Can {Un}Happiness Explain Macroeconomics?

Author:Swarnali A. Hannan - Sweta C. Saxena
Photo: Michael Spilotro
16IMF RESEARCH perspectives |
Swarnali A. Hannan
Sweta C. Saxena
One of the most intriguing
puzzles of the modern era is the
productivity slowdown in advanced
economies, which started before
the global nancial crisis despite
technological advancement. Recent
policy discussions have focused
on how to reverse that trend. What
often goes unnoticed is how one’s
happiness affects productivity—as a
sampling of more than 90 countries
in Figure 1 shows, an increase in
happiness can be associated with
a rise in total factor productivity
growth. The correlation becomes
even stronger after controlling for
income per capita, indicating
that there is more to the
association than the
income factor. In a study
conducted on 700
participants in the United
Kingdom, Oswald and
others (2015) nd that
happier individuals
have approximately
12 percent greater
productivity than a
control group,
with this higher productivity coming
from increased efforts by workers.
What determines happiness or life
satisfaction? Higher income per
capita leads to higher happiness,
but only up to a certain point
(Layard 2005). At the same time,
strong income growth does not
necessarily translate into greater
happiness. The World Happiness
Report (2017) shows that, while
GDP has multiplied more than ve-
fold over the past quarter century,
subjective wellbeing in China fell
for 15 consecutive years before
nally beginning to recover, with
the current levels still less than a
quarter of a century ago. Indeed,
the report also nds that factors
contributing to happiness beyond
income levels include a healthy life
expectancy, social support (having
someone to count on in times of
trouble), trust (perceived absence
of corruption in government and
business), perceived freedom to
make decisions, and generosity
(recent donations).
y = 0.72x + 1.73
R = 0.23
-30 -20 -10 10 20 30 40
Change in Total-factor Productivity
Change in Happiness (percent)
Figure 1: Productivity versus Happiness, 2005–2007 to 2012–2014
Higher happiness
Source: Penn World Table (version 9.0), World Happiness Report (2015).

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