Mid-Sem Test is for duration of 80minutes. Aids allowed: Calculator (non-programmable).

The test will consist entirely of MULTIPLE CHOICE QUESTIONS. Students have to choose one alternative that best completes the statement or answers the question. Each question is worth a mark. They need to enter their answer on the general purpose answer sheet & the test paper. Please find attached the revised Lecture 6 Lecture Slides, which gives out more information regarding the S1 2011 Mid-Sem Test for Micro200.

ASSIGNMENT OPTION ONE:The specific assignment tasks are: i) Research and summarise the empirical evidence that is available in between 2 and 5 scholarly (peer-reviewed) journal articles on the relationship between income and happiness & ii) With specific reference to at least two scholarly (peer-reviewed) journal articles in economics, discuss the contribution that behavioural economics makes to understandings of the relationship between income and well being. Details; The context of these tasks, provided in the introduction to the question, is the assumption in the traditional model of a positive relationship between utility and consumption. Therefore, a good starting point for the assignment is a brief exposition of this theoretical relationship. The well-known Easterlin paradox points out that average happiness has remained constant over time despite sharp rises in GNP per head. At the same time, a micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. There is no significant relationship between the improvement in happiness and the long term rate of growth of GDP per capita. This is true for three groups of countries analyzed separately - 17 developed, 9 developing, and 11 transition - and also for the 37 countries taken together. Time series studies reporting a positive relationship confuse a short-term positive association between the growth of happiness and income, arising from fluctuations in macroeconomic conditions, with the long-term relationship, which is nil.

Check that the articles are peer-reviewed and relevant (e.g. within economic journals and addressing the topic of the relationship between income and happiness/utility). The evaluation of part ii) also involves an assessment of the effort the student has made to search for relevant peer reviewed articles. For good marks the student needs to demonstrate an understanding of concepts from behavioural economics (e.g. reference points), making use of material in the selected articles. Well-being is a comprehensive term. We can think of well-being as subjective well-being or happiness. The opening topic sentence states: A basic assumption in traditional economics is that utility increases with the consumption of more goods and services and, thus, happiness is positively related to income. The student does not need limit their understanding of well-being to only mean our happiness. Wellbeing could relate to physical variables too such as our health. So the question can be a bit more open to interpretation. We should realise that well-being here at means at least happiness. Students should check out the seminal works by Daniel Kahneman, Richard Layard and Andrew Oswald (as listed in the updated lecture slides).

the reference-income hypothesis, for instance - how much we earn versus the norm among peers predicts our happiness levels - defies the simpler, alternative theory that the richer you are, the happier you feel (an idea known as the absolute-income hypothesis).

ASSIGNMENT OPTION 2:The specific assignment tasks are: i) The likely effects of increases in demand for iron-ore on iron-ore prices, iron-ore production and the demand and price of inputs used in the production of this commodity, including labour. (Remember to take account of the potential for input substitution); & The context of these tasks, provided in the introduction to the question, is the surge in demand for many minerals and metals located in Western Australia and the impacts of this on the States labour market D iron ore P iron ore

Production of iron ore likely to as it is profitable; market prospects are good. To produce more; got to use more inputs. In SR, DL as K is fixed. Price of L . Cost constraint will rotate out. SR, to produce same output, costs increases as labor costs increases or firms have to lower the production. Cost; show this on BC; rotation or shifting. In the LR, input substitution is possible. Can produce same output substituting K for L. ii) The effect of changes in wage rates in the mining sector for the supply of workers to mining and other industries; and the importance of workers preferences for living in city locations for the wage rates and other features of jobs in the mining sector. The introduction to the question also notes that most mine sites are situated in remote locations. Attracting workers to these locations can be difficult as many workers prefer to live in a major city, such as Perth, to be near their families and social facilities. If W ; effect on 1. 2. Mining Sector; Qs as W Other Sector; SL (as the OC of working in other sectors has increased)
L

Workers preferences for living in city for the wage rates: Other features of jobs in mining sector: Risks, . Note that this isnt a research essay and students shouldnt be penalized if they mainly rely on the text and lecture notes. The key thing to reward is demonstrated understanding of the relevant concepts and an ability to apply this understanding to the topic.

