LU
NL
AT
PT
SE
DE
UK
BG
CZ
EEHU
LVLT
MT
PL
RO
SK
SI
x=y Regression line
0
500
1000
1500
2000
Incomeaspirations
0 500 1000 1500 2000 2500 3000 3500 4000Disposable income
R-Squared=0.8335
Income aspirations (y axis): Equivalized net minimum income in Euros. Prices are inflated to the 2010 income
level. Source of data: EB.72.1 (2009) and EB.74.1 (2010).
Disposable income (x axis): Equivalized net household income in Euros. Prices are inflated to the 2010 incomelevel. Source of data: EU-SILC. Data refer to 2009 income year.
Applied equivalence scale: the square root of the number of household members.
Cyprus and Ireland do not appear on the diagram due to missing data.
In the graph, disposable income was used from an external dataset. We now perform the sametype of analysis at an individual level (not using country-means). Since material
circumstances and minimum income are measured on different scales, the following
procedure is employed. First, both the variables in each country are standardized separately.
The standardized coefficients can be interpreted as the distance between the mean values,
where the unit of distance is the standard deviation. Then the difference between the two
standardized variables is calculated (aspirations minus material circumstances). This shows
whether an individual holds the same place in the country-specific distributions of the two
variables. If the difference is positive, individuals have higher aspirations than their self-
placement based on material circumstances. In the case of a negative value, the respondent
compared to the country averages requires less minimum income than his/her material
circumstances would suggest. Table 1 contains the descriptive statistics on this discrepancyindex by country. As one can see, the median of this variable is below the 10 per cent
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standard deviation unit in the majority of countries, and exceeds that value only in Lithuania,
Italy and Estonia (countries are ranked according to the median value in column P50). It is
also noticeable that positive deviations (see the maximum values) have a much higher level in
absolute value than negative deviations (comparing column Maximum to column
Minimum). This means that in some cases respondents tend to have unrealistic aspirations;
in this case, there is a sizeable mismatch between material circumstances and incomeaspirations.
Table 1 Some descriptive statistics, by country, on the difference in minimum income and
material circumstances
Minimum P5 P50 P95 Maximum Mean
Standard
deviation
LV -3.15 -1.85 -0.16 2.18 13.33 0.03 1.41
IT -3.36 -1.73 -0.14 2.27 7.42 0.00 1.27
EE -4.10 -1.86 -0.12 2.22 16.63 0.01 1.38
LT -3.72 -1.98 -0.10 2.16 18.41 0.01 1.37FI -3.94 -1.96 -0.09 2.40 9.35 0.04 1.36
BE -3.66 -2.01 -0.09 2.32 16.17 0.01 1.41
PL -3.39 -1.74 -0.09 1.87 16.39 -0.02 1.20
SI -3.48 -1.90 -0.09 2.29 10.24 0.02 1.31
GR -3.48 -1.99 -0.08 2.29 6.37 0.01 1.28
AT -4.59 -1.97 -0.08 2.39 5.26 0.04 1.36
HU -4.10 -1.92 -0.08 2.15 15.95 0.02 1.33
IE -3.34 -1.88 -0.06 2.26 6.78 0.00 1.31
MT -3.83 -2.29 -0.06 2.27 7.49 -0.02 1.41
FR -3.78 -1.85 -0.06 2.10 14.21 0.04 1.34
UK -4.12 -1.92 -0.06 2.22 9.10 0.03 1.28
CY -3.58 -2.07 -0.06 2.23 6.12 0.02 1.31
ES -3.45 -1.92 -0.05 2.12 9.08 0.03 1.26
CZ -4.59 -1.92 -0.05 2.09 13.84 0.03 1.37
PT -3.39 -1.84 -0.05 1.75 18.59 0.03 1.29
SK -3.44 -1.76 -0.04 1.91 16.80 0.03 1.38
NL -4.25 -1.84 -0.03 2.28 6.20 0.03 1.26
SE -4.01 -1.85 -0.03 2.11 15.52 0.04 1.35
DE -4.37 -1.90 -0.02 2.21 10.09 0.03 1.29
LU -4.15 -2.01 0.00 2.49 4.88 0.07 1.37
BG -3.34 -1.84 0.01 2.06 5.61 0.03 1.18
RO -3.06 -1.83 0.04 1.87 15.30 0.07 1.30
DK -4.02 -2.03 0.06 2.13 6.14 0.03 1.26
Let us turn to the question of whether income aspirations decrease life satisfaction. Table 2
contains the results of an OLS regression. The dependent variable is life satisfaction. The
independent variables include material circumstances of the household, the usual socio-
economic variables and country fixed effects. Our particular interest focuses on the impact of
income aspirations. In column A we can see that the estimated coefficient is negative.
Controlling for all other characteristics, if someone doubles his expectations of minimum
income, that means a 0.06-point (ln[2]-0.09) decrease in life satisfaction. Compared to the
impact of material circumstances, this is moderate, since a one-unit increase on that 10-point
scale means a 0.5-point increase in life satisfaction. However, as was mentioned earlier, the
impact of material circumstances is overestimated, since it is probably biased by satisfaction
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with standard of living. Stutzer (2005) found, for example, a somewhat lower impact in the
case of household income.
Column B contains the impact of excessive aspirations on life satisfaction (this is
basically the discrepancy index shown in Table 1). The estimated coefficient is again
negative. It is somewhat less than in the case of income aspirations; however, we should bear
in mind that the unit of measurement is different for the two variables. One standard deviationchange causes nearly the same change in life satisfaction.
