Social Choice and Social Unemployment-Income Cleavages: New Insights from Happiness Research

The nexus between income and happiness is very much disputed. Many cross-sectional studies seem to be in support of a positive relationship. Yet, the failure of most studies to find a similar link between increases in income through time and happiness in developed countries of the western hemisphere sparked an intense debate over the issue. Starting from the fact that the theoretical basis in happiness research has been comparatively weak, we develop a novel theoretical approach that allows us to identify distributional consequences of unemployment as a key factor in the nexus. Social cleavages rooted therein imply a bias in the social choice between private and public goods with the bias and thus the importance for happiness conditional on the level of per-capita income. Our theory is backed by corresponding empirical evidence in international data: controlling for a number of variables, we find that, in low-income countries, subjective well-being significantly depends on income per capita; however, in high-income countries, the unemployment-related distribution is more important as a determinant, with significance shifting from the level of per-capita income to cleavages associated with unemployment. Our findings thus emphasizes the relevance of the income-satiation hypothesis found in many longitudinal studies also in cross-sectional perspective.