Monday, March 31, 2008

Why Recessions are Bad...for Your Happiness

In my previous posting I discussed some papers that showed recessions to be good on balance for your health. However, a paper by Rafael Di Tella, Robert J. MacCulloch and Andrew J. Oswald titled "The Macroeconomics of Happiness" finds that there are large psychological costs to recessions. Since emotional health affects physical health, it stands to reason that these findings indicate recessions are bad for health.
We show that macroeconomic movements have strong effects on the happiness of nations. First, we find that there are clear microeconomic patterns in the psychological well-being levels of a quarter of a million randomly sampled Europeans and Americans from the 1970s to the 1990s. Happiness equations are monotonically increasing in income, and have similar structure in different countries. Second, movements in reported well-being are correlated with changes in macroeconomic variables such as gross domestic product. This holds true after controlling for the personal characteristics of respondents, country fixed effects, year dummies, and country-specific time trends. Third, the paper establishes that recessions create psychic losses that extend beyond the fall in GDP and rise in the number of people unemployed. These losses are large.

4 comments:

  1. Chalk these studies up to the "economics of the obvious," but apparently, hurricane Katrina also made people unhappy. Go figure!

    - scott cunningham

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  2. Great line Scott. Yes, these authors have rigorously shown the obvious, but it provides a nice counterpoint to the Ruhm papers I cited on my previous posting.

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  4. Absolutely. I think it's all really fascinating, actually, even if it is kind of obvious. What it suggests to me is that health is not always a normal good for all people. Many people are choosing, optimally, to have worse health, because the costs of improving their health exceed the marginal benefit of doing so. Maybe because they are myopic, and so heavily discount the future gains. Nevertheless, if the cycle is a shock to income, causing happiness to fall while health improves, then it suggests that better health isn't, at the margin, the most important thing to people.

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