HOUSEHOLD WELFARE: HOW TO MEASURE AND INDEX?

JOSHUA JOHANNI

SUBMITTED TO THE DEPARTMENT OF ECONOMICS OF AVE MARIA UNIVERSITY

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF BACHELOR OF ARTS

DR. CATHERINE PAKALUK FACULTY ADVISOR

APRIL 28, 2011

Household Welfare: How to Measure and Index? Joshua Johanni ABSTRACT Despite the daily need for an estimation of welfare by policy makers and economists alike, it is still commonly assumed that income or GDP may be substituted in its place. There is a small segment of economists who have recognized the great fallacy in this belief, but as of yet nothing substantial has been produced to take its place. This paper theoretically examines the question of welfare and its relation to happiness. It proposes a theoretical function of indicators and categories of indicators which should be included in a measurement of welfare on a household level. These are based on human nature and on a more complete understanding of human happiness. This theory is adjusted for a national aggregate so that empirical testing may be done to substantiate the claim since Micro data is not readily unavailable. Upon analysis of national data it is found that most datasets fall into two statistical categories, but also that there are other significant determinants of happiness. This analysis begins with nine different variables attempting to explain happiness and ends up using the two most influential as representations for the rest. These variables are statistically significant and explain a significant portion of the variation in happiness. This paper lays the groundwork for future analysis and the potential to actually compile a comprehensive index of household welfare.

Household Welfare: How to Measure and Index? Joshua Johanni ACKNOWLEDGEMENTS I would like to thank and acknowledge my professors (Dr. Gabriel Martinez, Dr. Joseph Burke, & Dr. Catherine Pakaluk) for their massive influence in my academic formation. The level of rigor and dedication which they provide in the classroom, coupled with the outstanding personal tutoring and mentorship which they are always ready to give, has been of inestimable value to me. Thank You So Much! In regards to this specific thesis, Dr. Pakaluk has worked closely with me over the past year, and has been instrumental in the development of this topic. Originally, I wanted to know what the effects of the influx of women in the labor market were on the overall welfare of households. She encouraged me to pursue my question. However, preliminary research resulted in the determination that there is no comprehensive measure of household welfare by which to measure an effect. Thus, with her guidance, I began researching what might lend itself towards an accurate estimation of household welfare. She has continued to mentor me in this research and in the development of this thesis.

HONOR CODE By submitting this thesis the author declares to abide by and uphold the AMU Academic Honor Code as listed below: On my honor, I will not lie, cheat, or steal, and I will not be a party to others lying, cheating, or stealing.

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Household Welfare: How to Measure and Index? Joshua Johanni NON-PLAGARISM STATEMENT By submitting this thesis the author declares to have written this thesis by himself/herself, and not to have used sources or resources other than the ones mentioned. All sources used, quotes and citations that were literally taken from publications, or that were in close accordance with the meaning of those publications, are indicated as such.

COPYRIGHT STATEMENT The author has copyright of this thesis, but also acknowledges the intellectual copyright of contributions made by the thesis supervisor, which may include important research ideas and data. Author and thesis supervisor will have made clear agreements about issues such as confidentiality. Electronic versions of this thesis are in principle available for inclusion in any AMU thesis database and repository.

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Household Welfare: How to Measure and Index? Joshua Johanni TABLE OF CONTENTS ABSTRACT ......................................................................................................................................................... i ACKNOWLEDGEMENTS ........................................................................................................................... ii HONOR CODE ............................................................................................................................................... ii NON-PLAGARISM STATEMENT ............................................................................................................ iii COPYRIGHT STATEMENT ....................................................................................................................... iii LIST OF TABLES ........................................................................................................................................... vi LIST OF GRAPHS ......................................................................................................................................... vii LIST OF EQUATIONS ...............................................................................................................................viii 1. 2. 3. 4. 5. 6. 7. 8. INTRODUCTION ................................................................................................................................. 1 LITERATURE REVIEW...................................................................................................................... 2 MOTIVATION ....................................................................................................................................... 7 MICRO THEORETICAL FRAMEWORK ...................................................................................... 9 MACRO THEORETICAL FRAMEWORK ...................................................................................14 DATA......................................................................................................................................................14 PRELIMINARY ANALYSIS .............................................................................................................19 METHODOLOGY ..............................................................................................................................20 a. b. c. MODEL .......................................................................................................................................20 ADJUSTMENT AND ERROR TESTING...........................................................................24 CORRECTION ..........................................................................................................................30

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Household Welfare: How to Measure and Index? Joshua Johanni 9. 10. ANALYSIS .............................................................................................................................................30 CONCLUSION.....................................................................................................................................31

REFERENCES................................................................................................................................................33 APPENDIX .....................................................................................................................................................36 I. II. CODEBOOK..............................................................................................................................36 DATA 1 ........................................................................................................................................37

III. DATA 2 ........................................................................................................................................38 IV. V. VI. TREND GRAPHS 1 ..................................................................................................................39 TREND GRAPHS 2 ..................................................................................................................40 TREND GRAPHS 3 ..................................................................................................................41

VII. SUPPLEMENTAL GRAPHS 1 ...............................................................................................42 VIII. SUPPLEMENTAL GRAPHS 2 ...............................................................................................43 IX. SUPPLEMENTAL GRAPHS 3 ...............................................................................................44

Household Welfare: How to Measure and Index? Joshua Johanni LIST OF TABLES Table 1 - Descriptive Statistics Summary .....................................................................................................15 Table 2 - Preliminary Regression Summary .................................................................................................20 Table 3 Multivariate Linear Regression Results ........................................................................................21 Table 4 - Multicollinearity Test Results ........................................................................................................21 Table 5 - Variable Correlations ......................................................................................................................22 Table 6 - Condensed Multivariate Regression Results ...............................................................................24 Table 7 - R-Squared Analysis .........................................................................................................................25 Table 8 Jarque-Bera Statistic .......................................................................................................................26 Table 9- RESET Test P-Value .......................................................................................................................26 Table 10 - Adjusted Model Results ...............................................................................................................28 Table 11- Prais Winsten Adjusted Model Results .......................................................................................30 Table 12 - Codebook Part 1 ...........................................................................................................................36 Table 13 - Codebook Part 2 ...........................................................................................................................36 Table 14 - Data 1 .............................................................................................................................................37 Table 15 - Data 2 .............................................................................................................................................38

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Household Welfare: How to Measure and Index? Joshua Johanni LIST OF GRAPHS Graph 1 - Unemployment Rate, Happiness and the Natural Log ............................................................27 Graph 2 - Correlogram of Ln Model ............................................................................................................29 Graph 3 - Men Divorced ................................................................................................................................39 Graph 4 - Men Married ...................................................................................................................................39 Graph 5 - Both Parents ...................................................................................................................................39 Graph 6 - Fertility Rate ...................................................................................................................................39 Graph 7 - Abortion Rate ................................................................................................................................40 Graph 8 - Income ............................................................................................................................................40 Graph 9 - Unemployment Rate .....................................................................................................................40 Graph 10 - Gini Ratio .....................................................................................................................................40 Graph 11 - No Religion ..................................................................................................................................41 Graph 12 - Happiness .....................................................................................................................................41 Graph 13 - Happiness vs. Men Divorced ....................................................................................................42 Graph 14 - Happiness vs. Men Married .......................................................................................................42 Graph 15 - Happiness vs. Both Parents .......................................................................................................42 Graph 16 - Happiness vs. Fertility Rate .......................................................................................................42 Graph 17 - Happiness vs. Abortion Rate .....................................................................................................43 Graph 18 - Happiness vs. Income.................................................................................................................43 Graph 19 - Happiness vs. Unemployment Rate .........................................................................................43 Graph 20 - Happiness vs. Gini Ratio ............................................................................................................43 Graph 21 - Happiness vs. No Religion.........................................................................................................44 Graph 22 - Natural Log 1 ...............................................................................................................................44 Graph 23 - Natural Log 2 ...............................................................................................................................44

