Yannis Georgellis, Ph.D1, Gm Caporale, PhD1, Nikolaos Tsitsianis, Ph.D2, and Y.-P. Yin, PhD2. (1) Economics and Finance, Brunel University, School of Social Sciences, Uxbridge, UB8 3PH, United Kingdom, (2) Uviversity of Hertfordshire, Business School, Hatfield, AL10 9AB, United Kingdom
Using data from the European Social Survey (ESS), we examine the link between income and subjective well-being. We find that, for the whole sample of nineteen European countries, although income is positively correlated with both happiness and life satisfaction, reference income exerts a negative effect on individual well-being, a result consistent with the relative utility hypothesis. Performing separate analyses for some Eastern European countries, we also find some evidence of a ‘tunnel effect’, in that reference income has a positive impact on subjective well-being. Our findings support the view that in environments with stable income and employment, reference income serves as a basis for social comparisons, whereas in relatively volatile environments, it is used as a source of information for forming expectations about future status.