image: Richard Easterlin from the University of Southern California wins the 2009 IZA Prize in Labor Economics from the Institute for the Study of Labor (IZA), Bonn, Germany. view more
Credit: University of Southern California
This year's IZA Prize in Labor Economics, endowed with 50,000 euros, will be awarded to Richard A. Easterlin (University of Southern California). With this prestigious award, the renowned Institute for the Study of Labor (IZA Bonn, Germany) recognizes Easterlin's outstanding research on subjective well-being and on the relationship between demographic developments and economic outcomes. In both fields, the laureate's work laid the foundations for broadening the scope of traditional economic analysis and thus contributed to advancing our understanding of behavior in a wide variety of economic settings such as education, labor supply decisions and the economics of the family. The IZA Prize will be presented during the official award ceremony in Washington D.C. on October 22, 2009.
Richard Easterlin first showed in the 1970s that rising wealth does not necessarily improve individual well-being. It is true that wealthier societies are more satisfied on average than poorer ones. However, once labor income ensures a certain level of material wealth guaranteeing basic needs, individual and societal well-being no longer increases with growing economic wealth. Social comparisons and changes in expected living standard strongly influence individual well-being. When an individual has a high income but earns less than the social comparison groups, this directly affects subjective well-being. Also, as people tend to raise their demands with increasing income, an increase in wealth does not necessarily make them happier. Overall, Easterlin's research shows that people in wealthy nations show no higher life satisfaction than people in poorer nations once the level of income is high enough to provide for food, shelter and other fundamental needs. This apparently contradictory finding became known as the "Easterlin Paradox."
The mechanisms identified by Easterlin are highly relevant for many behavioral aspects of labor economics, such as job search behavior or female labor force participation. The "Easterlin Paradox" continues to fascinate scientists of various research disciplines. The "World Data Base of Happiness," which collects scientific work on well-being, lists more than 10,000 research papers in such diverse fields as psychology, medicine, sociology and economics.
Easterlin's research interests also include the relationship between demographic development and economics variables. His central idea – the so-called "Easterlin Hypothesis" - postulates that the economic and social fortunes of a cohort tend to vary inversely with its relative size. Easterlin attributes this relationship to several crowding mechanisms which operate in the family, education system and labor market. First, a larger birth cohort is likely to entail a larger number of siblings, which in turn can lead to a dilution of parental time and family resources per child. On average, a larger cohort is thus likely to perform worse at school. Second, there can be additional crowding effects caused by institutional factors of the education system: since the human and physical capital stock in education tends to be relatively inflexible, resources per student are lower in larger birth cohorts, thereby lowering the average quality of schooling obtained by members of large cohorts. Both mechanisms contribute to lower economic success of large birth cohorts. Finally, Easterlin argues that the entry of a large cohort of young and inexperienced workers into the labor market tends to be accompanied with lower relative wages and higher unemployment rates. These important findings of Easterlin's research have influenced economic science to the present day.
"Richard Easterlin's lifetime achievement is highly impressive. The economic analysis of well-being would not have been possible without his contributions. His work is also politically important because it shows that individuals do not only seek to maximize their wealth in order to satisfy their well-being and be 'happier'. The quality of life can also be measured in terms of social fairness, good infrastructure, and in a welfare state which encourages the strong and supports the weak on a quid quo pro basis," said IZA Director Klaus F. Zimmermann. "Against the background of the current economic crisis, Easterlin's findings are more significant today than ever for social and economic policies worldwide."
Richard Easterlin is currently Professor of Economics at the University of Southern California, Los Angeles. He is a Member of the National Academy of Sciences, a Distinguished Fellow of the American Economic Association, a Fellow of the American Academy of Arts and Sciences and the Econometric Society, and a former Guggenheim Fellow. Even at age 83, he is a very productive scientist, whose contributions receive much attention among experts.
The Institute for the Study of Labor (IZA) is a private, independent think tank in labor economics with a worldwide network of experts engaging in labor market research and policy advice. Headed by IZA Director Klaus F. Zimmermann, who is also Professor of Economics at the University of Bonn and President of DIW Berlin, the institute is one of the leading research institutions in the field. The IZA Prize in Labor Economics has been awarded since 2001. Among the past prize winners are Jacob Mincer, Orley Ashenfelter, Edward Lazear, David Card, Alan Krueger, Dale Mortensen, Christopher Pissarides, Richard Freeman, Richard Layard and Stephen Nickell.