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Household Welfare: How to Measure and Index? Joshua Johanni LIST OF EQUATIONS Equation 1 Theoretical Household Welfare Summary ...........................................................................10 Equation 2 Marriage.....................................................................................................................................11 Equation 3 Fertility.......................................................................................................................................11 Equation 4 Income.......................................................................................................................................12 Equation 5 Leisure .......................................................................................................................................12 Equation 6 Religion......................................................................................................................................13 Equation 7 Location ....................................................................................................................................13 Equation 8 Theoretical Household Welfare Complete ..........................................................................13 Equation 9 - Individual Regression ...............................................................................................................19 Equation 10 - Multivariate Linear Model .....................................................................................................21 Equation 11 Multicollinearity Test Model ................................................................................................21 Equation 12 - Condensed Welfare Model ....................................................................................................23 Equation 13 - Condensed Multivariate Model ............................................................................................24 Equation 14 - Estimated Equation................................................................................................................24 Equation 15- R-Squared Analysis Model .....................................................................................................25 Equation 16 - RESET Test Model ...............................................................................................................26 Equation 17- Adjusted Model ........................................................................................................................28 Equation 18 - Durbin Watson Statistic.........................................................................................................29 Equation 19 - Final Model Estimation .........................................................................................................31

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Household Welfare: How to Measure and Index? Joshua Johanni

1. INTRODUCTION A common trend in emerging economic research is that of attempting to define and measure actual welfare or well-being; see for example (Rasmussen 2006), (Kahneman and Deaton 2010), (Easterlin 2001) and (Blundell, Preston and Walker 1994). Historically, economists used financial indicators such as household income, GDP, or consumer confidence as measures of welfare. However, it has become increasingly evident that there are a large number of people who are financially well-off but are still not happy with their situation in life. This question of welfare must be rethought and aimed towards measuring the perceived quality of ones situation in life. This paper uses this question as a foundation for proposing a different way of thinking about and measuring welfare. It focuses on the human person in order to determine the factors which, by nature, contribute to his welfare. Ultimately, the one thing that people unanimously strive for is to be happy. Happiness

essentially serves as the economists utility. Every human being acts in order to maximize their own perceived level of happiness. Welfare can be thought of as the material potential for happiness. It is not possible to make people happy, but certain tangible factors can contribute towards the development of an environment which may increase ones natural inclination towards happiness. These factors can be measured and aggregated. This paper will propose several factors which should be included in such a measurement of welfare. There have been many studies which try to measure the happiness of people based on selfreported statistics. However, peoples happiness is something which constantly changes with

various environments and moods. As such, even perceived happiness can only be measured in the present moment or after the fact. A comprehensive index of welfare would not simply follow the

Household Welfare: How to Measure and Index? Joshua Johanni ever changing moods of the populous, but would identify the constants which contribute to peoples happiness. Finally, this paper will calculate preliminary empirical tests in order to find out whether the proposed factors have any statistically significant influence.

2. LITERATURE REVIEW The idea of household welfare is somewhat vague, and in traditional economic research it has been measured by a price index. Sociologists and Psychologists have recognized the influence of other variables on peoples well-being but their empirical research is limited and they usually focus on only one variable. However, economists have been experimenting with the combined role of income and other factors on household welfare. One of the most common factors economists use is the amount of leisure time which people have at their disposal. While these new models have improved, they still only take into account a specific category of welfare and their variables are limited. Summaries of a few recent works in the field are included below. a. Blundell, Richard, Ian Preston, and Ian Walker. An introduction to applied welfare analysis. The Measurement of Household Welfare. Cambridge: Cambridge University Press, 1994. This article presents a summary of how welfare analysis is currently approached. It states that the ability to combine economic theory and empirical data to measure individual and household welfare aids in measuring the impact from policy changes. Recently, economists have been

attempting to incorporate various exterior dimensions into welfare estimates. Welfare usually has been calculated from consumer demand, which is sometimes combined with labor supply and intertemporal decisions. Equivalence scales are created to facilitate the comparison of levels of

welfare between different types of households. They can help to assess whether a benefit aids

Household Welfare: How to Measure and Index? Joshua Johanni households with different compositions. Adding intertemporal considerations to the equivalence scales allows for the examination of influential demographic variables, and the tracking of them over time. It speaks of how the original models for the dispersion of household welfare weighted each member of the household equally. However, this cannot be the case as different members of the household hold different levels of voice in decisions. These models are either cooperative and not Pareto efficient, or non-cooperative and Pareto efficient. It then proceeds to analyze another measure for welfare, the real wage function. It is advantageous because it is interpretable and can be compared with actual wages. It touches on how the non-linearity associated with the budget constraint is an important aspect of any empirical work concerning the labor supply and how to deal with it. This article identifies that real income or expenditure is what is usually used as the indicator for household welfare. However, this does not take leisure time into account. Leisure time is important because it is the determinant of what time will be available to work and thus real income. Leisure time is a crucial part of the cost benefit analysis concerning incentives and disincentives to work. The article also notes that social welfare and inequality are two other conditions which both have an effect on income. Social welfare concerns social choice and income inequality, which can be measured by the Lorenz curve. In extension, the extreme degree of income inequality which qualifies as poverty must also be taken into consideration. The article concludes by making note that there has been a large amount of empirical work in the past few years which attempts to measure the effect of policy on individual behavior and living standards. This work has increased because it has become easier to obtain data and to analyze the

Household Welfare: How to Measure and Index? Joshua Johanni data. It then states that there is still much to be done in this field. This article is important because it identifies a similar goal in researching household welfare; it confirms that the standard methods are lacking and mentions a few variables that should be included in an accurate analysis of household welfare. b. Blanchflower, David, and Andrew Oswald. Money, Sex and Happiness: An Empirical Study. The Scandinavian Journal of Economics. Vol. 106. No. 3. September 2004. 393415. This article acknowledges that, in a relatively new branch of economics, economists have begun to examine various determinants of happiness. Income and sexual behavior are proposed as being prominent indicators of happiness. Based on a simple survey of women it was concluded that sex is the single activity that brings the most amount of happiness. One of the acknowledged issues with this proposed hypothesis is that the direction of causality is difficult to determine. This article basically defines happiness as being how much someone likes his/her life. The data comes from self-reported surveys of happiness. Self-reported happiness is assumed to be a result of circumstances, aspirations, comparisons with others, and an individuals baseline happiness. The article hypothesizes that a reported level of happiness is a function of actual happiness and some error. It defines actual happiness as being a function of real utility which is a function of real income, sexual activity, a set of demographic and personal characteristics, and time period. The data used is from the General Social Survey. In the area of sexual activity, the article highlights the issues with bias in an open survey of sexual activity. According to the data, the average American adult has sex a couple times a month and had only one sexual partner in the previous year. Those under 40 years old have sex much more

Household Welfare: How to Measure and Index? Joshua Johanni frequently and with more partners than those over 40 years old. There is also a statistical deviation between older men and women in number of times they reported having sex in a month. It is unclear what the cause of this difference is. Either men overestimate the number of times they have sex, or there are a few women who have large numbers of sexual partners such as prostitutes. It was found that people who did not have sex were less happy than the average person. Also, there is a definite positive correlation between marriage and sex. Upon analysis of the data, it was found that there is a correlation between the frequency of sex and reported happiness. It is concluded that both men and womens happiness increases from sex. There is some evidence that men on average get slightly more happiness from sex than women. People with one sex partner were statistically happier than those with more than one. Also, those who paid for sex were less happy than those who did not. As people get older their sexual activity decreases. Also, there is no statistical relation between income and sexual activity. This means that money does not buy more frequent sex or more sex partners. While education has a slight negative correlation with sex, it was found that sex has disproportionately strong effects on the happiness of highly educated people. In conclusion, this article notes that there is a large margin of error in this research and that there is still much to be done in this area of research. This article is important because it correlates happiness with welfare. It not only proposes that there are external indicators which affect happiness, but takes that theory and applies it in an actual empirical analysis. c. Rasmussen, Dennis. Does Bettering Our Condition Really Make Us Better Off? Adam Smith on Progress and Happiness. The American Political Science Review. Vol. 100. No. 3. American Political Science Association, August 2006. 309-318.

Household Welfare: How to Measure and Index? Joshua Johanni This article examines two apparently contradictory principles of Adam Smith. The first is that the measure of a society is the degree to which it promotes peoples happiness. The second is that he believes the most important aspect of commercial society is in its liberty and security. In order to create a commercial society characterized by economic growth, liberty, and security, people must strive to better their condition. This constant struggle is in conflict with peoples tranquility. Smith also believes that happiness is a lasting state characterized by contentment where one is not concerned with constant desires or tranquility. A key note is that while tranquility is necessary it is not happiness. It must be combined with enjoyment or pleasure, thus emotion is necessary. These two main principles appear to be in conflict in that the first cannot be achieved if the second is fulfilled and the second cannot be fulfilled if the first is pursued. Thus, the reigning question is why Adam Smith continued to advocate both over many years. The article examines the many attempted explanations of why one principle is more important than the other. It also looks at the argument that the two principles simply illustrate two different views. However, it concludes that these two principles do actually promote the same end. Adam Smith acknowledged the imperfection of humanity and realized that people can never be completely tranquil; they will always be pursuing some desire. Thus, he views the value of government in that it tends to promote happiness. He then looks at the situation inside out. The best way to attempt to bring happiness may not be to try to promote or create it, but the first step may simply be to eliminate those things which prevent it. Thus, a government which alleviates misery is closer to promoting happiness. He also views pain as having a greater negative effect on people than the positive effect of pleasure. Thus it is more important for a society to prevent misery than to promote enjoyment. This prevention of misery is actually the first step towards promoting

tranquility and happiness.

