Mind the gap? Business cycles and subjective well-being

ABSTRACT

We examine the relationship between output fluctuations and within-country variation in subjective well-being using country panels. We show that the deviation of output from trend, unlike trend growth, is positively associated with well-being. The explanatory power of the business cycle is found to be better than that of the level of output.

KEYWORDS:

• Subjective well-being
• GDP
• business cycle
• happiness
• life satisfaction

JEL CLASSIFICATION:

• O11
• I31
• E32

Acknowledgements

We thank Jari Hännikäinen, Tuomas Malinen, Jari Vainiomäki and various seminar participants for comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Although we use WVS happiness data, we acknowledge its deficiencies pointed out by e.g. Easterlin et al. (2010).

² Examining the properties of the continuous Eurobarometer time series further supports the idea of regressing SWB on a detrended variable. Pesaran’s (2007) test for cross-sectionally dependent panels reveals that unit roots in the SWB panel can be rejected. The lag length in the augmented Dickey–Fuller test for each country is chosen according to the Bayesian Information Criterion. The results are available upon request.

³ We also tried economic growth, but its explanatory power was comparatively low. In additional analyses, we reached the same conclusions by using IMF and OECD output gap measures (for the smaller samples for which they are available).

⁴ SDs are calculated using within-country variation.

⁵ Nonzero correlations are due to different periods for detrending and estimation and because some of the detrending techniques do not require the cycle component and the trend component to be uncorrelated.

Additional information

Funding

This work was supported by the OP-Pohjola Group Research Foundation and the Academy of Finland [project #252369].