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An international application of the relative income hypothesis: the impact of exposure to other countries on life satisfaction

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Abstract
In international comparisons of life satisfaction, countries with a higher Gross Domestic Product (GDP) per capita are found to have higher scores on this measure of subjective wellbeing. Yet, It has long been recognized that the effect of income on life satisfaction does not solely rely on absolute wealth, but is also dependent on relative characteristics, e.g. difference with others' incomes. Consequently, regardless of the country, citizens with higher incomes will have higher life satisfaction than citizens with lower incomes. Although this individual level effect is often explained by referring to the concept of 'relative income', the cause of international differences is usually ascribed to a difference in living standards. However, an increasing GDP per capita does not necessarily entail increasing subjective wellbeing, according to the Easterlin paradox, and the differences between countries should thus disappear once basic needs are fulfilled. Despite the improving living conditions, significant differences in life satisfaction between middle- and high-income countries remain. This study tests if there is an international comparison effect and assesses to what extent the relative income hypothesis can be applied to explain these international differences in life satisfaction. We examine how life satisfaction is affected by the international exposure rate and how this correlates with Gross National Income (GNI) per capita. It is hypothesized that increased exposure in low and middle income countries has a negative effect due to increased aspirations and relative deprivation, while the opposite holds true for rich countries. We draw on data from the World Value Survey, the World Bank and the KOF Globalization index in order to perform a multilevel analysis. The results confirm our hypotheses that international exposure has a negative effect on life satisfaction in middle income countries and a positive effect in high income countries. These significant effects in middle- and high-income countries suggest that an international comparison effect exists and is capable of partially explaining international differences. However, no impact of the exposure rate was found in low income countries, which implies that a certain level of living standards is a necessary condition for international comparison effects to occur. These results lead us to conclude that international exposure has an effect on life satisfaction similar to that of the relative income hypothesis, but on an international scale. Increased international exposure induces an international comparison effect that decreases life satisfaction in middle-income countries, and increases life satisfaction in high-income countries. The existence of an international comparison effect puts a different perspective on economic growth as a main goal of public policy. For example, instead of benefiting citizens' wellbeing directly, economic growth may affect them only indirectly through international comparison effects.
Keywords
International comparisons, Relative income, Life satisfaction

Citation

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Chicago
Schalembier, Benjamin. 2014. “An International Application of the Relative Income Hypothesis: The Impact of Exposure to Other Countries on Life Satisfaction.” In Wellbeing and Public Policy Conference, Abstracts.
APA
Schalembier, B. (2014). An international application of the relative income hypothesis: the impact of exposure to other countries on life satisfaction. Wellbeing and Public Policy Conference, Abstracts. Presented at the Wellbeing and Public Policy Conference.
Vancouver
1.
Schalembier B. An international application of the relative income hypothesis: the impact of exposure to other countries on life satisfaction. Wellbeing and Public Policy Conference, Abstracts. 2014.
MLA
Schalembier, Benjamin. “An International Application of the Relative Income Hypothesis: The Impact of Exposure to Other Countries on Life Satisfaction.” Wellbeing and Public Policy Conference, Abstracts. 2014. Print.
@inproceedings{5839509,
  abstract     = {In international comparisons of life satisfaction, countries with a higher Gross Domestic Product (GDP) per capita are found to have higher scores on this measure of subjective wellbeing. Yet, It has long been recognized that the effect of income on life satisfaction does not solely rely on absolute wealth, but is also dependent on relative characteristics, e.g. difference with others' incomes. Consequently, regardless of the country, citizens with higher incomes will have higher life satisfaction than citizens with lower incomes. Although this individual level effect is often explained by referring to the concept of 'relative income', the cause of international differences is usually ascribed to a difference in living standards. However, an increasing GDP per capita does not necessarily entail increasing subjective wellbeing, according to the Easterlin paradox, and the differences between countries should thus disappear once basic needs are fulfilled. Despite the improving living conditions, significant differences in life satisfaction between middle- and high-income countries remain. This study tests if there is an international comparison effect and assesses to what extent the relative income hypothesis can be applied to explain these international differences in life satisfaction. We examine how life satisfaction is affected by the international exposure rate and how this correlates with Gross National Income (GNI) per capita. It is hypothesized that increased exposure in low and middle income countries has a negative effect due to increased aspirations and relative deprivation, while the opposite holds true for rich countries. We draw on data from the World Value Survey, the World Bank and the KOF Globalization index in order to perform a multilevel analysis. The results confirm our hypotheses that international exposure has a negative effect on life satisfaction in middle income countries and a positive effect in high income countries. These significant effects in middle- and high-income countries suggest that an international comparison effect exists and is capable of partially explaining international differences. However, no impact of the exposure rate was found in low income countries, which implies that a certain level of living standards is a necessary condition for international comparison effects to occur. These results lead us to conclude that international exposure has an effect on life satisfaction similar to that of the relative income hypothesis, but on an international scale. Increased international exposure induces an international comparison effect that decreases life satisfaction in middle-income countries, and increases life satisfaction in high-income countries. The existence of an international comparison effect puts a different perspective on economic growth as a main goal of public policy. For example, instead of benefiting citizens' wellbeing directly, economic growth may affect them only indirectly through international comparison effects.},
  author       = {Schalembier, Benjamin},
  booktitle    = {Wellbeing and Public Policy Conference, Abstracts},
  language     = {eng},
  location     = {Clinton, NY, USA},
  title        = {An international application of the relative income hypothesis: the impact of exposure to other countries on life satisfaction},
  year         = {2014},
}