Household Welfare: How to Measure and Index? Joshua Johanni Thus, the best way of promoting tranquility and happiness is through creating a modern society which provides liberty and security. This is also evidenced in the observation that the rich tend to be no happier than the poor. While this goal for a society may not seem complicated, Smith points out that most societies have failed at achieving it. The article finally examines Smiths different stages of history, hunting, shepherding, agriculture, and commercial. This article is important because it provides the philosophy for a different measure of household welfare. Tranquility and peace are necessary for happiness but not complete. The indicators which should be included in a measurement of household welfare are generally those which contribute to degrees of tranquility and peace. The fact that tranquility and peace are not the whole of happiness is why a measure of household welfare is a potential for happiness. Emotion is necessary for actual happiness; tranquility just provides the condition for happiness to exist. Thus, a measurement which approaches welfare from the perspective of happiness is consistent with the philosophy of Adam Smith, the father of modern economics. The segment of economists who subscribe to this method of thinking about welfare has only recently taken significant footing in the field and it is slowly growing. Thus, preliminary documents and studies are just beginning to emerge. While not much exists in the way of referential empirical studies, there is a large amount of work in agreement with the fact that welfare is much more than household income or GDP. These works generally propose new hypotheses about what other variables should be included in a model attempting to explain welfare.

3. MOTIVATION A proper understanding of welfare is critical for any economic analysis which deals with the human condition. Whether this understanding is merely monetary in nature or something much

Household Welfare: How to Measure and Index? Joshua Johanni more complex, it is a fact that some form of measurement must be chosen. Choosing the correct measurement will often be the determining factor in whether the outcome of the analysis is correct. A wrong choice could result in a prediction which is actually the complete opposite of the true outcome. This is important because, when dealing with economic and political policy, an improper analysis leads to an improper decision which has far-reaching consequences. However, when welfare is viewed properly, it has the potential to become a powerful measure or index by which one may construct an ordered set of households or even nations. This type of index would enable one to confidently state that, on average, people in location A have the potential to be happier than people in location B. It would be possible to determine what role various factors have and their influence on actual happiness. It would also provide the potential to calculate the direct effects of a policy change on peoples happiness. This would be extremely useful for politicians who are attempting to decide whether or not a bill should be passed. Currently, the monetary economic effects and a loose survey-based public opinion are the only variables taken into account when making a decision. Policy makers rarely take into account what effect a policy will have on the actual welfare of households. With an accurate measure of household welfare, it would be possible to confidently affect household welfare for the better. It could also be used to aggregate the household welfare of the nation so as to track it over time and compare with other nations. As of yet, the only empirical types of measures available for measuring national welfare in terms of happiness are opinion surveys. These are often biased and are exogenous. Thus, they cannot be adjusted to account for immediate changes in the economy or changes in other parameters. The only solution to these changes would be to have an additional survey taken. This is complex and expensive. With a composite index of welfare based on various categories of indicators, it would be possible to track specific changes in welfare back to specific indicators. It would also be possible to run multiple

Household Welfare: How to Measure and Index? Joshua Johanni potential scenarios. Thus, rather than performing social experiments with different policies, it might be possible to run potential scenarios and predict whether a certain policy will make households better off or not. This would help to prevent many detrimental policies from getting passed do to a lack of understanding of the consequences.

4. MICRO THEORETICAL FRAMEWORK In order to think about welfare, one must examine the well-being of an individual. All people have an intrinsic desire for happiness. Most economists and statisticians overlook the combined subjective and objective aspects of happiness, and fail to adequately account for them. Happiness itself cannot be accurately calculated in the moment because, in actuality, it has both a subjective and objective dimension to it. (Rasmussen 2006) The subjective dimension consists of emotions or moods. (Blundell, Preston and Walker 1994) These are not measurable and often unpredictable. The objective dimension consists in the material things which contribute towards happiness. These are measurable and can be viewed as contributing towards potential for happiness. While happiness itself cannot be predicted with some specific number it is possible to estimate a potential for happiness or welfare. The majority of people have similar necessities which, when met, will

generally increase their happiness. When taking this approach to happiness, it is fair to state that people act in order to maximize their happiness. This is similar to maximizing utility in a more classical view of economics and thus, in maximizing potential for happiness one increases overall welfare. When dealing with people it is very difficult to measure levels of welfare. Even when viewing welfare as the situational potential for happiness, the underlying question of: What empirically measurable things contribute towards the happiness of an individual? still remains. Taking the view

Household Welfare: How to Measure and Index? Joshua Johanni of the happiness of an individual and applying it to examine the happiness of a household will result in a more complete and applicable theory on welfare. This adds to the previous question by asking, What enables one household to have a greater potential for happiness than another household? How can we create an ordered set of households by degree of potential for happiness, or more simply by welfare? The reason that household welfare is difficult to measure is because it has many undefined indicators, and many indicators which are difficult to measure. These are difficult to measure because they often rely on self-reported information which has a large bias due to the fact that peoples perception often does not reflect reality. From a microeconomic perspective, Household welfare, when treated as being synonymous with potential for household happiness, has several categories of indicators which should go into its measurement. In order to think about this properly, one should acknowledge that an environment perfectly conducive towards happiness will promote peace, tranquility, and meditation. (Rasmussen 2006) It will not be stressful or anxious. It will also fulfill some of the basic intrinsic desires of man such as familial companionship (Orden and Bradburn 1968) and some acknowledgment or reliance on a higher power (Pew Research Center 2010). The proposed categories for model variables include, Household Marriage, Household Fertility, Household Income, Household Leisure, Household Religion, and Household Location. Equation 1 Theoretical Household Welfare Summary Household Welfare = f (Marriage, Fertility, Income, Leisure, Religion, Location) On the microeconomic level, each of these categories can be broken down further in order to accurately justify the importance of their inclusion.

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Household Welfare: How to Measure and Index? Joshua Johanni Some indicators which should be included in a calculation of Marriage are what the current marital status is and what the past marital status has been for each individual. Equation 2 Marriage Marriage = f (Current Marital Status, Previous Marital Status) Marriage, undeniably, has an influence on an individuals happiness level. Marriage is something which stems from the very core of the nature of man and as such has a great effect on the happiness of the individual(s) involved. The previous marital status is merely a potential modifier on the current marital status. It is hypothesized that Marriage will ultimately be positively correlated with Household Welfare. Fertility should also be comprised of several indicators. These include: whether the couple is able to have children or not, how many children they actually have, how many were wanted, and whether they are now content with that number. Equation 3 Fertility Fertility = f (Ability to have Children, Number of Children, Number of Children Wanted, Contentment with Number of Children) These indicators are included because it is hypothesized that, under the proper conditions, given that the people are married and open to having children and want them, then children will have a generally positive correlation with the welfare of a household. Indicators which should be included in a calculation of Income are the degree of household job security and actual household income. An increase in income is effective in increasing happiness in so far as it prevents stress and provides for necessities.

