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Easterlin paradox revisited: Do increases in income bring higher levels of income satisfaction?

In this paper, we examine the relationship between income and income
 satisfaction in the pool of developed European economies, for the period
 between 2002 and 2018. Although the nexus between income and most subjective
 well-being indicators is frequently investigated in prior studies, the
 research investigating the relationship between income and income
 satisfaction over time is non-existing. We find that during the observed
 period real disposable household income significantly increased, while the
 satisfaction with household income remained constant. Furthermore, the
 analysis within hierarchical linear modeling shows that while
 between-country variations in income affect income satisfaction, this is not
 the case for income variations over time. Our findings support the notion of
 the Easterlin paradox, which indicates that in the long-run increases in
 income do not lead to higher levels of well-being. Explanations for such
 results may be found in the social comparison theory, hedonic adaptation
 theory and aspiration level theory: increasing income does not bring
 positive effects on income satisfaction due to relevance of the relative and
 not the absolute income, adaptation to income changes, or higher levels of
 aspirations resulting from income rise.


INTRODUCTION
According to Easterlin (1974), increases in countries relative income levels are not associated with rising levels of subjective well-being. This finding, later named Easterlin paradox, has found its theoretical foundations in the social comparison theory (Festinger 1954a), the hedonistic adaptation theory (Brickman and Campbell 1971), and the aspiration level theory (Lewin et al. 1944), which give different explanations to the fact that real income over time does not necessarily increase the levels of subjective well-being. As a response to Easterlins' original conclusions, a large number of researchers investigated the nexus between income and subjective well-being indicators, with findings confirming (e.g. Di Blanchflower and Oswald 2004) and disputing (e.g. Stevenson and Wolfers 2008;Sacks et al. 2012) Easterlins' original notion.
However, the researchers in this field typically investigate the nexus between increases in income and general subjective well-being indicators (such as life satisfaction or happiness), while the relationship between income and income satisfaction over time, to the best of our knowledge, has not been studied before. Income satisfaction could be a mechanism through which the income and general subjective well-being are (not) related: higher income increases income satisfaction, which in turn, makes the overall evaluation of life more positive. This relationship seems particularly important to be examined in the high-income context, having in mind the law of diminishing marginal utility, i.e. the counterintuitive notion that income has no significant effects on other wellbeing indicators at higher income levels. In order to fill this gap, we investigate the link between income and income satisfaction over time. We use OECD data on average disposable household income and the European Social Survey data on average income satisfaction from fourteen European developed economies, for the period between 2002 and 2018.
Our results indicate that during the observed period, disposable household income has been increasing, while there were no significant changes in income satisfaction. Furthermore, within the hierarchical linear modeling (HLM) framework, we show that while between-country variations in income affect income satisfaction, the link between income and income satisfaction over time is not significant. We discuss our results in terms of Easterlin paradox and present the implication of our work for future research in this field. This paper is structured as follows. After this introduction, in the second section we present literature a short literature review and our theoretical framework based on the social comparison theory, the hedonistic adaptation theory, and the aspiration level theory. In the third section we present the data and the descriptive results, while in the fourth section we present the estimation within the HLM framework and the results from the analysis. The last section concludes.

Material Well-Being, Income Satisfaction and Income
Material well-being, which is one of the essential components of the overall quality of life, can be defined as people's consumption possibilities and their command over resources (OECD 2013). Many studies which use crosssectional data confirm a positive relation between different aspects of subjective and objective indicators of material well-being: between accumulated wealth and financial satisfaction (Hansen et al. 2008), financial behavior and financial satisfaction (Xiao et al. 2009), wealth, income and consumption, and standard of living satisfaction (Headey et al. 2008), material goods index and subjective economic well-being (Hayo and Seifert 2003).
In this paper, we focus on one particular indicator of material well-beingincome satisfaction. Previous studies indicate that income satisfaction tends to be higher in countries with higher income levels (Ng and Diener 2014;Morrison et al. 2011;Christoph and Noll 2000), while the same is true for within-country estimates: individuals from the highest income groups are more satisfied with their financial situation than individuals from lower-income groups (Diener and Oishi 2000;Ferrer-i-Carbonell and Gërxhani 2010;Vera-Toscano et al. 2006). In general, a large number of studies have reported a positive relationship between income and well-being measures in the cross-section (Helliwell et al. 2013;Diener and Biswas-Diener 2002;Cummins 2000, Vladisavljević andMentus 2019).
The conclusions are less unified, however, when the relationship between well-being indicators and income is examined through time. According to Easterlin (1974), increasing average income levels in a country will not lead to higher well-being levels. His original research and findings, later labelled as "Easterlin paradox" continue to be a subject of debate and extensive research thirty years after his work, with research getting the same conclusions as Easterlin (e.g. Di Tella and Macculloch 2010;Blanchflower and Oswald 2004), or findings contradicting his work (Stevenson and Wolfers 2008;Sacks et al. 2012). However, as mentioned in the introduction, all of these researches examine the nexus between income and general well-being indicators, while the research investigating the relationship between income and income satisfaction over time is non-existing.
Theoretically, Easterlin paradox has been linked with the social comparison theory, the hedonistic adaptation theory, and the aspiration level theory. According to these theories, increases in real income over time do not necessarily increase subjective well-being levels. In the next part of this section, we present theories of social comparison, hedonistic adaptation and level of aspiration, which provide a theoretical background of Easterlin's hypothesis.

