The Role of Reference Income in Shaping Europeans’ Well-Being in the Last Two Decades. Evaluation of Comparison and Information Effects

Magdalena Grabowska , University of Warsaw
Agata A. Górny, University of Warsaw

The reference income (i.e., the average income in one’s reference group) is a crucial indicator of individuals’ subjective well-being. It influences individuals’ well-being through two different effects – information and comparison. The comparison effect involves a negative relationship between reference income and happiness (relative income hypothesis), meaning that if one's reference group is well off, the individual's well-being is lower. Existing research, however, suggests that in Central and Eastern European (CEE) countries, this relationship was positive because of the predominance of the information effect (“tunnel effect”) during the early 21st century. This effect means that individuals use reference income to make expectations about their future. The study aims to describe the trends in the reference income-happiness relationship in the context of the “tunnel effect” and the recent pandemic. Using 10 waves of the European Social Survey for 32 European countries, we perform separate multilevel analyses for 4 European regions to evaluate the differences in absolute and reference income effects. Our results demonstrate that current economic and social circumstances influence the way the income of others affects people’s happiness. Specifically, the “tunnel effect” appears after major events increasing hope or uncertainty such as EU accession, recovering from crises, or military conflicts in the neighboring country. We also find evidence of a decreasing importance of absolute income for CEE countries over time. Surprisingly, we do not observe any universal change in reference income coefficients in 2020. Nevertheless, the "tunnel effect" related to the pandemic might have occurred with a lag.

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 Presented in Session P2. Health, Mortality, Ageing - Aperitivo