Reference Income and Subjective Well-being: An Empirical Analysis of Income Levels and Social Comparison considering Macroeconomic Differences among European Countries

Sammanfattning

This paper examines how income level and reference income are associated with subjective well-being and how the latter relationship varies with the overall welfare of the country in which individuals reside. To this end, we exploit self-reported happiness and economic growth across 35 European countries from 2010 to 2024, utilising cross-sectional data. Our running conjecture is that, in a European context, people experience a positive association with their income-level, while the relationship with reference income is expected to differ significantly between rich and poor countries. To test this conjecture, we use macroeconomic indicators from the World Bank and microeconomic data from the European Social Survey. We use regression analysis in which we separately control for the income level and reference income – defined using several socio demographic and economic criteria – and include an interaction term in which the richer-income country indicator is interacted with the reference income variable. Our study indicates that higher income levels are positively related to subjective well-being, whereas the association of a reference income increase for similar others depends on whether the country is rich or poor. The interaction model suggests a positive association for reference income in poorer countries and a negative association for richer countries. We conclude the paper by discussing these findings further in the context of welfare economics and from the perspective of Internet diffusion.