Social Comparison
Social comparison theory (Festinger 1954a) argues that individuals tend to evaluate themselves, their opinions, abilities and well-being through comparison with others. 3 This argument is in line with the relative income hypothesis formulated by Duesenberry (1967), according to which individual's income satisfaction is dictated more by a level relative to others than by absolute level of income, and that there is a struggle to keep income on a level with that of relevant others. The assumption also reflected in Hirsch's "positional and status" goods (Hirsch 1976), which may not be augmented because their value derives from the fact that they are not available to others. Frank (1985( , 1999( , in: Binswanger 2006 also emphasizes the relevance of status goods, and he understands the production of these goods as a misallocation of productive resources, as in the final analysis, they are incapable of rising overall well-being. As Binswanger (2006) notes, it is impossible for everybody to outperform everybody else, and the search for higher status becomes on aggregate a zero-sum game. Thus, even if income grows for every individual, this does not result in increased relative income for every member of the society, and the dissatisfaction of another annuls the gains of satisfaction resulting from increased income for one member. Finally, even if an individual happens to outperform relevant others, the satisfaction with income due to the relative position is continuously eroded by overall income growth.
Many studies have indicated that satisfaction with different well-being domains is affected by relative income comparisons. For example, Clark et al. (2009) showed that conditional on their own income and neighbourhood median income, individuals are more satisfied with life as their percentile neighbourhood ranking improves. Similarly, Card et al. (2012) investigated how knowledge of one's position in the pay distribution of immediate coworkers affects job satisfaction and job search intentions. They found that when the workers are given the information that they are paid below the median for their department and occupation (particularly for those in the lowest pay quartile), this reduces their job satisfaction and increases their intention to look for a new job. On the other hand, workers paid above the median showed no significant changes in job satisfaction and job change intentions. Secondly, the effect of the treatment is more closely related to the pay rank than to the actual level of pay relative to the median in the pay unit.
Following the social comparison theory, therefore, individuals are satisfied with their income if they have more than the relevant others and dissatisfied otherwise. Thus, a proportional increase in all incomes would leave average satisfaction unaffected (Angeles, 2010).