The questions I have so far after going through the questions briefly are mainly about the theories that I am supposed to use, for example: The question wants the "likely effects of increase in demand for iron-ore on its prices and production", it is obviously a shift in demand curve, but I am wondering that am I supposed to shift the supply curve as well to answer the question? Otherwise it would be too simple. And the increase in demand will also shift the isocost curve outward, which therefore increases the demand for the input, however how about the price? Should I apply the "demand supply theory" on both K ( normal demand and supply curves for goods ) and L ( wages / LS and MRP curves ), or merely rotate the L inward while remain K the same as the question says that "most mine sites are situated in remote locations and attracting workers to these locations can be difficult" which obviously implies a wage increase.

Prof. Robert Cummins is the leader on measuring subjective well-being (satisfaction) and the links between the usual variables e.g. income, marriage and gender etc. Theres a whole stack of his research available, try: http://www.deakin.edu.au/research/acqol/index.php That website goes into some good details and some of the reports provide good empirical evidence of the link between income and subjective well-being. I suggest downloading the latest report to get a feel for Australian Unity Wellbeing Index e.g. http://www.deakin.edu.au/research/acqol/auwbi/survey-reports/

Hence, the Option 2 Assignment requires only some (not extensive) knowledge about the Western Australian economy/mining sector.

Yes, been very busy lately. Teaching Global Money and Capital Markets 200 and coordinating Honours (Economics) students. Will work on a couple of publications too. I have sent you a link in the previous email re income and happiness (re Robert A. Cummins works), and I suggest you check out those links and read a survey report to get an idea. Yes, well-being is a comprehensive term. I think you can think of well-being as subjective well-being or happiness. Not really a problem here because the opening topic sentence states: A basic assumption in traditional economics is that utility increases with the consumption of more goods and services and, thus, happiness is positively related to income. But, thats not to say we can or should limit our understanding of well-being to only mean our happiness. Well-being could relate to physical variables too such as our health. So the question can be a bit more open to interpretation. We should realise that well-being here at means at least happiness. I wouldnt worry about it too much. I have requested Siobhan for an marking guide for the assignment, so that should help us out a bit will let you know once I have it. Students should try the Journal of Happiness Studies or Social Indicators Research, and of course check out the seminal works by Daniel Kahneman, Richard Layard and Andrew Oswald. You could elude to your students the updated lecture materials --- I mentioned these in my first email. Perhaps you could spend 5 to 10 mins revising the updated lecture materials on happiness and behavioural economics and listen to Siobhans i-Lecture recording on it to aid your understanding.

2. Yes, Prof. Robert Cummins is the leader on measuring subjective well-being (satisfaction) and the links between the usual variables e.g. income, marriage and gender etc. Theres a whole stack of his research available, try: http://www.deakin.edu.au/research/acqol/index.php That website goes into some good details and some of the reports provide good empirical evidence of the link between income and subjective well-being. I suggest downloading the latest report to get a feel for Australian Unity Wellbeing Index e.g. http://www.deakin.edu.au/research/acqol/auwbi/survey-reports/

Good to hear from you! I have just received several emails from you now. Yes, as you said, I didnt receive any before this one probably because of the wrong email address. Anyhow, I will attempt to answer your questions. As for the lecture slides, I wouldnt be too worried about the changes. Just make sure your students are aware of them perhaps you could spend 5 or 10 minutes revising some of the new content missed in your lectures (or just upload the newer slides etc.). I personally wasnt notified of any changes so I couldnt inform you, sorry, but I see what you mean after I downloaded the slides from BB. 3.Perhaps youre best off downloading the latest ones from BB (they are usually uploaded two days before the lecture which is on Mondays here in Bentley), and utilise Siobhans new slides for your lecture. I dont possess a copy of Siobhans new lecture slides (only from BB). Plus, I dont know whether

there are going to be any more changes. I assumed that shed be teaching the same content which she roughly is. However, I think Siobhan is only minor updating some of the slides e.g. to provide more recent examples such as slides 52 & 53 on Consumer Theory Part 1. Basic theory remains the same.

She has updated the content for Week 4 - Consumer Behaviour Part III for the Behavioural economics section to help with the first option of the assignment. Plus, Week 5 - Production & Costs incorporates some new environmental stuff (Slides 43 to 52) to help with the second option one.

