Abstract
The standard of living of persons and households is not only a matter of income, but ultimately depends on the level and quality of their consumption in terms of goods and services purchased. Consumption expenditures can be regarded as the result of decisions based on the demand, preferences and limited economic resources, and are thus manifestations not only of different lifestyles, but also of inequality, affluence and deprivation. But how are different levels and kinds of consumption related to subjective well-being (SWB)? While the relationship between income and SWB has been explored in numerous studies, surprisingly little is known as yet about the association between consumption expenditures and SWB. Referring to theoretical considerations and previous research, this article focuses on the empirical analysis of how and to what extent SWB—in terms of life satisfaction—is affected by the level and structure of consumption expenditures in German households. The analysis is based on the data from the German Socio-Economic Panel Study, which for the first time in 2010 included a module on consumption expenditures. The results of our analysis demonstrate that life satisfaction increases with increasing consumption expenditures, but the findings also suggest that persons in the lowest decile of consumption expenditures turn out to be less unsatisfied with their lives than persons in the lowest income decile. Moreover, our research provides evidence to suggest that low levels of spending resulting from voluntary decisions do not reduce life satisfaction at all. Finally, the paper also points out the ways in which SWB is affected by particular kinds of consumption expenditures. It appears that expenditures on clothing and leisure are drivers of SWB, while expenditures on food and housing—which may be considered more demand driven—do not affect life satisfaction significantly.
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Notes
SWB may, however, also be directly affected by unspent income, e.g., if income as such provides options, security and social prestige, or the prospect of future consumption.
For more details, see (Headey et al. 2004: 9).
More generally, this means that “current-out-of-pocket expenditures may therefore provide an inaccurate picture of the service flow provided by a consumer unit’s stock of consumer durables…, spending on new automobiles is included in expenditures, but the consumption value of the existing stock is not” (Cutler and Katz 1991: 32).
The SOEP is a representative longitudinal study of private households and individuals within households, which is carried out by the German Institute for Economic Research, DIW Berlin. This annual survey currently has a sample size of almost 11,000 households, and around 30,000 persons. For more information on the SOEP, see www.diw.de/en/soep; detailed data documentation information is available at www.diw.de/en/diw_02.c.221180.en/research_data_center_soep.html (accessed October 6, 2014).
For more information on the German Income and Consumption Survey, see Statistisches Bundesamt (2013).
Although the SOEP employed different approaches to collecting housing expenditures, the single-expenditure items were combined to give a total level of housing expenditure according to the taxonomy used in the official Income and Expenditure Survey. Accordingly, expenditures relating to modernization work which increases the financial value of buildings are not considered as consumption, but rather investment. In calculating the housing expenditures of home owners, no “imputed rent” has been taken into account.
For more detailed information, see Becker et al. (2002).
See Noll and Weick (2007) for a more detailed analysis of the issue of “overspending.”
In each of the regression models, both consumption expenditures and household income are treated as logarithmized variables both due to the expected nonlinear relationships and in order to normalize the skewed income and expenditure distributions. Logarithmizing income—and analogously consumption expenditures—as predictors of life satisfaction in regression models seems to represent the current state of the art. See, e.g., Van Praag and Ferrer-I-Carbonell (2008).
Using percentages of the total expenditure rather than the absolute amounts spent in diverse categories of goods and services produced similar results overall. See Noll and Weick (2014: 5).
The observation of a decrease in the proportion of the total expenditure that is spent on nutrition with increasing household income goes back to the studies of the German statistician Ernst Engel in the nineteenth century and is thus also referred to as “Engel's law.”
Available empirical evidence also suggests a positive association between luxury consumption and SWB. See Hudders and Pandelaere (2012).
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Noll, HH., Weick, S. Consumption expenditures and subjective well-being: empirical evidence from Germany. Int Rev Econ 62, 101–119 (2015). https://doi.org/10.1007/s12232-014-0219-3
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DOI: https://doi.org/10.1007/s12232-014-0219-3
Keywords
- Consumption
- Consumption expenditures
- Household income
- Household expenditures
- Subjective well-being
- Life satisfaction