Hedonic Adaptation
Hedonic adaptation is the psychological process by which people become accustomed to a positive or negative stimulus, such that the emotional effect of that stimulus is attenuated over time. It occurs in response to both positive and negative experiences, to a single or a recurring event, and it must be constant or repeated for adaptation to occur (Lyubomirsky 2011). 4 Accordingly, the increase in individual income should not have long-term effects on income satisfaction, as a person adapts to the change after a certain period.
Hedonic adaptation theory is very similar to the set-point theory, according to which there is a level of satisfaction with different domains which remains practically constant during the life cycle, because innate characteristics such as personality and temperament have a substantial effect on well-being -in the long-run, individuals are fixed at hedonic neutrality (Bruni and Porta 2007). Therefore, life circumstances including variations in health and income typically account for a very small (and temporary) percentage of variation in satisfaction with different domains -individuals initially do react to events and their wellbeing varies, however soon they return to baseline levels of well-being that are determined by personality factors.
The vast literature on well-being has shown that many major life events have only a temporary effect on self-reported well-being, for example, after one or two years maximum (Williams 2011). 5 Brickman et al. (1978) found that lottery winners were no happier than non-lottery winners, while people with paraplegia were not nearly as unhappy as they expected, and these authors first suggested process of hedonic adaptation. Also, even when this process does not fully restore ones pre-injury level of well-being, it substantially weakens hedonic losses. Bottan and Perez Truglia (2011) found that well-being increases one year after negative events like becoming unemployed or widowed, and it decreases one year after positive events like getting married or having children.
Also, many research shows that there is a hedonic adaptation to income satisfaction. Di  use the data from 1984 to 2000 on 7,812 4 It should be noted that findings also suggest that reaction patterns depend on the type of event (Uglanova and Staudinger 2012). Experiences are not homogenous in terms of anticipation length and the duration of the adaptation. This is important for how responsive a given event is in terms of the precision with which the event's timing is taken into account (ibid.). For example, people tend to adapt more quickly to positive than negative events, second, being uncertain of the outcome inhibits habituation, and finally, normativity is essential, in the sense that of the event within a life-course of a concrete individual, and in the sense of the frequency of this event in a given population (ibid.). 5 See also: Diener et al. 2006. respondents from Germany and find strong adaptation to income changes, and complete adaptation to income increases within four years. Stutzer (2004) found the effect of income increase adaptation on overall life satisfaction. Also, he hypothesized that people who adapted to a low income in the past lower income aspirations in the present. The data confirmed this hypothesis -respondents who were in a much worse financial situation in the previous year reported lower aspirations, while a much better financial situation in the past is reflected in a higher aspiration level today. This is very relevant for the aspiration level theory, which is presented in the next part.

Aspiration Level
Aspiration level theory centers on the belief that individual well-being is determined by the gap between aspiration and achievement (Stutzer 2004). Aspirations tend to rise in line with rising income -as their incomes rise, individuals are induced to seek continuous and even higher incomes in order to maintain the same level of satisfaction. Additional income initially provides more satisfaction as it makes possible individuals to buy more goods and services. However, they tend to adapt to higher income by rising income aspirations. The rising aspirations, in turn, lower the satisfaction individuals derive from a certain level of income, as the well-being of additional consumption wears off. In the longer run, this causes satisfaction to stagnate because the gap between income and satisfaction with income remains fairly constant (Binswanger 2006).
Prior research indicates that people adapt their aspirations in response to changes in their income. 6 For example, Stutzer (2004) found that higher income aspirations reduce people's overall life satisfaction -the negative effect of an increase in the aspiration level on well-being is of a similar absolute magnitude to the positive effect of an equal increase in income. Also, the results indicate that a higher average income in the community increases people's levels of aspiration, and the estimated effects are more significant for people who interact with other community members. Clark (1999) used the panel data on 2,000 British employees to show that overall job satisfaction is strongly positively correlated with the change in the employees' pay between waves, but is unrelated to the current level of pay.
Also, many studies provide evidence that relative income affects wellbeing and interpret these findings by aspirations rise effect (Clark et al. 2008, in: Knight andGunatilaka 2012). Easterlin (2005) found that in the United States, between 1978 and 1994 there was an apparent rise of the share of respondents wishing to travel abroad, to own a swimming pool, and to own a vacation home. However, the share of those who succeeded in achieving it at every moment of observations was much smaller despite rising incomes over the period. In these domains, Easterlin notes, there was a complete adaptation and aspiration rise. Easterlin also showed that income aspirations are rising in proportion to income.

* * *
The theories presented may, to a great extent, explain not only the Easterlin paradox but, by the equivalent mechanisms, the lack of the relationship between the objective income and income satisfaction also. Having these mechanisms in mind, we hypothesize that these variables are not related in the long-run. In the following section, we present the data and provide descriptive statistics and trend analyses.

