 I'd like to talk about relative income in Latin America. There are three parts here. The first part is just theoretical, a review of relative and absolute income. The second part is just an illustration of the empirical analysis. And the last part is just considerations of these findings for inequality and economic growth policies and that kind of issues. We economists, and there are many economists here, I presume, focus too much on absolute income. The idea that well-being is something of a relation between a person and the objects. Actually, there is this tradition of objective well-being and then you focus on the objective issues, those objects that you can measure. And then there is the idea that the well-being of a person depends on what this person has or the income this person has. This is what we call the individualistic bias in economics. These persons are out of context, there is no surrounding community, there are no peer effects, that kind of issue. And this shows up also in public policy. We focus on absolute poverty, 125 dollars of household per capita per income, thresholds that depend on whether you jump the line or not, but there is no effect of what are the others doing. You are getting out of poverty if you jump the line, but we don't care if the others are also jumping or not because we don't, we presume there is no other effect of the others or well-being. This is more or less what economic theory says and what we teach in microeconomics. The utility of Peter or Mary depends on the income of Mary and that's it, only on that income. And then you have this tradition of utility as well-being and then we get into the idea that if we want to raise people's well-being, what we have to do is to raise people's income. And then as an illustration, the idea is that your well-being depends on what you have and this is your car and we don't care whether the others have a different car or something like this. It doesn't matter. As long as you have that car, your well-being will depend on that car. There is no context. The same happens with houses. As you can see, that house, and this comes from car marks. Car marks says that the house may be big or small. That depends on what they built in your neighborhood. If they built this house, then your house is big. But if you live here, the house is small. And that affects well-being. That's the hypothesis. The hypothesis is, well, it's not only your house. It's not only your income. It's also the surrounding conditions. And this happens with many other things because we are persons, not individuals. And by that I mean we are in society. We are defined as persons in a context, social context. And then you don't know where is a good salary. You don't even know where is a good researcher. 10 papers per year, 20 papers. That depends on your colleagues. If you publish three papers and your colleagues publish one, you're a very good researcher. But if they are publishing 20 and you three, you are not so good. Productivity, a good income. Where is a big TV? When I grew up, it was just black and white, 12 inches. Now you need 80 inches, no flat hands. So it's context, depends. And it's not only with income, a strong man. There are very nice studies about beauty. Is this guy handsome? Well, is your husband handsome or not? That kind of experiment. But now you don't see role models in the TV. What you see is models, very good-looking men in the TV. And then you evaluate your husband or your wife. That tells us that look, there are standards. That happens everywhere. So the critique is we have focused too much on this idea of absoluteness. We are neglecting the social context. We are socially immersed. We are persons in society. And this affects our aspirations or standards, our evaluation norms, even our values, that affects. And it surprises us that there is a long tradition in economics that states look, there are relative factors. But we don't consider that. Adam Smith. Adam Smith talked about look. Do you need shoes in London to walk? That depends. If everybody uses shoes or not in London, then you should be ashamed. You are ashamed of walking without shoes in London because everybody else uses shoes. If everybody else uses Georgie or money, then maybe you are ashamed of not using that kind of clothes. So everything is relative. And there are needs that are relative. Carmacks has this example of the big and a small house and all that depends on what you have in front of your neighbors. And John Minor Keynes also talks about the relative needs. There are needs that are relative. And of course, some people say this happens when you have high income levels. That's part of my argument here, whether that happens only when income is high or you have relative effects even at low income levels. You have these consumption theories. James Dussonberry talking about keeping up with the Jones and the idea that the neighborhood is important and Thorstein-Webelen talking about conspicuous consumption. What is the role of consumption? Is it something that I consume because I get satisfaction from that? Or is it something I consume because it gives me a status, relative positions, no? It is almost 40 years ago, 1974 was the, there is another paper in 1973. But in 1974, there is these papers about happiness and income by Richard Easterling. And this is what rises the study of relative income from a subjective well-being approach, no? The idea that people with high income are happier than people with low income. That's cross-section. As you move up in a cross-section study, higher income implies happier people. But in time series, when income rises, happiness does not rise, no? So what you get from cross-section is basically status. You are happier not because you have access to more possessions that give you satisfaction of needs, but because you are better off than somebody else in this status marker, which is income. No, and this is an argument of we live in a position of society, position matters, and we use income and consumption as a status marker, no? And