It Pays to Be Happy (If You are a Man): Subjective Wellbeing and the Gender Wage Gap in Urban China

In this study we examine whether subjective wellbeing contributes toward a better understanding of the reasons for the gender wage gap. We explore whether the Personal Wellbeing Index, which is a psychometrically valid measure of subjective wellbeing, can explain differences in income between males and females. A feature of the study is that we employ a novel identification strategy proposed by Lewbel (2012), which utilizes a heteroscedastic covariance restriction to construct an internal instrumental variable (IV), to address the endogeneity of subjective wellbeing and years of schooling. Using a sample from urban China, we find that the relationship between subjective wellbeing and wages is stronger for males than females. In the ordinary least squares (OLS) results, the returns to subjective wellbeing are higher for males than females and in the IV estimates the coefficient on subjective wellbeing is significant (and large) for males, but is insignificant for females. We find that 0.2 per cent of the observed gender wage gap can be attributed to differences in mean subjective wellbeing in favor of females, while 53.5 per cent can be ascribed to gender differences in returns to subjective wellbeing in favor of males. We also find evidence that the relationship between subjective wellbeing and income is non-linear and that income peaks at higher levels of subjective wellbeing for men than women.