Income Comparisons in China Andrew E. Clark (Paris School of Economics and IZA) Cl Claudia Senik (Paris School of Economics and Paris IV) di S ik (P i S h l f E i d P i IV) Happiness and Economic Growth: Lessons from Developing Countries March 9 th 2012 March 9 2012
One of the reasons that we are (or should be) One of the reasons that we are (or should be) interested in China is that it is a very large country so that it “matters” in a global sense country, so that it “matters” in a global sense. Another is it’s fantastic recent level of economic growth growth.
Chinese growth rates are (arguably) unprecedented Chinese Real GDP Growth Rate 16 14 12 10 8 8 6 4 2 2 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 1 1 1 1 1 1 1 1 2 2 2 2 2
Leading to a rise in real GDP of an order of magnitude
What might be the Subjective Well-Being consequences g j g q of such growth? While the Chinese case is impressive, there is something of a parallel with Japan of a parallel with Japan. Japan was a poor country in the 1950s/early 1960s, but then experienced unprecedented growth. Easterlin, R. A. (2005). “Diminishing Marginal Utility Easterlin, R. A. (2005). Diminishing Marginal Utility of Income? Caveat Emptor”. Social Indicators Research . pp. 243-255. esea ch . pp. 3 55.
Fact 1 . Richer countries are happier countries. The blue lines show the estimated relationship between income and between income and happiness Japan Japan was in the middle of the income distribution in the early 1960s and had Japan was in the middle of the income distribution in the early 1960s, and had a middling level of happiness
So what happened as Japan became richer? So what happened as Japan became richer? Look at annual indices (1962=100) of life satisfaction and real GNP per capita for Japan satisfaction and real GNP per capita for Japan, 1958-1987 B Between 1962 and 1987 Japan experienced 1962 d 1987 J i d unprecedented economic growth, with GNP per capita (in real terms) rising 3.5-fold: i (i l ) i i 3 5 f ld growing from 22 to 77 percent of the United States level in 1962 We might then imagine that Japan would follow g g p the blue regression tramlines above: as Japan became richer, it would become happier. , pp
In fact, the trend in happiness was flat, despite Japan’s remarkable economic growth What “should” have happened What did happen
Are the Japanese strange? Not necessarily: the same thing can be observed in 30 years of American data N t il th thi b b d i 30 f A i d t 40000 3 2000 US$) 2.5 30000 30000 Per Capita (2 Happiness 2 1.5 20000 Average H Real Income P 1 Happiness Real Income Per Capita 10000 0.5 R 0 0 1973 1977 1981 1985 1989 1993 1998 2003 Year Year This is the Easterlin Paradox. Richer individuals are happier, but as countries become richer over time they do not become happier. The challenge to social science is to try to explain why.
One candidate explanation of the Easterlin paradox is via p p comparisons of my own income or consumption to: • The consumption of “others” The consumption of others • My own consumption in the past This is a great research topic. But, unfortunately, not always so easy to carry out convincing tests convincing tests.
We would like to estimate a “well-being” function of the form: W = W(Y, Y*, ....) The key variable Y* here is “comparison income”: the income to which we compare/income of the reference group reference group.
Imagine that we can measure well being, W , in Imagine that we can measure well-being “ W ” in surveys via job satisfaction, life satisfaction, happiness mental stress/depression etc happiness, mental stress/depression etc. These measures have by now been reasonably- widely validated by widely validated by physiological/neurological studies, third- party raters, and (most importantly) future t t d ( t i t tl ) f t behaviours such as divorce, unemployment duration, quitting one’s job, and morbidity and mortality. y
But there remains the problem of measuring Y*: But there remains the problem of measuring Y : to whom do we compare? Peer group/people like me Others in the same household Spouse/partner Spouse/pa e Myself in the past Friends Friends Neighbours Work colleagues “Expectations” p
We very rarely have direct information about to whom people compare. • And if we do have that information, we do not know how much individuals in the reference group earn. • A d And when we do have information, it rarely covers h d h i f ti it l everyone in the reference group. The data we use here help us to overcome these drawbacks.