Data
We use income satisfaction data from the European Social Survey -ESS, which is conducted bi-annually since 2002. ESS uses nationally representative samples to collect data on a variety of different socio-economic indicators. For this research, we use the ESS data from developed countries of Western, Northern and Southern Europe, for which the data are available for the period from 2002 to 2018. These are Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. In all the rounds of the European Social Survey, satisfaction with present household income is measured by using the question: "Which of the descriptions on this card comes closest to how you feel about your household's income nowadays?". Responses are given on a four-point scale, where 1 means "Living comfortably on present income", 2 "Coping on present income", 3 "Finding it difficult on present income", and 4 "Finding it very difficult on present income". For the analysis, we use country averages of income satisfaction for each year. Additionally, we reverse the four-point scale so that the higher levels of income satisfaction correspond to higher values of the variable. The average income satisfaction in the sample is 2.2, ranging from 1.5 to 2.6.
The data on the objective counterpart of income satisfaction, real household disposable income are taken from the OECD (2019). Disposable income, according to OECD (2019) is, as a concept, closer to the idea of income as generally understood in economics, than is either national income or gross domestic product. This indicator corresponds to the sum of wages and salaries, and other income, net property income, net current transfers and social benefits other than social transfers in kind, less taxes on income and wealth and social security contributions paid by employees, the self-employed and the unemployed. OECD provides data only on real net disposable income growth rate which, if used as a measure of income, would eliminate country-level differences in incomes. In order to account for the country-level differences in incomes, as a starting point of income, we use median household disposable income per capita from EU-SILC for 2017, adjusted for the comparative price levels of final consumption by private households [ratio between Purchasing power parities (PPPs) and market exchange rate for each country]. We then use the OECD real net disposable income growth rates to reconstruct the series for the entire period. 7 The average value of the variable is 12,124 EUR PPP (2017=100), ranging from 6,481 to 18,041 EUR PPP.
We have applied post-stratified design weight (which is constructed using the information on age, gender, education, and region) in order to mutually adjust individual respondents' probabilities of being sampled, accounting for differences in inclusion probabilities, sampling errors and possible non-response errors (Kaminska, 2020).  Tables 2 and 3 in Appendix). The rise was most pronounced in Norway, Ireland and Sweden, where real income increased by about 50% over 16 years, and least pronounced in Portugal, Spain, Belgium, Netherlands and Germany where it remained below 20%. It is also noticeable that the 2008 economic crisis had a different effect on different countries: in some countries, there was an evident stagnation/lowering of the income during the crisis, for others the crisis had not significantly affected the increasing trends.

Fig. 1 Real disposable income (left) and income satisfaction (right) trends by country
On the other side, income satisfaction remained approximately constant over the entire observed period (Figure 1, right). The exception is the case of Ireland, with an evident substantial decline of perceived household income adequacy in the period after the economic crisis indicated. 7 Ideally, we would use the median equivalised disposable household income for all years, but it is not available for the entire period analysed. Data from other sources (e.g. EU-SILC, 2019), also clearly indicate a substantial rise of median income during the observed period. In order to examine the statistical significance of long-term changes in objective income levels and income satisfaction at the country level, paired sample t-tests have been applied. The results indicate a statistically significant increase in mean disposable household income between 2002 and 2018 (t 14 = 3.194, p<0.001), while the change in income satisfaction in the same period was not significant (t 14 = 0.755, p>0.1).

Empirical Model and Estimation Method
In order to investigate the nexus between income and income satisfaction directly, we follow Diener et al. (2013) and split income variable y ct (income in country c for the period t) to between-and within-country components. Between-country income ӯ c is calculated as the average country income, and effectively captures the differences between the countries in income levels. We then deduct the average country income ӯ c from the original income variable y ct , to arrive to mean-centered within-country income ỹ ct . Centering of the variable removes between-country variation, so the variable ỹ ct represents within-country, i.e. the variation of income over time. Then both ӯ c and ỹ ct enter the empirical model for the estimation of the effect of income on income satisfaction IS ct : IS ct = β 0 + β 1 ӯ c + β 2 ỹ ct + w ct (1) As between-country income ӯ c is constant across countries, we further follow Diener et al. (2013) and use hierarchical linear modeling (HLM) to estimate the association between income satisfaction and income. Following the HLM conventional notation, within-country income ỹ ct is a Level 1 variable, as it varies both across countries and time; while between-country income ӯ c is a Level 2 variable as it varies only across countries. Besides correcting the standard errors of the Level 2 variable for the lower number of degrees of freedom, HLM also allows applying random variance components to intercept and slopes of the model and to control for the potential autocorrelation in the residuals w ct (Raudenbush and Bryk 2002), which are typically described in terms of the k-ordered autoregressive model. Model coefficients are then estimated via maximum likelihood (ML) procedure. Given the relatively small sample for the analysis, we test our results' robustness by applying Kenward-Roger (1997) correction of degrees of freedom. We use both level and log specifications of income as an additional robustness check.

