Income and happiness across European firms: Do reference values matter?

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.