“IFPRI Public Policy and Rural Poverty” Program Survey Jointly conducted by IFPRI the China Academy of Jointly conducted by IFPRI, the China Academy of Agricultural Sciences, and Guizhou University.
Guizhou Province
About.com does not seem to have been sponsored by the local tourist office… Location : Guizhou ( 贵州 ) Province is in ( 贵州 ) P L ti G i h i i i China's south. It is one of China's less- developed provinces. Capital city : Guiyang ( 贵阳 ) is the capital and largest city in Guizhou and largest city in Guizhou. Attractions : there isn't a big list of famous attractions in Guizhou.
The Guizhou data is very interesting for a y g number of reasons. • It is panel with waves in 2004 2007 and It is panel, with waves in 2004, 2007 and 2010. • At each wave individuals are interviewed • At each wave, individuals are interviewed within households. • Serious attempts are made to interview all S households within 26 different villages in Guizhou. • In 2010, the head of household provided , p information on various measures of satisfaction, including satisfaction with satisfaction, including satisfaction with income.
In 2010, average household income was , g 16157.75 Renminbi (about 2500 Dollars, using an exchange rate of 6 3) using an exchange rate of 6.3). The distribution of income is very unequal. The Gini coefficient in 2010 in the Guizhou The Gini coefficient in 2010 in the Guizhou data was 0.547. Th The highest OECD figures are around 0.5 hi h t OECD fi d 0 5 (Chile and Mexico) The D9/D1 figure is 14 3; D9/D5 is 3 6 The D9/D1 figure is 14.3; D9/D5 is 3.6.
In this context of fast income growth, but also considerable inequality, we would like to see whether there is any evidence of income comparisons in China. i i Chi If there are, then the effect of income growth on well-being will be dampened. ell being ill be dampened The natural reference group in this dataset is the village. There are 25 villages in the 2010 wave. The smallest village has 36 households interviewed; the largest has 256 households interviewed.
No. of Cum. HHs % % There are 25 villages in the There are 25 villages in the 36 36 1 1 1.1 1 1 1.1 40 1.3 2.4 2010 wave. 45 1.4 3.8 48 1.5 5.4 56 1.8 7.1 The smallest village has 36 61 1.9 9.1 households interviewed; 63 2.0 11.1 72 2.3 13.4 the largest has 256 the largest has 256 86 2.7 16.1 households interviewed. 89 2.8 18.9 102 3.2 22.2 112 112 3 6 3.6 25 7 25.7 123 3.9 29.6 125 4.0 33.6 129 4.1 37.7 147 4.7 42.3 161 5.1 47.4 167 5.3 52.7 168 168 5 3 5.3 58 1 58.1 184 5.8 63.9 213 6.8 70.7 218 6.9 77.6 221 7.0 84.6 230 7.3 91.9 256 8.1 100.0
Our measure of well-being here is satisfaction with income. ti f ti ith i “ Are you satisfied with your current income?” Freq. Freq. Percent Percent Cum. Cum. Not satisfied 1,295 42.13 42.13 Not too satisfied Not too satisfied 896 896 29 15 29.15 71 28 71.28 Average 481 15.65 86.92 Rather satisfied 374 12.17 99.09 Very satisfied Very satisfied 28 28 0.91 0 91 100 00 100.00 Total 3,074 100.00 Our Guizhou villagers are not very satisfied. Littl Little evidence of Sen’s Happy Slaves here id f S ’ H Sl h
The completeness of information regarding p g g the reference group means that we can not only appeal to standard (estimated) only appeal to standard (estimated) measures of centrality such as the mean, but we can also consider the median. b t l id th di We also know the household’s rank within the village: is it the top earner? In the top the village: is it the top earner? In the top 10%? The top 25%?
Empirical questions: Empirical questions: • Does own household income predict income satisfaction? income satisfaction? • What aspects of the distribution of household income in the village matter, h h ld i i th ill tt conditional on the household’s own income? • Here are some of our preliminary results Here are some of our preliminary results. • None of these are contractually-binding
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