Experienced versus Decision Utility of Income: Relative or Absolute Happiness

A central finding in happiness research is low correlations between income and happiness. This is paradoxical since most people seem to attach a high value to a rise in their income. The various versions of this paradox can be explained in terms of rising aspirations (Easterlin 2001) and positional externalities (Frank 1997). However, econometric/ statistical studies which test these explanations on the level of individual cross-sections are rare and have produced mixed results. A careful analysis of the results of such studies leads to the conclusion that there seems to be considerable support for the explanations mentioned. On the other hand, these explanations seem only partial and do not take into account top-down relations between life satisfaction and aspiration levels as implied by some studies. Therefore, an alternative explanation of the above paradox in terms of the intrinsic/extrinsic-goals distinction of Kasser and Ryan (1993) is investigated. This approach points to a second kind of discrepancy between decision utility and experienced utility of income and implies that life satisfaction depends on absolute rather than relative income. It has some potential, but, in its present stage, it yields less specific predictions with respect to the paradoxes than the theories of aspirations and positional externalities. On the other hand, in the case of top-down relations between life satisfaction and aspiration levels, the intrinsic/extrinsic-goals explanation seems more fundamental.Economics ;

Happiness and Loss Aversion: When Social Participation Dominates Comparision

A central finding in happiness research is that a person’s income relative to the average income in her social reference group is more important for her life satisfaction than the absolute level of her income. This dependence of life satisfaction on relative income can be related to the reference dependence of the value function in Kahneman and Tversky’s (1979) prospect theory. In this paper we investigate whether the characteristics of the value function like concavity for gains, convexity for losses, and loss aversion apply to the dependence of life satisfaction on relative income. This is tested with a new measure for the reference income for a large German panel for the years 1984-2001. We find concavity of life satisfaction in positive relative income, but unexpectedly strongly significant concavity of life satisfaction in negative relative income as well. The latter result is shown to be robust to extreme distortions of the reported-life-satisfaction scale. It implies a rising marginal sensitivity of life satisfaction to more negative values of relative income, and hence loss aversion (in a wide sense). This may be explained in terms of increasing financial obstacles to social participation.public economics ;

Male and female labour force participation: the role of dynamic adjustments to changes in labour demand, government policies and autonomous trends

This study investigates the extent and speed of dynamic adjustment of labour supply to changes in labour demand, government policies and autonomous trends. We estimate error-correction models (ECMs) for male and female participation rates in the Netherlands between 1969 and 2004. The results show significant short and long-run effects of labour demand as well as a negative autonomous trend for male participation. In contrast, we find no significant long-run labour-demand effects and a very strong positive autonomous trend for female participation. Including female and male participation as additional explanatory variables in the male and female ECMs, respectively, reveals significant substitution effects between female and male participation. For male participation the substitution effects from female participation account for the negative trend in the basic ECM, while for female participation the substitution effects from male participation counterbalance labour demand effects that are now significant. In addition, we find very significant breakpoints in male and female participation at 1994, which indicate the effects of exogenous participation-promoting policies by the Dutch governments after 1994. The adjustments of the participation rates to changes in labour demand, government policies and autonomous trends are moderately fast.labour economics ;

Identification, Screening and Stereotyping in Labour Market Discrimination

According to social-psychological research, feelings of uncertainty in decision-making evoke two opposite responses: (i) reduction of uncertainty by information search, leading to less stereotyping of people, and hence less discrimination; (ii) social identification with an ingroup, inducing more reliance on stereotypic perceptions and prejudices, and hence more discrimination against an outgroup. We integrate both responses in a microeconomic model of hiring and pay decisions by an employer. Increasing competition in the product market makes the employer feel more uncertain about his profits, but also raises the opportunity cost of screening expenditures. This elicits substitution of ingroup identification for screening expenditures, and hence enhances discrimination.discrimination, stereotyping, social identity, uncertainty, screening

Male and female labour force participation: the role of dynamic adjustments to changes in labour demand, government policies and autonomous trends

This study investigates the extent and speed of dynamic adjustment of labour supply to changes in labour demand, government policies and autonomous trends. We estimate error-correction models (ECMs) for male and female participation rates in the Netherlands between 1969 and 2004. The results show significant short and long-run effects of labour demand as well as a negative autonomous trend for male participation. In contrast, we find no significant long-run labour-demand effects and a very strong positive autonomous trend for female participation. Including female and male participation as additional explanatory variables in the male and female ECMs, respectively, reveals significant substitution effects between female and male participation. For male participation the substitution effects from female participation account for the negative trend in the basic ECM, while for female participation the substitution effects from male participation counterbalance labour demand effects that are now significant. In addition, we find very significant breakpoints in male and female participation at 1994, which indicate the effects of exogenous participation-promoting policies by the Dutch governments after 1994. The adjustments of the participation rates to changes in labour demand, government policies and autonomous trends are moderately fast.education, training and the labour market;

Male and Female Labour Force Participation: The Role of Dynamic Adjustments to Changes in Labour Demand, Government Policies and Autonomous Trends

This study investigates the extent and speed of dynamic adjustment of labour supply to changes in labour demand, government policies and autonomous trends. We estimate error-correction models (ECMs) for male and female participation rates in the Netherlands between 1969 and 2004. The results show significant short and long-run effects of labour demand as well as a negative autonomous trend for male participation. In contrast, we find no significant long-run labour-demand effects and a very strong positive autonomous trend for female participation. Including female and male participation as additional explanatory variables in the male and female ECMs, respectively, reveals significant substitution effects between female and male participation. For male participation the substitution effects from female participation account for the negative trend in the basic ECM, while for female participation the substitution effects from male participation counterbalance labour demand effects that are now significant. In addition, we find very significant breakpoints in male and female participation at 1994, which indicate the effects of exogenous participation-promoting policies by the Dutch governments after 1994. The adjustments of the participation rates to changes in labour demand, government policies and autonomous trends are moderately fast.labour force participation, discouraged worker effect, business cycle effects, persistence, substitution effect, error-correction model

Identification, screening and stereotyping in labor market discrimination

Social-psychological research reveals two opposite ways in which a person can respond to increased feelings of uncertainty in decision-making. First, he (or she) may try to reduce his uncertainty by searching for more specific information. This leads to less stereotyping and discrimination. Second, he may identify more strongly with a salient social group he belongs to (his ingroup, e.g. men). This induces him to rely more on stereotypic perceptions and prejudices, and hence to discriminate more against an outgroup (e.g. women). This paper develops a microeconomic model that integrates both responses in the context of hiring and pay decisions by an employer. The model determines simultaneous equilibrium levels of expenditures on screening of job applicants and ingroup identification. Increasing competition in the product market makes the employer feel more uncertain about his profits, but also raises the opportunity cost of screening expenditures. The latter rise elicits substitution of ingroup identification for screening expenditures, and hence enhances discrimination. Affirmative action has the opposite effect by raising the marginal benefits of screening expenditures. Some experimental and empirical evidence is briefly discussed.microeconomics ;

The power of competition: reducing or reinforcing discrimination?

Economic theory argues that competition can diminish discrimination in the labor market, while arguments from social psychology’s social-identity theory point into the opposite direction. We ran two experiments to test the psychological predictions in an ‘economic’ setting. Participants were categorized artificially and played a team game, facing either strong or weak competition. They further had to choose a new team member from either of the categories, and pay for enactment of their preference. Only under strong competition, subjects were willing to pay for their preference. The result gives qualified support to the prediction from social-identity theory.microeconomics ;