Yours, Andrew

Do We Need $75,000 a Year to Be Happy? By Belinda Luscombe Monday, Sep. 06, 2 People say money doesn't buy happiness. Except, according to a new study from Princeton University's Woodrow Wilson School, it sort of does up to about $75,000 a year. The lower a person's annual income falls below that benchmark, the unhappier he or she feels. But no matter how much more than $75,000 people make, they don't report any greater degree of happiness. Before employers rush to hold or raise everyone's salary to $75,000, the study points out that there are actually two types of happiness. There's your changeable, day-to-day mood: whether you're stressed or blue or feeling emotionally sound. Then there's the deeper satisfaction you feel about the way your life is going the kind of thing Tony Robbins tries to teach you. While having an income above the magic $75,000 cutoff doesn't seem to have an impact on the former (emotional well-being), it definitely improves people's Robbins-like life satisfaction. In other words, the more people make above $75,000, the more they feel their life is working out on the whole. But it doesn't make them any more jovial in the mornings. The study, by economist Angus Deaton and psychologist Daniel Kahneman, who has won a Nobel Prize for Economics, analyzed the responses of 450,000 Americans polled by Gallup and Healthways in 2008 and 2009. Participants were asked how they had felt the previous day and whether they were living the best possible life for them. They were also asked about their income. The authors found that most Americans 85% regardless of their annual income, felt happy each day. Almost 40% of respondents also reported feeling stressed (which is not mutually exclusive with happiness) and 24% had feelings of sadness. Most people were also satisfied with the way their life was going. (See TIME's special issue on the science of happiness.)

So, where does the $75,000 come into play? Researchers found that lower income did not cause sadness itself but made people feel more ground down by the problems they already had. The study found, for example, that among divorced people, about 51% who made less than $1,000 a month reported feeling sad or stressed the previous day, while only 24% of those earning more than $3,000 a month reported similar feelings. Among people with asthma, 41% of low earners reported feeling unhappy, compared with about 22% of the wealthier group. Having money clearly takes the sting out of adversities. At $75,000, that effect disappears. For people who earn that much or more, individual temperament and life circumstances have much more sway over their lightness of heart than money. The study doesn't say why $75,000 is the benchmark, but "it does seem to me a plausible number at which people would think money is not an issue," says Deaton. At that level, people probably have enough expendable cash to do things that make them feel good, like going out with friends. (The federal poverty level for a family of four, by the way, is $22,050.) But in the bigger view of their lives, people's evaluations were much more tied to their income. The more they made, the more they felt their life was going well. The survey asked respondents to place themselves on a life-satisfaction ladder, with the first rung meaning their lives were not going well and the 10th rung meaning it was as good as it could be. The higher their income, the higher the rung people chose. "Importantly, the same percentage increase in income has the same effect on evaluation for everyone, rich or poor alike, even though the absolute dollar amounts differ," the authors write. So every 10% rise in annual income moves people up the satisfaction ladder the same amount, whether they're making $25,000 or $100,000. "High incomes don't bring you happiness, but they do bring you a life you think is better," conclude the authors. Might it be time for Oprah to give these guys their own show? Past research on money and happiness has also found that it's not absolute wealth that's linked with happiness, but relative wealth or status that is, how much more money you have than your neighbors. It's no surprise, then, that when the same polls are done in different countries, Americans come out as a bit of a mixed lot: they're fifth in terms of happiness, 33rd in terms of smiling and 10th in terms of enjoyment. At the same time, they're the 89th biggest worriers, the 69th saddest and fifth most stressed people out of the 151 nations studied. Even so, perhaps because of the country's general wealth, they are in the top 10 citizenries where people feel their lives are going well, beaten out by such eternal optimists as the Canadians, New Zealanders and Scandinavians. Right. Now that Princeton researchers have untangled that life mystery, maybe someone at MIT can look into the optimal amount of money required to buy us love.

Read more: http://www.time.com/time/business/article/0,8599,2016291,00.html#ixzz1IorKY300

Saturday, March 08, 2008 Income and Happiness How are income and happiness related? Income and Happiness: An Imperfect Link, by Robert H. Frank, Economic View, NY Times: ...This week, Senator Byron Dorgan, Democrat of North Dakota, will ... hold a hearing exploring whether traditional economic measures like per-capita income accurately capture peoples sense of well-being. This has long been a contested issue. ... The debate is not just of philosophical interest; it also has important policy implications. Recent research findings offer support for specific arguments on both sides. Mounting evidence suggests, however, that per-capita income is a less reliable measure of well-being when income inequality has been rising rapidly, as it has in recent decades. ... [The problem is]... the assumption, traditional in economic models, that absolute income levels are the primary determinant of individual well-being.

