The Macroeconomics of Happiness

Rafael Di Tella

Harvard Business School

Robert J. MacCulloch

London School of Economics

and Andrew J. Oswald

University of Warwick

This version: July 30, 2002

Abstract

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 1970's to the

1990's. Happiness equations are monotonically increasing in income,

and have a 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. Fourth, the welfare state appears to be a

compensating force: higher unemployment benefits are associated with

higher national well-being.