Income-happiness paradox in Australia: Testing the theories of adaptation and social comparison

This paper investigates whether the theories of adaptation and social comparison can explain the income-happiness puzzle (Easterlin Paradox) in Australia. Alternative specifications of happiness model that incorporate adaption, comparison incomes and other relevant variables are estimated using the panel data from the five waves (2001-2005) of the Household Income and Labour Dynamics in Australia (HILDA) surveys. The statistical tests provide no support for the adaptation effect on happiness. However, we find strong support for the theory of social comparison as an explanation for the happiness paradox. An increase in peer group income hurts the poor more than the rich, suggesting that a redistribution of income is likely to enhance the overall wellbeing of society. A sensitivity analysis is conducted to check the robustness of results.