This assumption is contradicted by consistent survey findings that when everyones income grows at about the same rate, average levels of happiness remain the same. Yet at any given moment, the pattern is that wealthy people are happier, on average, than poor people. Together, these findings suggest that relative income is a much better predictor of well-being than absolute income. In the three decades after World War II, the relationship between well-being and income distribution was not a big issue, because incomes were growing at about the same rate for all income groups. Since the mid-1970s, however, income growth has been confined almost entirely to top earners. Changes in percapita G.D.P., which track only changes in average income, are completely silent about the effects of this shift. When measuring the economic welfare of the typical family, the natural focus is on median, or 50th percentile, family earnings. Per-capita G.D.P. has grown by more than 85 percent since 1973, while median family earnings have grown by less than one-fifth that amount. Changing patterns of income growth have thus caused per-capita G.D.P. growth to vastly overstate the increase in the typical familys standard of living during the past three decades. Some economists have advanced an even stronger claim that there is no link, at least in developed countries, between absolute spending and well-being. Recent work suggests that this is especially true for spending categories in which the link between well-being and relative consumption is strongest. For instance, when the rich spend more on larger mansions..., the apparent effect is merely to redefine what counts as adequate. Evidence also suggests that higher spending at the top instigates expenditure cascades that pressure middle-income families to spend in mutually offsetting ways. Thus, when all spend more on interview suits, the same jobs go to the same applicants as before. Yet in many other categories, greater levels of absolute income clearly promote well-being, even in the richest societies. The economist Benjamin Friedman has found that higher rates of G.D.P. growth are associated with increased levels of social tolerance and public support for the economically disadvantaged. Richer countries also typically have cleaner environments and healthier populations than their poorer counterparts. That per-capita G.D.P. is an imperfect index of economic welfare is not news. The lesson of recent work is that its weaknesses are more serious than we previously realized. And it is an especially uninformative metric when income inequality has been rising sharply, as it has been in recent decades. A society that aspires to improve needs a better measure of what counts as progress.

This would be a good place to note this from Will Wilkinson: Better to Be Richer, The Fly Bottle: I just ran across Angus Deatons latest summary of his happiness findings at the Gallup website: As the graph indicates, life satisfaction is higher in countries with higher GDP per head. The slope is steepest among the poorest countries, where income gains are associated with the largest increases in life satisfaction, but it remains positive and substantial even among the rich countries; it is not true that there is some critical level of GDP per capita above which income has no further effect on life satisfaction. Please share this fact with friends at your next cocktail party. Heres the graph:

Deaton conjectures that the consistent relationship between income and life satisfaction has to do with some kind of shared global standard for self-reporting the Danes know how good they have it relative to the folks in Togo, and the folks in Togo know how bad they have it relative to Danes. I dont know about that. Here's more from Angus Deaton: The link between money and contentment has been a question of considerable interest to researchers since Richard Easterlin noted in a seminal 1974 paper that average national happiness does not increase over long spans of time, despite large increases in per-capita income. ... It is far from clear why questions of life satisfaction should be so closely related to national incomes. Much of the literature on the topic emphasizes the relative nature of such responses; when people answer such questions, they must surely assess their life satisfaction relative to some benchmark, such as their own life in the past, or the lives of those around them. Indeed, a recent study by Andrew Clark, Paul Frijters, and Michael Shields found that life satisfaction is sensitive to respondents' income relative to those with whom they most closely associate, which implies that there should be no relation between

average national life satisfaction and national income, unless there is some other aspect of national income that raises everyone's life satisfaction together. A simpler interpretation of the Gallup World Poll findings is that when asked to imagine the best and worst possible lives for themselves, points 10 and 0 on the scale, people use a global standard. Danes understand how bad life is in Togo and other poor places, and the Togolese, through television and newspapers, understand how good life is in Denmark or other high-income countries. ... If this interpretation is correct, it would be an indication of how much the globalization of information has affected the perceptions of populations worldwide -- because the consistently high correlation between income and satisfaction could not have existed in its absence