Results
We first test if the effects of within-country income ỹ ct on income satisfaction are different across countries, i.e. whether we should include a random intercept or random slope component as well in the HLM. The results first suggest that the random intercept component of the model is significant (LR chi2(1) = 134.86; p<0.001), indicating that the random intercept model is a preferred specification to ordinary least square (OLS) specification. Random intercept effectively captures the differences between countries in the level of income satisfaction. Estimation results also suggest that the random slope of ỹ ct should also be in the model, as the likelihood ratio test, which compares the random slope and random intercept model, shows the preference for a random slope model (LR chi2(1) = 4.5, p<0.05). In other words, we reject the null hypothesis that the effects of with in-country income trends on income satisfaction are the same for all countries.
Unlike in previous studies, using the natural logarithm of income instead of income levels does not yield inarguably better specification in terms of the lower log-likelihood or higher Wald chi-square statistics. Therefore, we estimate the equation (1) using both linear and log specification of income, and we check the robustness of the results by applying Kenward-Roger correction for small samples. Results of the estimation are presented in Table 1. Robust standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Note: Kenward-Roger correction for small samples changes the number of degrees of freedom to be used when estimating the significance of the coefficients, while the coefficients and standard errors remain the same.
As expected, between-country income effects on income satisfaction are statistically significant in all specifications, confirming that countries with higher income on average have higher income satisfaction levels. A 10,000 EUR (PPP) higher average income of a country per year increases the country's average income satisfaction by 0.69. In relative terms, log specification suggests that 1% higher country income associated with income satisfaction higher by 0.8.
More importantly for our analysis, the within-country income effect on income satisfaction is not statistically significant, neither in level nor in log specifications. This result indicates that although there is a link between income and income satisfaction, in line with the theories presented, this link can be entirely attributed to the cross-country variation, while the association between these two variables over time is none-existing. In other words, we find no evidence that increasing the income results in a higher level of income satisfaction. However, it should be noted that the random slope component of the model is also significant, indicating that this link could be significant for particular countries. A low number of observations per country (maximum 9) is not a sufficiently long time series to analyze these differences further. This is also visible from Figure 2, where we plot two income components against income satisfaction. Income satisfaction increases with higher levels of between-country income, however, higher levels of within-country income are not related to increases in income satisfaction.

Fig. 2 Income satisfaction nexus with within-country (left)
and between-country (right) income variations

CONCLUSIONS
In this paper, we examined the nexus between income satisfaction and household disposable income in fourteen developed European economies in the 2002-2018 period. While previous research has indicated that countries and individuals with higher income have higher levels of income satisfaction, little is known about whether the increases in income over time lead to increases in income satisfaction. In line with the research examining the so-called Easterlin paradox, which suggests that increases in countries' income levels are not associated with rising levels of general subjective well-being, we examine if income increases lead to increases in income satisfaction. Such an examination is especially relevant for high-income economies, given the diminishing marginal utility of income.
Our results show that, although there was a significant rise in household disposable income between 2002 and 2018, there was no significant change in income satisfaction in the same period. The analysis of the data within the hierarchical linear modeling (HLM) confirms that changes in income over time do not lead to changes in income satisfaction. Therefore, the result presented in our research is in line with the Easterlin paradox, which suggests that, over time, there is no link between income and general subjective well-being. In line with our theoretical framework, these results can be explained in terms of the social comparison theory, hedonic adaptation theory, and aspiration level theory: increasing income does not bring positive effects on income satisfaction due to the relevance of the relative and not the absolute income, adaptation to income changes or higher levels of aspirations resulting from income rise.
Although our data do not allow distinguishing between these three potential explanations, the result we obtained is important as it offers additional insight into the nature of the Easterlin paradox. We show that the non-existing link between income and general satisfaction can be explained by the lack of association between income and income satisfaction. Since income increases do not increase income satisfaction, there is no reason to expect that income rises will positively affect general satisfaction. Our result shows that income satisfaction is an important concept and that, if available, it should be a part of the research design when investigating the Easterlin paradox.
Additionally, this research adds additional arguments confirming the Easterlin paradox and indicating that developed societies' economic policies should not focus only on income growth but also on other, non-monetary aspects of well-being, such as good working conditions, work-life balance, and stable and secure environments.

Limitations
An important limitation of the work is that our findings are limited to highincome countries. In line with the rule of diminishing marginal utility, the lack of a link between income and income satisfaction is more likely to be found in high-income countries and cannot be generalized to other countries. However, our findings confirm the importance of non-monetary aspects of well-being, which low-and middle-income countries should be aware of during their further development.
Additionally, the significant random slope in our model suggested that there could be a significant (positive or negative) link between income and income satisfaction in some countries. However, a small number of observations per country does not enable that kind of analysis.