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Household Welfare: How to Measure and Index? Joshua Johanni Equation 4 Income Income = f (Job Security, Household Income) A measurement of job security is important in measuring Household Welfare because it functions as a stress factor in a household. Job security can also be incorporated into the actual value of a job given the probability for the retention of that job. Income combined with Location will enable the derivation of other indicators as well, such as the potential for quality of housing, food, clothing, transportation, education, and other necessities. These indicators will then reveal the level of luxury at which the household exists. While household income has been positively correlated with

household welfare, there should be a significant demonstration of diminishing returns and theoretically there should be a point at which another dollar of household income does not increase household welfare. It could also be conceived that, at a certain point, an additional dollar of household income will actually decrease household welfare. Some indicators which should be included in a calculation of Leisure are measures of leisure time spent together as a family, spent as a couple, and spent individually. Leisure time reduces stress, creates positive externalities for other members of the household, and increases ones ability to be more productive when working. Equation 5 Leisure Leisure = f (Family L.T., Couple L.T., Individual L.T.) Each of these indicators is important because they all have a direct proportional relationship with the happiness of different segments of the household, thus affecting the total household welfare. Religion can be viewed as the degree of how religious the household is and what religion the household is. The degree of how religious a household is can be determined from the households

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Household Welfare: How to Measure and Index? Joshua Johanni opinion of their own religion, how much time they commit in volunteer work and how much they give in personal charity. Equation 6 Religion Religion = f (Opinion of Religion, Charitable Giving, Volunteer Time, Religious Denomination) The degree of how religious a household is directly affects the welfare of the household because it is evidence of what that households outlook is on life. A household with a positive outlook on life tends to be happier than one which has a more pessimistic outlook. The actual denomination of religion in a household can also have an effect on the happiness in that household. This can occur because some religions are more conducive to dealing with life issues than others, thus relieving stress and inducing peace and harmony. Household Location can be seen as where one lives and at what quality he lives. Equation 7 Location Location = f (Physical Location, Quality of Living) Location has to do with physical security, ease of access to local necessities, and quality of living. These indicators tend to contribute towards an internal peace of mind or stress level. Equation 8 Theoretical Household Welfare Complete Household Welfare = f ((Current Marital Status, Previous Marital Status), (Ability to have Children, Number of Children, Number of Children Wanted, Contentment with Number of Children), (Job Security, Household Income), (Family L.T., Couple L.T., Individual L.T.), (Opinion of Religion, Charitable Giving, Volunteer Time, Religious Denomination), (Physical Location, Quality of Living))

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Household Welfare: How to Measure and Index? Joshua Johanni 5. MACRO THEORETICAL FRAMEWORK While the information presented in the previous section may be accurate from a theoretical perspective, a single dataset with all of those variables in it is not readily available. For an accurate microeconomic empirical test, all of the variables to be used must be in a single dataset and all of the information must be obtained from each sample. Perhaps future studies may furnish such a dataset making it possible to estimate a complete model. However, this paper will examine a theoretical aggregate of indicators determining household welfare on a national scale. A national measure of this type will require a modification to the actual variables chosen. The new variables will follow the same logical progression and categories established in Equation 1 for individual household welfare. For each of these categories the question can be proposed as to what contributes to the happiness or welfare of people and households on a national scale. While this model may not be directly what was originally intended there is merit to a national aggregate of this type. One such possibility would be easily comparing national household welfare over time and against other countries.

6. DATA The datasets used for this analysis were chosen for their relevance to a specific category in Equation 1 - Household Welfare = f (Marriage, Fertility, Income, Leisure, Religion, Location) modified in theory for a particular relevance on a national level. The complete table of data used is included in Appendix II and Appendix III. A codebook describing the variables used along with their detailed sources is included in Appendix I. The relevant time period which will be used is 1947 to 2009 (this is merely because that was the available time period for the data). One note is that there are differing amounts of data available for each variable; i.e. some variables will not have data for every year or may not go all the way back to 1947. The variables which will be used are summarized in Table 1 below followed by a detailed description of each variable.

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Household Welfare: How to Measure and Index? Joshua Johanni Table 1 - Descriptive Statistics Summary
Label MenDivorced MenMarried BothParents FertilityRate AbortionRate Income Unemployment Rate Gini Ratio NoReligion Happiness Numberof Observations 36 36 62 49 60 43 62 43 27 38 Mean 0.073 0.624 0.820 2.184 0.150 2.202 5.661 0.430 0.091 0.331 Median (50thPercentile) 0.076 0.615 0.825 2.014 0.198 2.238 5.600 0.426 0.076 0.317 Standard Deviation 0.017 0.039 0.046 0.500 0.118 0.425 1.525 0.028 0.034 0.078 Min 0.037 0.570 0.741 1.738 0.0001 1.384 2.900 0.386 0.051 0.149 Max 0.091 0.712 0.876 3.654 0.293 2.803 9.700 0.470 0.164 0.523

Under the category of Marriage, the first variable is Men Divorced, which is the percent of men, over 18 years of age, with income, that are divorced, as reported by the U.S. Census Bureau. See Graph 3 in Appendix IV for the trend of Men Divorced over time. This variable is hypothesized to have a negative correlation with happiness. Divorce often leads to financial issues, familial issues with children, anxiety, and stress. All of these things lead to a greatly reduced potential for happiness. The second Marriage variable is Men Married, which is the percent of men, over 18 years of age, with income, that are married, and their spouse is present, as reported by the U.S. Census Bureau. While many of the reasons for including this variable in the model are similar in concept to those for Men Divorced, it is still theoretically distinct. Not only are more men getting divorced over time but, fewer and fewer men are even getting married. See Graph 4 in Appendix IV for the trend of Men Married over time. The third Marriage variable is Both Parents, which is the percentage of families in which married couples are still present, as reported by the U.S. Census Bureau. When a family is relying completely

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Household Welfare: How to Measure and Index? Joshua Johanni on only one parent it creates an environment of difficulty for the household unit as a whole. Often, in this scenario, there is a notable decrease in income and in leisure time due to the fact that one person must work a full-time job and keep the home in order. See Graph 5 in Appendix IV for the trend of Both Parents over time. Under the category of Fertility, the first variable is Fertility Rate, which is the national average number of births per woman, as reported by the World Bank. Fertility Rate, not only provides insight into the average size of families, but also into the mindset of the populous. Are families willing to have children? Why or why not? It also gives an indication of the statistics for future population. A fertility rate of about 2.1 would indicate that the population will remain about the same in the next year. (The additional 0.1 is due to deaths or tragedies.) Likewise, anything above 2.1 would indicate future increases, and anything below 2.1 future decreases. The population is the source from which all economic activity is generated. The population determines the labor force and the consuming customer base. Thus, this variable is useful as an economic indicator as well. See Graph 6 in Appendix IV for the trend of Fertility Rate over time. The second Fertility variable is Abortion Rate, which is the percentage of pregnancies that end in abortion, compiled by Wm. Robert Johnston from a number of different sources. The historical trend in Abortion Rate is very clear in that abortions were almost non-existent until around 1973 when abortion was legalized in the United States by the Supreme Court in the case of Roe v. Wade. This decision allowed people to have very easy and legal access to abortions and thus, due to a decrease in cost, increased the demand for abortion. Abortion itself is an indicator of welfare because it illustrates a lack of value for family which is the pillar of any economy and society. The decrease in familial appreciation and decrease in economic strength which stem from that justifies

16

Household Welfare: How to Measure and Index? Joshua Johanni the hypothesis that Abortion Rate is negatively correlated with Happiness. See Graph 7 in Appendix V for the trend of Abortion Rate over time. Some categories and variables had to be dropped or discarded due to a lack of data or insufficient dataset. The Location category was dropped as no suitable national dataset was found. The variable for the Leisure category was also discarded due to a lack of observations. Under the category of Income, the first variable is Income, which is the income per capita in tens of thousands of 2009 dollars, as measured by the U.S. Census Bureaus Current Population Survey. Income is a common indicator which economists have historically used for measuring household welfare. A common national extension of that is Gross Domestic Product or National Income. Income per capita was specifically chosen in an effort to maintain the theoretical roots of this study by basing the estimate on indicators related directly with households. See Graph 8 in Appendix V for the trend of Income over time. The second Income variable is Unemployment Rate, which is the percentage of the labor force that is unemployed at a given time, as reported by the Federal Reserve Economic Data. Unemployment Rate is a good indicator of job security and level of income as well. Job security is important for welfare, because a secure job will create a sense of peace whereas an insecure job will be a source of stress and concern. As the unemployment rate increases more and more people are looking for jobs, thus competition increases and the average job becomes less secure. See Graph 9 in Appendix V for the trend of Unemployment Rate over time. The third Income variable is Gini Ratio, which is a measure of the inequality in incomes. This variable is measured with a value of 0 equaling total equality and a value of 1 equaling maximum inequality. It is measured by calculating the ratio of the area that lies between the line of equality