Table 2 Explaining life satisfaction, unstandardized OLS coefficients
Dependent variable: Life satisfaction
A B
Material circumstances 0.544*** 0.52***
Income aspirationsEquivalized minimum income (ln) -0.086***Excessive aspirations(standardized aspirations minus standardized material
circumstances) -0.035**Year = 2009 Ref. Ref.
Year = 2010 -0.018 -0.019
Female Ref. Ref.
Male -0.186*** -0.186***
Age -0.04*** -0.041***
Age square 0*** 0***
Primary education Ref. Ref.
Secondary education 0.097** 0.095**
Tertiary education 0.351*** 0.348***
Retired -0.13* -0.13*
Self-employed Ref. Ref.
Employed 0.016 0.013
Inactive -0.544*** -0.543***
Student 0.429*** 0.428***
Village 0.058* 0.06*
Town Ref. Ref.
Large town -0.046 -0.047
Country fixed effects Yes Yes
F-stat 405.96*** 406.54***
R square 0.28 0.28
N 44350 44350
*** The coefficient is different from zero at 1 per cent significance level.
** The coefficient is different from zero at 5 per cent significance level.* The coefficient is different from zero at 10 per cent significance level.
The impact of aspirations is, however, not homogeneous. In the case of poorer1 individuals,
income aspirations (Table 3, Panel A) and excessive aspirations (Table 3, Panel B) decrease
life satisfaction more than among well-off respondents. Among the rich (whichever definition
is applied), aspirations do not have any impact on life satisfaction. This finding is similar to
that of Ferrer-i-Carbonell (2005), who basically discovered that relative income has a larger
effect among the poor. It is up to future research to find out whether the difference between
1 We applied basically two definitions. We identified as poor those who placed themselves on level 1, 2 or 3 ofa 10-point material circumstances scale, or who answered that they had much less money than was indicated as
the minimum acceptable in the minimum income question. Similarly, the rich were identified as those whoplaced themselves on level 10, 9 or 8, or who answered that they had much more than the minimum acceptable
income.
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rich and poor can be explained by the fact that the poor usually compare their income to that
of the rich, while those at the top of the income distribution find it harder to identify a richer
reference group.
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Table 3 The impact of aspirations on life satisfaction according to material status a
sensitivity analysis (unstandardized OLS coefficients)
Dependent variable: Life satisfaction
Poor Rich
Definition of income status
The impactin the
wholesample
(Table 1)
Low material
circumstances(Values: 3, 2,
1)
Net income of
the householdis much less
than theindicated
minimumincome
High material
circumstances(Values: 10, 9,
8)
Net income of
the householdis much more
than theindicated
minimumincome
A
Materialcircumstances
0.54*** 0.64*** 0.55*** 0.2** 0.41***
Income aspirationsEquivalized minimumincome (ln)
-0.09*** -0.22** -0.16* 0.06 0.05
B
Materialcircumstances 0.52*** 0.56*** 0.51*** 0.22** 0.43***
Excessive aspirations(standardized aspiration
minus standardized materialcircumstances)
-0.04** -0.13*** -0.07** 0.05 0.02
Other control variables: yes; country fixed effects: yes. The control variables are identical to those appearing inTable 1.
The OLS models were run on a selected sample. The selection criterion is defined in the first row of the table.*** The coefficient is different from zero at 1 per cent significance level.
** The coefficient is different from zero at 5 per cent significance level.* The coefficient is different from zero at 10 per cent significance level.
If we consider that the positive impact of material circumstances is counterbalanced by thenegative impact of aspirations, we should find out why this does not hold in the case of the
rich. One solution is offered by the research of Kahneman and Deaton (2010). Those authors
found that material resources do not increase life satisfaction according to some monotone
increasing function; instead there is an inflection point in income, after which any further
increase does not translate into a gain in life satisfaction (because emotional and relationship
aspects gain emphasis). If we continue this logic, it may be that, once the satiation point is
reached, neither income nor aspiration has any impact on life satisfaction. It could serve as an
indication of this that when we investigated the connection between disposable income and
income aspirations (Figure1), we also found some elasticity. In richer countries the same unit
increase in disposable income translated to a smaller gain in income aspirations. Indisputably,
however, more research is needed to test this hypothesis.
Summary and some statements about the connection between life satisfaction and
aspirations
1. The average magnitude of income aspirations in a country is positively related to
disposable income. In those countries where disposable income is low, people find a lower
level of minimum income acceptable. However, there is some elasticity in the connection
between income aspirations and disposable income. The discrepancy between the
minimum income and disposable income increases with increasing disposable income
(Figure 1). In other words, respondents adapt to a certain level of income and articulatetheir aspirations on the basis of this income level.
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2. Income aspirations are quite realistic. However we could not compare economic
aspirations to real material resources; what we could do was compare the deviation from
the country-means in income aspirations and perceived household resources (Table 1).
Based on this comparison, we can conclude that, on average, people tailor their aspirations
to the perceived level of income. On the one hand, this finding underlines the fact that
aspirations grow if material resources increase. On the other hand, however, we shouldconsider that the level of discrepancy (in absolute value) is much higher if aspirations
exceed perceived material resources than vice versa.
3. Income aspirations and excessive aspirations both decrease life satisfaction
(Table 2). The positive impact of material resources on life satisfaction is somewhat
counterbalanced by the negative impact of aspirations. This relationship also holds when
country fixed effects and some socio-economic variables are controlled for.
4. The negative impact of aspirations is stronger among the poor. This contradicts
somewhat the assumption that income and aspirations go together, but it might be
explained by some recent findings that, beyond a certain income level, increasing income
does not translate into a gain in life satisfaction (Table 3).
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