Measuring Happiness and Wellbeing

Why measure wellbeing?
One of the fundamental goals of public policy is to make people happy (others, arguably, are equality and protection of animals and the planet). This is not happiness in a narrow or superficial sense, but being happy and content with their meaningful lives. It doesnt mean they should always be laughing and shouldnt be sad at lifes misfortunes. And it doesnt mean that it is governments job to make you happy. But it is always worth remembering what the ultimate purpose is of planning, housing, economic development and social care. The aim is to move people further up the scale of happiness or wellbeing. The role may be seen to end as soon as a minimum has been met, but essentially its about moving in that direction. Is a focus on wellbeing any different from what local government and public services do anyway? Isnt it implicit that we try to improve housing, reduce crime, create jobs and provide social care to reduce misery and increase happiness? Yes, but sometimes we, or the systems we devise, forget what were doing it for. If we measure reductions in unemployment but ignore the fact that it is through soulless, poorly paid jobs, if we negotiate contracts for meals on wheels that efficiently

provide food but ignore companionship, if we design urban spaces that allow people to drive quickly to their destinations but cut off personal contact, then we may have let our focus on immediate outputs drive out the real point of why were doing it. As well as being important in its own right, people who are happier tend to live longer (Seligman, 2003, pp.3-4), have happier marriages and be more healthy. Measuring wellbeing is important so as to know whether we are progressing towards that ultimate aim. The impetus for measuring wellbeing was given a boost with the Prime Minister's announcement on 25th November 2010 that from next April we will start measuring our progress not just by how our economy is growing, but by how our lives are improving not just by our standard of living, but by our quality of life. This is part of a move by government's from around the world to include measures of wellbeing, to sit alongside GDP, in their national statistics.

What is happiness?
Happiness is essentially feeling good enjoying life and wanting the feeling to be maintained (Layard, 2005, p.12). There are many sources of happiness, but according to Layard, there is a single dimension of how good we feel you cant be both happy and unhappy at the same time. There is, though, a difference between how excited or tranquil (or aroused) you are, leading to a difference between contentment and joy (Layard, 2005, p.21). Martin Seligman (Authentic Happiness, 2003) suggests that there are three sorts of positive emotions: those oriented towards the past, the present and the future. Of the present ones, there are two sorts: pleasures and gratifications. Pleasures include bodily pleasures and higher pleasures (rapture, thrill, gladness etc.). Gratifications are activities we like doing, that engage us, that we lose ourselves in; sometimes called flow. However, he suggests complete happiness also needs to be authentic, and has to be about more than just momentary pleasures. This can be achieved by making use of your strengths and virtues for something larger, that gives meaning (not necessarily religious).

Can you measure happiness?

It is not straightforward but the short answer is yes, it is possible to measure happiness reasonably reliably. It is also possible to measure many of the components of wellbeing more generally. Care is needed in interpreting the results but we can and should be measuring the happiness and wellbeing of local people. Peoples self-reports of happiness show correlation with the views of other people and with brain scans (Layard, 2005, pp.17-20). Activation of the left side of the brain, (in particular the dorsolateral prefrontal cortex) tends to be associated with greater happiness (Layard, 2005, p. 2476, footnote 3).

What makes you happy?

About 50% of your happiness is genetic. Some people are just naturally more happy than others. There are things individuals can do to increase their happiness (see reference to The How of Happiness in the links at the end of the page). However peoples environment and communities can also have a big impact. If you live in a cold, damp flat which leaves you physically and socially isolated, youre scared to go out because of the crime and anti-social behaviour and your boring and repetitive job provides few or no opportunities for expressing your personal strengths or provides income to change your circumstances then you have an uphill struggle towards happiness. There is a formula for happiness: H=S+C+V Your level of happiness (H) is determined by your biological set point (S) plus the conditions of your life (C) plus the voluntary activities (Very) you do. (Haidt, 2006, p.91). According to Lyubomirsky, S=50%, C=10% and V=40%. More precisely, the key factors influencing happiness are, in order: Family relationships Financial situation Work Community and friends Health The other two important facts are
y y

y y y y y

Personal freedom Personal values (Source: Layard, Richard, Happiness: lessons from a new science, Allen Lane, London, 2005, p.63)

What measures are available

Lots of indicators are available to probe the various personal and circumstantial aspects of wellbeing and these are discussed in detail in the Young Foundations WARM toolkit. However there are also widely used, very simple but robust questions which can be used to find out about any given individuals level of wellbeing and which can build up to a picture for the community as a whole.