17

Household Welfare: How to Measure and Index? Joshua Johanni and the Lorenz curve. A growing disparity between the rich and the poor is often a source of discontent and frustration for a large section of the populous. There could also be some correlation drawn between job security and income inequality. The more unequal the market is, the poor getting poorer and the rich getting richer, the more cutthroat and competitive certain segments of the market are going to get. Thus, at a lower level of income and a high level of inequality, ones job may be less secure than if there was less inequality. See Graph 10 in Appendix V for the trend of Gini Ratio over time. Under the category of Religion, the variable is No Religion, which is the percentage of people who responded that they had no religious affiliation, as reported by the National Opinion Research Centers General Social Survey. This variable was chosen because people often tend to inflate their religious activities and affiliations. Religion is generally viewed in a positive light and thus people report how they want to see themselves and not how they actually are. (Chaves and Stephens 2003) By picking a response of no religious affiliation, there is a much smaller bias in the responses. There is no incentive for people to report that they have no religion. Whereas, reporting another religion may provide emotional benefits or may simply be a habit or social norm. Religion in itself has a positive effect on the happiness of an individual. Whether an individual simply turns towards their religion in time of tragedy or are devout their entire lives, the impact that religion itself has on a person is positive and contributes towards their interior peace and happiness. Thus, it can be hypothesized that No Religion will be negatively correlated with Happiness. See Graph 11 in Appendix VI for the trend of No Religion over time. Under the category of Happiness, the variable is Happiness, which is the percentage of people that responded on a survey that they were Very happy. The survey question had three choices:

18

Household Welfare: How to Measure and Index? Joshua Johanni Very, Somewhat, and Not Very Happy. The data was compiled from an article in the Social Psychology Quarterly, which had compiled it from several surveys, and from the General Social Survey. This variable will be the dependent variable in the model. This variable was chosen in an attempt to reduce response bias as well since people are more apt to answer Somewhat Happy when they may not be. This analysis is attempting to discern whether the previous variables mentioned can be shown to be explanatory variables for Happiness. See Graph 12 in Appendix VI for a trend of Happiness over time.

7. PRELIMINARY ANALYSIS The first step in determining a relationship between Happiness and the other variables is to test for individual relationships and significance between each variable and Happiness as demonstrated in the equation below. Table 2 below is a summary of the individual regression coefficients for Happiness on each of the other variables and their statistical significance.

Equation 9 - Individual Regression h= Where: h = Happiness

j j

+ j( j )

= The constant for some variable j = The beta value of some variable j

j = Some independent variable

19

Household Welfare: How to Measure and Index? Joshua Johanni Table 2 - Preliminary Regression Summary
Men Divorced Happiness Constant R squared N 1.556 * (0.57) 0.406 *** ( 0.041) 0.212 25 Men Married 0.679 * ( 0.247) 0.132 ( 0.156) 0.215 25 BothParents 1.299 *** (0.222) 0.731 *** (0.182) 0.472 38 Fertility Rate 0.063 * (0.027) 0.181 ** (0.057) 0.122 33 Abortion Rate 0.407 *** ( 0.1) 0.402 *** (0.021) 0.303 37 Income 0.084 ** (0.024) 0.485 *** (0.052) 0.291 29 Unemployment Gini Ratio Rate 0.017 * (0.008) 0.431 *** (0.049) 0.092 37 1.219 ** (0.34) 0.822 *** ( 0.145) 0.298 29 NoReligion 0.865 ** ( 0.249) 0.376 *** ( 0.024) 0.299 27

*p<0.05,**p<0.01,***p<0.001

As is seen above, all of the coefficients are individually statistically significant and the signs are mostly as hypothesized. Income is the only variable which was not as it was expected; it has a slightly negative correlation with happiness. Note that, for this set of regressions, Both Parents is the best choice as explanatory variable for Happiness with an R2 of 0.47. This means that, assuming the model is correct, the variation in Both Parents explains 47% of the variation in Happiness. Graphs of these regressions are included in Appendix VII, Appendix VIII, & Appendix IX.

8. METHODOLOGY

A. MODEL The first step in attempting to determine whether or not these variables are significant explanatory variables of happiness is to choose a model. It is best to begin by running a multiple linear regression with Happiness as the dependent variable. This is an attempt to find out if the there is a linear relation and what percent of the variation in Happiness might be explained by the variation in the rest of the independent variables.

20

Household Welfare: How to Measure and Index? Joshua Johanni Equation 10 - Multivariate Linear Model Happiness =
1

+ 2(Men Divorced) + 3(Men Married) + 4(Both Parents) + 5(Fertility Rate) + 6(Abortion

10

Rate) + 7(Income) + 8(Unemployment Rate) + 9(Gini Ratio) + Table 3 Multivariate Linear Regression Results

(No Religion) + e

Rsquared 0.739 Men Divorced Happiness Men Married Both Parents Fertility Rate 0.110 (0.149) Abortion Rate 0.450 (0.830) Unemployment Gini Ratio NoReligion Rate 0.023 * (0.010) 0.684 (1.666) 1.049 (0.709)

N 25

Income 0.349 * (0.146)

Constant 4.222 (2.350)

7.041 3.370 8.042 (4.026) (3.844) (4.618) *p<0.05,**p<0.01,***p<0.001

Based on the results of this regression, it appears as if there are issues with multicollinearity. The results are not statistically significant, there are high standard errors and there is a high R2 value. In order to test for multicollinearity, Happiness is taken out of the regression and is replaced with one of the independent variables as the dependent variable for the new regression. If the R2 is high for this regression, then the presence of multicollinearity has been confirmed.

Equation 11 Multicollinearity Test Model Men Divorced =

6 1

+ 2(Men Married) + 3(Both Parents) + 4(Fertility Rate) + 5(Abortion Rate) +

(Income) + 7(Unemployment Rate) + 8(Gini Ratio) + 9(No Religion) + e

Table 4 - Multicollinearity Test Results

Rsquared 0.9841 Men Married Happiness Both Parents Fertility Rate Abortion Rate 0.012 (0.051) Unemployment Gini Ratio NoReligion Rate 0.000 (0.001) 0.110 (0.100) 0.024 (0.044) N 25

Income 0.005 (0.009)

Constant 0.192 (0.138)

0.372 0.069 0.003 (0.220) (0.286) (0.009) *p<0.05,**p<0.01,***p<0.001

21

Household Welfare: How to Measure and Index? Joshua Johanni The R2 for this regression is extremely high at 0.98. This confirms the presence of multicollinearity. Multicollinearity occurs when three or more variables are linearly dependent. The next step is to examine the correlations between each of the variables to get a better view of how the variables are actually related. Table 5 - Variable Correlations
Happiness Happiness MenDivorced MenMarried BothParents FertilityRate AbortionRate Income Unemployment Rate Gini Ratio NoReligion Year 1 0.495 0.498 0.563 0.438 0.583 0.588 0.270 0.597 0.609 0.617 1 0.992 0.991 0.878 0.364 0.955 0.591 0.959 0.765 0.963 1 0.992 0.865 0.306 0.941 0.553 0.944 0.742 0.960 1 0.881 0.413 0.961 0.587 0.969 0.796 0.982 1 0.467 0.872 0.668 0.865 0.695 0.884 1 0.531 0.537 0.553 0.759 0.542 1 0.727 0.964 0.866 0.975 1 0.622 0.610 0.610 1 0.852 0.976 1 0.881 1 Men Divorced Men Married Both Fertility Abortion Income Parents Rate Rate Unemployment Rate Gini Ratio No Year Religion

The table above demonstrates that many of the variables are strongly correlated with each other. When two variables are strongly correlated they cannot be used as two independent variables in the same regression because statistically it is not possible to distinguish between their separate effects. The only way to correct for multicollinearity is by dropping variables from the regression until there are no more independent variables highly correlated with each other. It is also important to note that all of the variables are strongly correlated with Year, the time series variable. This indicates a strong trend over time and can make it difficult to run a regression using them because statistically there is not enough variation in them to tell them apart.

