Relative income and life satisfaction: Who compares their income to whose income and to what extent?
Relative income is considered a key to explain the paradox that, since the end of the Second World War, an increase in per capita income does not raise the average happiness or life satisfaction in western countries and Japan. This study uses comparison income as the measure of the relative income and verifies the sign of the coefficient of comparison income in terms of life satisfaction by conducting micro-econometric analysis. This study offers three main contributions. The first is to estimate the life satisfaction equation by using the fixed effects ordered logit model, which previous studies rarely consider. Second, to estimate the average income of the reference group, we use the inverse of the distance between the residential areas as the weight, which is new to the literature. Third, we analyze the direction and intensity of the income comparison simultaneously. We analyze a Japanese sample aged 20 or over in seven waves from 2011 to 2017. The results yield several findings. The sign of the coefficient of comparison income for the overall sample and low-income group is negative in almost all cases, using equivalent household income as an explanatory variable. Therefore, people may have feelings of relative deprivation when others earn more income, even if we control for individual fixed effects without assuming the cardinality of utility and define the reference group using several individual and regional attributes.