Dr. Maarten Verdrik

Maarten Vendrik is senior assistant professor in the Department of Economics of Maastricht University. His current research interests include happiness economics and labour supply dynamics.  

Happiness effects of policy reforms

A new development in happiness economics is the investigation of the effects of changes in government policies and laws on the well-being of citizens. These effects are important and interesting in themselves, but they also allow the happiness researcher to tackle a thorny and persistent problem in happiness research. This is the problem that for many explanatory variables of happiness only correlations can be estimated, but no causal effects. Just like changes in, for example, income can affect happiness, changes in happiness can also affect income via their impact on productivity (see the EHERO blog of Arnold Bakker). The most reliable way to identify causal effects is doing a laboratory experiment or exploiting a field or natural experiment in the real world. The exogenous effects of changes in government policies and laws on economic behaviour and well-being are increasingly used in economic research as natural experiments. One interesting example of a natural experiment in happiness economics is the impact of an important reform of the Dutch pension system in 2006 on the mental health and job satisfaction of workers who are close to retirement. This reform implied that public sector workers born on January 1, 1950, or later face a substantial reduction in their pension rights, while workers born before this threshold date can still retire under the old, more generous rules. As a consequence, the former workers have to make a choice between accepting a lower pension at the age that they initially wanted to retire and the option of working longer and retire later. The group of workers that was examined were older public sector employees born in 1949 and 1950. They were invited in 2008 and subsequent years to participate in an internet survey designed by a group of researchers at the Research Center of Education and the Labour Market (ROA) in Maastricht in cooperation with the Algemeen Burgerlijk Pensioenfonds (ABP). This survey included several questions on the mental health, life and domain satisfactions, and work motivation of the respondents (without mentioning the purpose of the survey of measuring the effects of the pension reform). The data from this survey were matched with administrative data from the ABP on individual pension rights, wage income, and other individual characteristics. The analysis of this rich dataset has so far resulted in three scientific papers that are relevant for happiness economics. For the 2008 wave, the first study  (link) finds depression rates among the 1950 cohort that are about 40% higher than among the 1949 cohort. In addition, for the 2008 and 2009 waves, the second study (link) finds an effect of the pension reform on the average job satisfaction of the 1950 cohort that is equivalent to earning a wage that is more than 50% lower. These effects are strikingly strong and persistent. To explain this, the second study shows that the effects result from social comparison with colleagues who are not hit by the reform as well with those hit by the reform. Workers from the 1950 cohort suffer more from the reform when they have more colleagues from the unaffected 1949 cohort, while they suffer less when they have more colleagues who are hit by the reform as well (shared misery). The major part of the social comparison effect is non-monetary and can be attributed to feelings of being unfairly treated among those hit by the reform. Furthermore, the job satisfaction of those not hit by the reform is indirectly and negatively affected by the reform as well. Thus, those born in 1949 are depressed by their colleagues being hit by the reform rather than relieved by their escape from the reform.      These large negative effects of the Dutch pension reform in 2006 strongly suggest that, in designing pension system reforms, policy makers should take such negative side effects into account and try to avoid social comparisons. There are two reasons for that. First, the main objective of social policy is to promote the well-being of the population as a whole, and that includes the people that are hit by  a reform. Second, higher depression rates and lower job satisfaction as a result of a reform are likely to have a negative impact on work motivation and productivity. For the case of the Dutch pension reform, a third study of the ROA research group (link) suggests that such a negative impact is especially prevalent among workers who are revengeful. All these effects should be taken into account in the trade-offs inherent in the design of policy reforms.