22

Household Welfare: How to Measure and Index? Joshua Johanni From a theoretical standpoint these results are actually understandable. Some of the variables which have the highest correlations are fundamentally related. Men Married, Men Divorced, Both Parents, and Fertility Rate are all highly correlated with one another. Income is highly correlated with Unemployment Rate and Gini Ratio. This could be an indication that the areas which really matter to national household welfare could potentially be condensed into two categories. One category would summarize indicators relating to marriage and family and the other category would summarize indicators relating to ones job and the economy. Equation 12 - Condensed Welfare Model National Household Welfare = f (Familial Welfare, Economic Welfare) For the purposes of this analysis, the next step is to choose which variable best fulfills each of these categories. Both Parents would be a good indicator for Familial Welfare as it encompasses both marriage and divorce. If the percentage of families, with married couples, increases, then either marriage must be increasing, divorce decreasing, or some combination of the two. This would also support its strong correlation with Fertility Rate; the more families there are with married couples (as a result of more people getting married, and / or fewer divorces) the more children will ultimately result in being born. This also links inversely with Abortion, as the fertility rate increases, the abortion rate decreases. Thus, Both Parents will be used for Familial Welfare. An important aspect to keep in mind is that the two variables which are picked cannot be highly correlated because it would result in collinearity once again. The only economic indicator that Both Parents is not highly correlated with is Unemployment Rate. This would be a good choice for Economic Welfare anyhow because it is highly correlated with both Income and Gini Ratio and will thus stand in for them as well. Unemployment Rate encompasses income, job security, and overall economic well-being. As the unemployment rate increases, competition increases, salaries and income decrease, job security

23

Household Welfare: How to Measure and Index? Joshua Johanni decreases, and with a greater percentage of people out of work worried about their incomes and their jobs, consumer confidence decreases and consumption decreases. Thus, Unemployment Rate is an excellent indictor of overall economic well-being. Equation 13 - Condensed Multivariate Model Happiness =
1

+ 2(Both Parents) + 3(Unemployment Rate) + e

Table 6 - Condensed Multivariate Regression Results

Rsquared 0.4889 Both Parents Happiness N 37

Unemployment Constant Rate

1.224 *** 0.010 0.611 ** (0.230) (0.006) (0.200) *p<0.05,**p<0.01,***p<0.001

Equation 14 - Estimated Equation Happiness = - 0.611 + 1.224(Both Parents) 0.0101(Unemployment Rate) + e This model still needs to undergo further testing for other various potential issues, but it no longer has any issues with collinearity and is a solid model to start from.

B. ADJUSTMENT AND ERROR TESTING After identifying a potential model, the first thing to do is to test to see if the correct functional form was specified. One way of testing for this is by comparing the R2 values from other possible models to see which is greater. It is only appropriate to compare these when the models have the same left-hand side variable and the same number of right-hand side variables.

24

Household Welfare: How to Measure and Index? Joshua Johanni Equation 15- R-Squared Analysis Model Happiness =
1

+ 2(Variable 1) + 3(Variable 2) + e

Table 7 - R-Squared Analysis

Men Divorced MenDivorced MenMarried BothParents FertilityRate AbortionRate Income Unemployment Rate Gini Ratio NoReligion 0.316 0.319 0.271 0.282 0.177 0.179 0.489 0.108 0.380 0.403 0.453 0.094 0.284 0.277 0.276 0.352 0.279 0.283 0.271 Men Married Both Fertility Abortion Income Parents Rate Rate Unemployment Rate Gini Ratio No Religion

The table above depicts the R2 values for regressions run in the form of Equation 15 using all possible combinations of two independent variables on Happiness. The grayed out cells are combinations of variables which were not run, as their correlations were all equal to or greater than 0.8. This test confirms that the variation in the model chosen, using Both Parents and Unemployment Rate, explains the greatest percentage (49%) of the variation in Happiness. Another test which can be run is the Jarque-Bera test. It tests to see if the residuals were generated by a normal distribution and thus determine if the functional form of the model is adequate. The null hypothesis is that the residuals were generated by a normal distribution and the alternative hypothesis is that they were not. The 5% significance level critical value for this test statistic is 5.99.

25

Household Welfare: How to Measure and Index? Joshua Johanni Table 8 Jarque-Bera Statistic
Happiness =
1

2 (Both

Parents) +

3 (Unemployment

Rate) + e

Jarque BeraTestStatistic:

2.653

Because the test statistic is less than the critical value for this test, the null hypothesis is not rejected and the conclusion is that the correct functional form is specified. One final test to run checking the functional form of the model is the Regression Specification Error Test (RESET). The purpose of this test is to see if higher ordered polynomials of the explanatory variables have been omitted. Equation 16 - RESET Test Model Happiness =
1

+ 2(Both Parents) + 3(Unemployment Rate) + 4(yhat 2 ) + 5(yhat 3) + e Where: yhat = The predicted values from Equation 13 - Condensed Multivariate Model

The test is run by estimating the model in Equation 16 and calculating an F-test for the joint hypothesis that the coefficients for yhat 2 and yhat 3 are both equal to zero. Table 9- RESET Test P-Value
RESETTestPvalue 0.0091

Because the p-value is less than 0.05, the null hypothesis is rejected, and it is concluded that either yhat 2 or yhat 3 are relevant and thus the model should be respecified.

26

Household Welfare: How to Measure and Index? Joshua Johanni In order to choose a different model it is helpful to look at the individual variables involved. Graph 15 - Happiness vs. Both Parents in Appendix VII shows that Both Parents is highly correlated with Happiness. However, Graph 19 in Appendix VIII shows that Unemployment Rate has a decreasing marginal decline in its relationship with Happiness. As Unemployment Rate initially increases, Happiness rapidly decreases. However, as it continues to increase, the marginal decline in Happiness decreases. By taking the natural log of Unemployment Rate it is possible to account for this curvature in the model. See Graph 22 and Graph 23 in Appendix IX for the individual effect of the natural log on Unemployment Rate. Graph 1 below illustrates the change in the individual relationship between Happiness and Unemployment Rate. Graph 1 - Unemployment Rate, Happiness and the Natural Log

The coefficient from a regression of Happiness on Unemployment Rate is -0.017 with an R2 of 0.091. The coefficient from a regression of Happiness on Ln(Unemployment Rate) is -0.123 with an R2 of 0.144. This indicates that by taking the natural log of the variable Unemployment Rate it is possible to improve the individual regression model.

27

Household Welfare: How to Measure and Index? Joshua Johanni The main question is what effect it will have on the multiple regression model and whether it will pass the tests for functional form. Equation 17- Adjusted Model Happiness =
1

+ 2(Both Parents) + 3(Ln(Unemployment Rate)) + e

Table 10 - Adjusted Model Results

Rsquared 0.51 Both Parents Happiness N 37

Ln(Unemployment Constant Rate)

1.184 *** 0.072 p=0.059 0.513 * (0.230) (0.037) (0.214) *p<0.05,**p<0.01,***p<0.001

This model has a higher R2 (0.51) than the original model (0.49), although it is only marginally larger. This model passes the Jarque-Bera test with a statistic of 3.080. This model also improves the results of the RESET test and passes with a p-value of 0.050. Thus this model has sufficiently passed the tests and is of an adequate functional form. While it fits the data well, that does not eliminate the possibility of other errors. Because the data is time-series data it is necessary to test for autocorrelation. Autocorrelation means that the error from one observation is correlated with the errors in other observations. Thus, if autocorrelation is present the coefficients may still be used, but hypothesis testing and confidence intervals will not be accurate. One of the ways to examine the correlation between observations at different time periods is with a correlogram. In the correlogram each dot represents the level of correlation at some time interval.

28

Household Welfare: How to Measure and Index? Joshua Johanni Graph 2 - Correlogram of Ln Model

The correlogram of the adjusted model visually indicates that there is autocorrelation present. Another way to confirm the presence of autocorrelation is the Durbin-Watson test. The Durbin Watson test statistic has a special distribution whose critical value may only be calculated from a table. For this test the critical value has an upper and a lower bound. The equation which the Durbin Watson statistic is based on is below.

Equation 18 - Durbin Watson Statistic et = et-1 + vt Where: et = Predicted error from the regression H0 : = 0 HA: 0

29

Household Welfare: How to Measure and Index? Joshua Johanni The null hypothesis is rejected if the Durbin Watson statistic is less than the lower bound and it cannot be rejected if it is above the upper bound. However, if the statistic is in-between the lower bound and upper bound then the test is inconclusive. The lower bound for this model is 1.112 and the upper bound is 1.446. The Durbin Watson statistic is 0.818, which is lower than the lower bound. Thus, the null hypothesis is rejected and the presence of autocorrelation is confirmed.