A standard question is: All things considered, how satisfied are you with your life as a whole nowadays? This is used in the British Household Panel Survey which has around 10,000 people from the UK. It was also a voluntary indicator in the Place Survey. The Eurobarometer Survey Series uses a similar question: "On the whole are you very satisfied, fairly satisfied, not very satisfied or not at all satisfied with the life you lead?" Defra uses a range of wellbeing indicators in their Sustainable Development Indicators, including life satisfaction. The Edinburgh-Warwick Mental Well-being Scale asks respondents to state how frequently, on a five point scale, they have experienced 14 statements, such as feeling optimistic, relaxed or useful, over the previous two weeks.

The WARM toolkit

The Young Foundation's WARM toolkit, produced by the Young Foundation as part of the Local Wellbeing Project shows how a range of measures can be brought together to illuminate the wellbeing of neighbourhoods and local areas. Solidly based on the extensive evidence about happiness and wellbeing, it shows how a mix of indicators can provide a coherent and meaningful view of the wellbeing of areas down to neighbourhood level.

What is important for happiness and what is not? If you had to guess, which ones of the following would you say are important for happiness: money, friends, having children, getting married, looks, health, moving to a better climate? Is your age important? What about your level of education? The safety of your community? Common sense predicts that the most likely source of satisfaction with life is objective circumstances but often this is not the case. There is very little relationship between happiness and many life circumstances we consider so important that we would sacrifice years of our lives in order to have them. Compare your thoughts with the table on the next page, which summarises the research findings on the correlates of happiness, and see whether you've got it right. A word of warning here - unravelling causes and effects is not easy. Although these correlates are often considered to be the causes of happiness, they may as well be its consequences. For example, it may be that having good friends brings happiness or that those who are happy attract good friends.

Happiness and relationships Diener and Seligman in their study of exceptionally happy people (the upper 10% of 222 college students) found only one main difference between the happiest and the rest of the students. The very happy people had a rich and fulfilling social life. They spent the least time alone, had good relationships with friends and had a current romantic partner. They did not have fewer negative and more positive events, nor differed on the amount of sleep, TV watching, exercise, smoking, drinking, etc. Marriage usually leads to a rapid increase in SWB, which, unfortunately, comes down after a while. However, it does not return to the starting point, but stays at a higher level than before. So marriage changes the set point of SWB, although this change is not large. However, if your relationship is on the rocks, you are likely to be less happy than people who are unmarried or divorced. The truth as research knows it SWB is related to: Optimism Extraversion Social connections, i.e. close friendships Being married (marriage still scores better than cohabiting, although the latter is picking up as a predictor of SWB in individualistic societies) Having engaging work Religion or spirituality Leisure Good sleep & exercise SWB is not really related to: Age (although there are somewhat contradictory findings in this respect) Physical attractiveness Money (once the basic needs are met, the difference between the very rich & alright is negligible) Gender (women are more often depressed but also more often joyful)

Education level Having children (see the next page for further clarification) Moving to a sunnier climate (in fact, moving to Australia will increase your SWB only by 1-2 %) Crime prevention

Social class (through lifestyle differences & better coping methods) Subjective health (what you think about your health)

Housing

Objective health (what doctors say)

Interesting facts about well-being y y y y y y y y In three months, the effects of being fired or promoted lose their impact on happiness level. Winning the lottery often leaves people less happy. Real income has risen dramatically in the prosperous nations over the last 50 years, but levels of SWB have stayed flat. Recent changes in an individual's pay predict job satisfaction, but average levels of pay do not. People in wealthy nations appear to be much happier than in poorer ones but this finding does not hold true for some nations (e.g. Brazil). Desiring wealth leaves one less happy. People who go to church are happier and live longer, although this may be explained by the social support that belonging to a religious community gives to people. Having children does not make you happier and having under fives and teenagers actually makes you less happy. Saying that, having children can make your life more meaningful, and also parents tend to live longer. Watching soap operas enhances well-being. Happiness is partly innate. All objective life circumstances combined account for not more than 10% of variance in wellbeing.

y y y

Seligman introduces the happiness formula: H = S+C+V, where H stands for happiness, S for a set range, C for the circumstances and V for the factors under voluntary control. S is a genetically determined level of happiness, which remains relatively stable through the life span and returns to its original point soon after the majority of significant life events. It determines happiness up to about 50%. C is the circumstances we've already considered (and accounts for about 10%). So, if you want to be happy, get married, join a church but don't bother about making more money, staying healthy, getting educated or moving to a sunnier climate. Finally, factors under voluntary control (V) refer to intentional and effortful practices a person can choose to engage in (which account for about 40%).

