Effect of income and wealth on subjective well-being in the context of different welfare state regimes

In our paper, we study the effect of two economic standing measures on the subjective well-being of the elderly. The aim of our study is threefold. First, we aim to estimate the causal effect of income and net wealth on the life satisfaction of the elderly in Europe. Second, we aim to establish whether different welfare regime types have particular ways of moderating the effects of income and net wealth on subjective well-being. Finally, we aim to make a deeper inquiry into the intra-country differences in distinct welfare regime types. For our analysis, we derive data from the Survey of Health, Aging and Retirement in Europe (SHARE), and classify countries into the following welfare regimes: Conservative (Austria, France, and Germany); Social-democratic (Denmark, Sweden); Mediterranean (Italy, Spain); and Post-socialist (the Czech Republic, Slovenia). Our sample contains data on 94,242 individuals aged 50 or over. We address the income endogeneity issue found in the literature by utilizing the panel structure of our data and instrumenting for income by using the spouses’ years of education as instruments, as well as the lag of income. Our findings show a positive effect of both economic standing measures on life satisfaction, although the strength of the coefficients, or even their significance, is heavily moderated by the institutional context or welfare regime type. Furthermore, we confirm the negative overall bias affecting the ordinary least squares (OLS) estimates, which is consistent with the results found by Luttmer (2005), Knight et al. (2009), and Powdthavee (2010). We strengthen our findings by estimating our model equation on four subsamples, each representing one of the welfare regime types, which support our initial results. Finally, we make a deeper inquiry into the heterogeneity of countries classified into the four welfare regimes. Especially after controlling for endogeneity, our results indicate that the relationship between economic standing and life satisfaction is mostly driven by individual countries, which suggests caution when studying the effect of economic standing on subjective well-being, particularly in a multi-country setting. With our analysis, we were able to provide valuable insights for future debate on the relationship between economic standing and subjective well-being in old age, as well as the role of welfare policy in improving one’s subjective well-being.