Relative Income and Subjective Wellbeing: Rural versus Urban Distinctions in Intra-national and Inter-national Comparisons

Considerable work, based on the Easterlin Paradox, substantiates that both absolute income and interpersonal income comparisons matter for individuals’ life satisfaction (subjective wellbeing). Most studies show that the inter-personal comparisons which matter most are those set in relation to similar intra-national individuals. One recent contribution, however, shows also that inter-national income comparisons matter for life satisfaction. Using European and World Values Survey data, we confirm the intra-national predictions of the Easterlin Paradox for developed countries. Individuals’ life satisfaction rises as their personal income rises. However, their life satisfaction falls as the incomes of similar individuals within their own country rise. The coefficients on these two effects are approximately equal, in line with Easterlin’s findings. Thus, ceteris paribus, an overall rise in a country’s income that affects each individual by the same proportion leaves overall subjective wellbeing broadly unchanged. This result, however, does not hold for transitional countries. In addition, we extend the recent work on inter-national income comparisons, confirming the importance of inter-national income comparisons in determining people’s subjective wellbeing. This result changes the interpretation regarding the effect of a distribution-neutral increase in national income on wellbeing. A country that raises its per capita income faster than others will experience a rise in wellbeing, while residents’ wellbeing will suffer in a country that lags behind others. A separate body of literature shows that there may be material differences between levels of urban and rural life satisfaction even after controlling for other variables. In some developed countries, rural life satisfaction, ceteris paribus, tends to be higher than in cities while the opposite tends to hold in transitional and developing countries. We test the hypothesis that these spatial differences are in part a result of differing emphases on intra-national or inter-national income comparisons according to whether individuals live in rural or urban settings, finding support for this hypothesis in transitional countries but not in developed countries. Furthermore, once we control for other factors, we cannot reject the presence of a spatial equilibrium. This extension takes both the rural-urban life satisfaction literature and the Easterlin-based literature in new directions, resolving some of the outstanding questions attached to the findings of each branch of the literature. Paper for Regional Studies Association conference; Piacenza, Italy; May 2015. Theme: SS34. Cities of the Mind Subjective Wellbeing in Urban Regions * Motu Economic & Public Policy Research Trust, PO Box 24390 Wellington 6142, New Zealand. Email: arthur.grimes@motu.org. nz (presenting author). + University of Auckland, Auckland, New Zealand. 1 We wish to thank Robert MacCulloch for his very considerable input into this paper. We also thanks the Marsden Fund of the Royal Society of New Zealand and the Resilient Urban Futures programme for funding support.