The economics of happiness: a progress report Little by little, psychology's insights into happiness and well-being are being integrated into economic theory and debate. Happiness has become one of the hot topics in economics over the last decade, with both the size and depth of the literature increasing at a rapid rate. Though US-based psychologists Daniel Kahneman and Ed Diener and economists Richard Easterlin and Alan Krueger can take much credit, so too can the British 'brat pack' consisting of Warwick's Andrew Oswald, Paris-based Andrew Clark, Dartmouth's Danny Blanchflower and (as an honourary elder statesman), the LSE's Richard Layard. The two Andrews were writing about this stuff years ago, when 'respectable' academic economists thought the topic barking. What is particularly encouraging is that economists are starting seriously to tackle the major empirical and the theoretical challenges that this literature has uncovered. A new paper by Andrew Clark, Paul Fritjers and Michael A Shields, prepared for the Journal of Economic Literature, ups the ante. Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles (PDF) takes as its starting point Easterlin's seminal 1974 paper which posed a paradox - that happiness does not appear to increase with income, once basic needs are fulfilled. The paper covers a lot of ground, including adaptation, social comparisons, relative income, utility and much more besides. There is a short but insightful description of the key challenges for empirical work. And to wrap it up, the authors explore some implications for economic theory and policy design. As a sampler, here are the authors concluding remarks: The interaction between economic theory and happiness is therefore the next milestone for the developing economics of happiness literature. However, it is clear that the empirical literature on happiness still faces several challenges, many of which are shared with other empirical literatures. Two of the key challenges are to deal with a general inability of survey data to precisely time changes in income with changes in happiness over long time periods, and the difficulty in mapping incomes into current and expected consumption. It is also the case that most datasets do not contain reliable (if any) ex ante information regarding the group (the reference point) to which individuals compare themselves. Similarly, no dataset can contain all the variables of importance, so that researchers will continue to face the issue of endogeneity with respect to income and other variables such as marriage, education, and the reference group. Finally, natural experiments producing exogenous variation in income are only rarely observed, making the issue of establishing the causal effect of income on happiness a major challenge. Our final conclusion is that taking relative income seriously is an important step towards greater behavioural realism in Economics, such that our models and empirical analysis move closer to how real people feel and behave. Some may not like the insertion of additional arguments into individual utility, and remark that any behaviour can be rationalised by an appropriate manipulation of the utility function. While this is formally true, it does not apply wholesale to the issue of relative income. As we have tried to demonstrate, utility functions including relative income terms produce a wide variety of testable predictions regarding both well-being (measured by survey or neurologically) and observable behaviours: it is not true that anything goes. To our mind, this is precisely why we need to appeal to both direct measures of utility and observed behaviour in order to obtain a better idea of what the utility function looks like, and make policy recommendations in the best interest of society. Testing these predictions not only allies theory and empirical analysis in economics, it also spills across many disciplines in the social and natural sciences; it is arguably the most important and the most promising of the research avenues open to this thriving literature.

Empirical Studies on the Social Determinants of Well-Being

This section collects empirical investigations on the social determinants of well-being. Suggested readings address different "social" factors potentially able to improve well-being and life satisfaction - like interpersonal relations, social protection systems, well-functioning public institutions and public services - often in opposition with the other determinants of well-being traditionally considered by economic studies, like income and material wealth. There is a growing evidence that agents' behaviour - even in its economic dimensions - cannot be entirely explained by the rational choice paradigm adopted by neoclassical economics. Empirical studies show that homo economicus isn't happier and, in advanced market economies, happiness seems to be related to social and relational factors besides income, material wealth, and private consumption.

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Essential Readings

Alesina, A., Di Tella, R., MacCulloch, R. (2002), Inequality and Happiness: Are Europeans and Americans Different?, NBER Working Paper No. w8198.

Bjrnskov, C. (2003), The Happy Few: Cross-Country Evidence on Social Capital and Life Satisfaction, Kyklos (2003), vol. 56 (1), pp. 3-16.

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