C. CORRECTION One method of adjusting the model for autocorrelation is the Prais-Winsten estimation of feasible generalized least squares. Generalized least squares are used to estimate models when autocorrelation is present. It uses an estimation of in order to adjust for the autocorrelation. Table 11 below illustrates the regression results for the adjusted natural log model. Table 11- Prais Winsten Adjusted Model Results
Rsquared 0.63 BothParents Happiness Ln(Unemployment Rate) N 37

Constant 0.613 ** (0.235)

1.321 *** 0.077 p=0.065 (0.255) (0.040) *p<0.05,**p<0.01,***p<0.001

DurbinWatsonStatistic Transformed Original 0.818 1.180

Rho

0.310

9. ANALYSIS The final model and estimation demonstrates that the initial hypothesis for these variables is correct.

30

Household Welfare: How to Measure and Index? Joshua Johanni Equation 19 - Final Model Estimation Happiness = - 0.613 + 1.321(Both Parents) - 0.077(Ln(Unemployment Rate)) + 0.31et-1 Both Parents is positively correlated with Happiness with a coefficient of 1.321 and the modified Unemployment Rate, Ln(Unemployment Rate) is negatively correlated with Happiness with a coefficient of -0.077. The R2 indicates that the variation in this model accounts for 63% of the variation in Happiness. This model is successful in demonstrating a significant relationship between these variables and Happiness as both of these variables are statistically significant. An important point to make note of is that these two variables are not contained simply at face value. The conclusion is not that Happiness is a function of Both Parents and Unemployment Rate. Each of these dependent variables is also representing the number of variables which are highly correlated with it. This is merely an empirical representation of the condensed theoretical model which had Familial Welfare and Economic Welfare as independent variable categories. A more complete model could be created by making a model for each of these categories, thereby including other indicators. Whether there are six categories comprised of multiple variables, as my initial hypothesis proposed, or two categories comprised of multiple variables does not matter. The important aspect to recognize is that there are many non-monetary determinates which comprise welfare and thus have a strong influence on happiness.

10. CONCLUSION In conclusion, the estimation results which have been empirically obtained support the proposed hypothetical theory that welfare, as the objective aspect of happiness is comprised of many measurable variables, most importantly ones which are not directly linked with monetary success. The goal of this paper has been accomplished in that its aim was to propose this idea, suggest some

31

Household Welfare: How to Measure and Index? Joshua Johanni indicators and attempt to support them empirically. These have been successfully fulfilled. Creating a comprehensive index or indicator of welfare on a national or even household level is left for future work. Such an index would be immensely valuable, and could prove very interesting for analyzing human behavior. An interesting statistic is that this model had an R2 of 63%. While happiness is comprised of subjective and objective dimensions, the degree to which each of those influences actual happiness is not known. Is it dominantly ones emotions or mood that ultimately determines whether they are happy or not? Or is it their environment and material circumstance? It is a mystery as to which one on average has a greater effect on people. However, this statistic suggests that the majority (63%) of the variation in the average persons happiness can be explained by the variation in tangible circumstances and things. It appears that, for the average person, their subjective dimension of happiness is supplementary to their objective situation. This hypothesis about the relation between the subjective and objective dimensions of happiness could prove a very interesting and fruitful future research topic.

32

Household Welfare: How to Measure and Index? Joshua Johanni REFERENCES Blanchflower, David G., and Andrew J. Oswald. "Money, Sex and Happiness: An Empirical Study." The Scandinavian Journal of Economics (Blackwell Publishing) 106, no. 3 (September 2004): 393415. Blundell, R. W., Ian Preston, and Ian Walker, . The Measurement of Household Welfare. Cambridge University Press, 1994. Bok, Derek. The Politics of Happiness: What Government Can Learn from the New Research on Well-Being. Princeton University Press, 2010. Chaves, Mark, and Laura Stephens. "Church Attendance in the United States." In Handbook of the Sociology of Religion, edited by Michele Dillon, 85-95. New York: Cambridge University Press, 2003. Chiappori, Pierre-Andr . "Collective Labor Supply and Welfare." The Journal of Political Economy (The University of Chicago Press) 100, no. 3 (June 1992): 437-467. Chiappori, Pierre-Andr . "Rational Household Labor Supply." Econometrica (The Econometric Society) 56, no. 1 (January 1988): 63-90. Cowan, Philip, and Carolyn Cowan. "News You Can Use: Are Babies Bad for Marriage?" Council on Contemporary Families. January 9, 2009. http://www.contemporaryfamilies.org/marriagepartnership-divorce/babies.html (accessed January 31, 2012). Deaton, Angus. "Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll." Journal of Economic Perspectives 22, no. 2 (2008): 53-72.

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Household Welfare: How to Measure and Index? Joshua Johanni Di Tella, Rafael, and Robert MacCulloch. "Some Uses of Happiness Data in Economics." Journal of Economic Perspectives 20, no. 1 (2006): 25-46. Diener, Ed, and Martin E. P. Seligman. "Beyond Money: Toward an Economy of Well-Being." Psychological Science in the Public Interest (American Psychological Society) 5, no. 1 (May 2004). Easterlin, Richard A. "Income and Happiness: Towards a Unified Theory." The Economic Journal 111, no. 473 (July 2001): 465-484. Fagan, Patrick, and Robert Rector. "The Effects of Divorce on America." The Heritage Foundation. June 5, 2000. http://www.heritage.org/research/reports/2000/06/the-effects-of-divorceon-america (accessed January 31, 2011). Frey, Bruno, and Alois Stutzer. Happiness and economics: how the economy and institutions affect well-being. Princeton: Princeton University Press, 2001. Grootaert, Christiaan. "The Conceptual Basis of Measures of Household Welfare and Their Implied Survey Data Requirements." The Review of Income and Wealth 29, no. 1 (March 1983): 1-21. Kahneman, Daniel, and Angus Deaton. "High income improves evaluation of life but not emotional well-being." PNAS (Proceedings of the National Academy of Sciences of the United States of America) 107, no. 38 (September 2010): 16489-16493. Kokoski, Mary F. "Indices of Household Welfare and the Value of Leisure Time." The Review of Economics and Statistics (The MIT Press) 69, no. 1 (February 1987): 83-89. Legatum Institute. The 2010 Legatum Prosperity Index. 2010. http://www.prosperity.com/prosperiscope/ (accessed January 31, 2011).

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Household Welfare: How to Measure and Index? Joshua Johanni Mercer. Mercer 2010 Quality of Living survey highlights - Global. 2010. http://www.mercer.com/qualityofliving (accessed January 31, 2011). Orden, Susan R., and Norman M. Bradburn. "Dimensions of Marriage Happiness." The American Journal of Sociology (The University of Chicago Press) 73, no. 6 (May 1968): 715-731. Pew Research Center. The Pew Forum on Religion and Public Life. 2010. http://pewforum.org/ (accessed January 31, 2011). Rasmussen, Dennis C. "Does "Bettering Our Condition" Really Make Us Better Off? Adam Smith on Progress and Happiness." The American Political Science Review (American Political Science Association) 100, no. 3 (August 2006): 309-318. Rogers, Stacy, and Danelle DeBoer. "Changes in Wives' Income: Effects on Marital Happiness, Psychological Well-Being, and the Risk of Divorce." Journal of Marriage and Family (National Council on Family Relations) 63, no. 2 (May 2001): 458-472. Scorelogix. Job Security Score. 2008. http://jobsecurityscore.com/about_us.php (accessed January 31, 2011). Sightline Institute. Measure Gross National Happiness. n.d. http://www.sightline.org/research/sust_toolkit/solutions/measure_happiness (accessed April 21, 2011).

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX

I.

CODEBOOK Table 12 - Codebook Part 1

Category Code Label PerMenID MenDivorced

Marriage PerMenIM MenMarried PerFamMC BothParents FertRate FertilityRate

Fertility AbortRate AbortionRate

Location (dropped) N/A

Leisure (dropped) N/A

Percentof Menover18 Percentof Menover PercentofFamilies National Average Numberof Percentage of Pregnancies withIncome thatare Description 18withIncome that withMarriedCouples BirthsperWoman(Fertility whichEndinAbortion(Abortion MarriedandSpouse is are Divorced Present Rate) Rate) Present Source U.S.CensusBureau U.S.CensusBureau U.S.CensusBureau WorldBankData Wm.RobertJohnston

N/A

N/A

N/A

N/A

Details

Ta ble P14[1974 2009] Ta bl e P14[19742009] ("Numberofmen over ("Numberof men over18 18with i ncome tha ta re with i ncome tha ta re di vorced"a s a ma rri ed a nd s pous e i s percenta ge of"Number pres ent"a s a percenta ge of ofmen over18with "Numberof men over18 with i ncome") i ncome")

Ta ble F 7[1947 2009]

Compi l ed da ta seton Code:SP.DYN.TFRT.INSource:(1) www.johns tons a rchive.netSources Uni ted Na tions Popul a ti on from:Centers forDis ea s e Control , Di vi s ion.2009.World Popul a tion Depa rtmentof Hea l th,Al a n Guttma cherIns titute,Na ti ona l Pros pects :The 2008Revi s ion.New Sta ti s ti cs,Interna tiona l Fa mi l y York,United Na ti ons,Depa rtment Pla nni ng Pers pectives ,United ofEconomica nd Socia l Affa i rs Na ti ons Depa rtmentofEconomic (a dva nced Excel ta bl es ). a nd Soci a l Affa i rs

N/A

N/A

Table 13 - Codebook Part 2

Category Code Label IncPerCap Income UnRate UnemploymentRate Percentage of LaborForce whichisUnemployed (UnemploymentRate) Income GiniRatio Gini Ratio Religion Religion NoReligion Happiness Happy Happiness

CurrentPopulation SurveyMoney Description Income perCapitain 10,000sof 2009 Dollars Source U.S.CensusBureau

Measureof the inequalityinincomes. Percentage ofPeople Percentage of People that Ratioofthe areathatliesbetween thatResponded Responded"VeryHappy"tothe the line ofequalityandthe Lorenz "None"forthe Questionof HowHappyThey curve.Value of0=Total Equality& QuestionofTheir Were Value of1=Maximal Inequality Religion U.S.CensusBureau National Opinion ResearchCenter CompiledVarious
For[1947 1977]"Happiness:Time Trends, Seasonal Variations,"byTomW.Smith publishedinSocial PsychologyQuarterly (Compilation fromAmericanInstitute of Public Opinion[Gallup]SurveyResearch Center[SRC],UniversityofMichigan National Opinion ResearchCenter[NORC] General Social Survey,NORCSRCOmnibus SurveySRCElectionSurveyContinuous National Survey,NORCSRCMental Health Survey) For[1977 2009]General Social Survey Variable:HAPPY

Federal Reserve EonomicData

Details

Ta ble P1[19672009]

Va ri a bl e:UNRATE

Ta bl e H 4[19672009]

Genera l Soci a l Survey Va ri a bl e:RELIG

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX II. DATA 1 Table 14 - Data 1
Year 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 GiniRatio 0.468 0.466 0.463 0.470 0.469 0.466 0.464 0.462 0.466 0.462 0.458 0.456 0.459 0.455 0.450 0.456 0.454 0.433 0.428 0.428 0.431 0.426 0.426 0.425 0.419 0.415 0.414 0.412 0.406 0.403 0.404 IncPerCap 2.653 2.686 2.773 2.803 2.751 2.709 2.715 2.718 2.768 2.783 2.734 2.644 2.564 2.469 2.408 2.369 2.306 2.224 2.245 2.289 2.348 2.286 2.238 2.179 2.094 2.031 1.943 1.916 1.918 1.930 1.974 PerFamMC 0.741 0.750 0.750 0.752 0.752 0.754 0.757 0.758 0.763 0.767 0.769 0.766 0.766 0.763 0.770 0.777 0.776 0.778 0.781 0.786 0.792 0.791 0.793 0.799 0.801 0.803 0.808 0.813 0.813 0.817 0.825 PerMenIM 0.570 0.576 0.574 0.585 0.580 0.587 0.590 0.592 0.592 0.596 0.603 0.598 0.597 0.595 0.605 0.611 0.610 0.613 0.616 0.618 0.624 0.628 0.631 0.638 0.638 0.641 0.647 0.654 0.656 0.661 0.667 PerMenID 0.091 0.091 0.091 0.090 0.091 0.088 0.088 0.088 0.087 0.088 0.088 0.090 0.087 0.087 0.083 0.081 0.079 0.075 0.076 0.076 0.073 0.071 0.068 0.067 0.066 0.065 0.061 0.058 0.059 0.057 0.052 FertRate 2.050 2.100 2.113 2.100 2.054 2.045 . 2.013 2.034 2.056 2.008 1.999 1.971 1.976 1.978 2.002 2.020 2.046 2.063 2.081 2.014 1.934 1.872 1.838 1.844 1.807 1.799 1.828 1.812 1.840 1.808 AvgHrsL 5.25 5.18 5.11 5.09 5.13 5.19 5.11 . . . . . . . . . . . . . . . . . . . . . . . . AbortRate . 0.196 0.195 0.199 0.194 0.197 0.21 0.205 0.209 0.213 0.219 0.22 0.223 0.228 0.228 0.24 0.252 0.259 0.263 0.274 0.269 0.274 0.269 0.274 0.28 0.281 0.285 0.288 0.293 0.293 0.288 UnRate 9.3 5.8 4.6 4.6 5.1 5.5 6 5.8 4.7 4 4.2 4.5 4.9 5.4 5.6 6.1 6.9 7.5 6.9 5.6 5.3 5.5 6.2 7 7.2 7.5 9.6 9.7 7.6 7.2 5.9 Happy . 0.296 . 0.204 . 0.149 . 0.150 . 0.313 . 0.315 . 0.302 . 0.286 0.315 . 0.308 0.332 0.324 0.336 0.285 0.318 0.286 0.341 0.306 0.305 . 0.338 . Religion . 0.164 . 0.164 . 0.143 . 0.137 . 0.141 . 0.140 . 0.117 . 0.092 0.091 . 0.067 0.079 0.078 0.080 0.067 0.067 0.071 0.073 0.073 0.071 . 0.072 .

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX III. DATA 2 Table 15 - Data 2
Year 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 GiniRatio 0.402 0.402 0.398 0.397 0.395 0.400 0.401 0.396 0.394 0.391 0.386 0.397 . . . . . . . . . . . . . . . . . . . . IncPerCap 1.948 1.865 1.807 1.746 1.744 1.787 1.728 1.614 1.566 1.555 1.476 1.384 . . . . . . . . . . . . . . . . . . . . PerFamMC 0.825 0.828 0.838 0.841 0.845 0.850 0.852 0.858 0.857 0.861 0.863 0.864 0.865 0.868 0.868 0.869 0.870 0.870 0.870 0.872 0.872 0.872 0.870 0.867 0.868 . 0.876 0.867 0.865 0.872 0.868 0.867 PerMenIM 0.673 0.682 0.695 0.707 0.712 . . . . . . . . . . . . . . . . . . . . . . . . . . . PerMenID 0.048 0.047 0.045 0.041 0.037 . . . . . . . . . . . . . . . . . . . . . . . . . . . FertRate 1.760 1.790 1.738 1.774 1.835 1.879 2.010 2.266 2.480 2.456 2.464 2.558 2.721 2.913 3.190 3.319 3.461 3.620 3.654 . . . . . . . . . . . . . AvgHrsL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AbortRate 0.277 0.264 0.242 0.217 0.193 0.163 0.132 0.111 0.05 0.0057 0.0024 0.0022 0.0015 0.0018 0.0023 0.0013 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0001 0.0002 0.0002 . 0.0002 . 0.0002 UnRate 6.1 7.1 7.7 8.5 5.6 4.9 5.6 6 5 3.5 3.6 3.8 3.8 4.5 5.2 5.6 5.6 6.7 5.5 5.5 6.8 4.3 4.1 4.4 5.6 2.9 3 3.3 5.2 6.1 3.8 . Happy 0.340 0.348 0.325 0.324 0.298 0.307 0.280 0.288 0.443 . . . 0.490 0.298 0.377 0.397 . . . . . 0.441 0.523 . . . 0.474 . . . 0.412 0.385 Religion 0.078 0.061 0.076 0.076 0.068 0.064 0.051 . . . . . . . . . . . . . . . . . . . . . . . . .

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX IV. TREND GRAPHS 1

Graph 3 - Men Divorced

Graph 5 - Both Parents

Graph 4 - Men Married

Graph 6 - Fertility Rate

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX V. TREND GRAPHS 2

Graph 7 - Abortion Rate

Graph 9 - Unemployment Rate

Graph 8 - Income

Graph 10 - Gini Ratio

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX VI. TREND GRAPHS 3

Graph 11 - No Religion

Graph 12 - Happiness

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX VII. SUPPLEMENTAL GRAPHS 1

Graph 13 - Happiness vs. Men Divorced

Graph 15 - Happiness vs. Both Parents

Graph 14 - Happiness vs. Men Married

Graph 16 - Happiness vs. Fertility Rate

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX VIII. SUPPLEMENTAL GRAPHS 2

Graph 17 - Happiness vs. Abortion Rate

Graph 19 - Happiness vs. Unemployment Rate

Graph 18 - Happiness vs. Income

Graph 20 - Happiness vs. Gini Ratio

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Household Welfare: How to Measure and Index? Joshua Johanni APPENDIX IX. SUPPLEMENTAL GRAPHS 3

Graph 21 - Happiness vs. No Religion

Graph 23 - Natural Log 2

Graph 22 - Natural Log 1

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