sociologists have studied this. They have reference groups. They say, well, we compare to others because we are in society, no? Our standards or evaluation norms come from comparison. Whom do we compare to? Well, there are many comparisons. You can compare to your colleagues when you are evaluating your academic productivity. You compare to neighbors when you think about your car or your house. You compare with what you see in TV, no? You see people in Miami and Chicago, and then you compare to them even though you are in Belize or you are in Guatemala, no? But you compare to your fellow citizens. There are many comparisons. We are making comparisons all the time, even now, no? You see what the others are wearing, no? He's using sweater and knot. That kind of comparison happens because we are immersed in society. Sociologists also study the nature of comparisons. Competition, sometimes we compare to compete, but sometimes we compare to establish a distance, no? Very far away from that guy, no? Or sometimes we compare to see what I would like to be in the future, no? The aspiration, a group. Or we compare to others who are part of our own group. It's membership, no? It's my family. I compare to them and what happens to them affects me in a different way, whether they are part of my membership group or whether they are part of my competition group, no? And there are different objects of comparison. We tend to use income, and actually Bordeaux and Baudrillard, some sociologists, say that this is because we live in a depersonalized society. We no longer know the people behind the mask. So what we look is what they wear, what they possess, what they show to everybody else, and that's income, no? And then we talk about positional goods. Goods that tell the other people, this is my position in society. This is my status, no? But that's not the only possibility. In some villages comparisons are based on other variables, not on what you have, but whether there is some divorce in the family. If there is divorce in the family, that's a decline in your status, no? Because what is important for the status in this society is the strength of your marriage, all life, no? But in other societies is the car you have or the clothes you are wearing, no? So this is the literature, and this is an empirical study in Latin America. We use 18 countries, about 1000 observations. We have two variables measuring well-being, life satisfaction, which is very important in Latin America because life satisfaction has a high, effective content. And life evaluation, which is more cognitive oriented. It's more about the best and worst life according to standards. Life satisfaction is also about how I'm feeling, no? Whether I'm enjoying life or not. And of course we have income, which is an important variable, and the typical control variables. One of the problems we face is how to form groups, and there are different methodologies. In this case, given the data we have, we assume that comparisons take place between people of the same gender, more or less the same age in the same country. So we form groups within the database on the basis of people who live in the same country have more or less the same age, a little bit more, a little bit better, the less and the same gender. And then the comparison in income takes place between my income and the income of this group, which is more or less similar to me, no? And we have 252 groups from this database according to this methodology. Of course we run different kinds of group constructions, but this is what I'm presenting here. You cannot see this, but there are a lot of variability. For some people having $700 may be a lot in one group, but having $700 may be nothing if they belong to a different group. And that's the diversity we want to take advantage of. This is the kind of typical regression where we introduce my income in lock terms, but also the average income of the reference group. So in this regression, we have a subjective well-being variable. I have my income, the income of the reference group and some control variables. And we check what happens when we get an increase in my income or an increase in everybody's income in my group. And when my income increases, controlling for the income of everybody else, no, I get an increase in life satisfaction and also in the evaluation of my life as a good life. But when the income of everybody else increases and my income remains constant, my life satisfaction declines and my life evaluation declines, which means that we have a competition here, with people in the same group. We can transform this into what we call the absolute effect of income and the relative effect of income. The absolute effect is what you get, the well-being you get from income due to possessing and consuming these commodities you buy with income. And the relative effect is what you get from that income because it puts you above the others. In generalized income processes where income increases for everybody, you end up only with the absolute income. The relative income does not exist because this is a status, no? It's position. What we find here is that the relative income is more important than the absolute one. And for the cognitive-oriented variable, life evaluation, the relative income is important and the absolute income is not significant. What does it mean? That for life evaluation, basically, income plays a status marker role. That's it. And for life satisfaction, there is a small, relatively smaller, absolute effect that the relationship between you and your possessions but more important relative income effect, which is how this income compares to others. So that's what we get. And we wanted to get to other studies or one is whether people at the top also compare with people in the bottom. Those at the bottom compare with those at the top within the reference group and they say, look, we're not doing well, no? This reduces my happiness. But those at the top, are they affected by the income? And what we find out is that there is no difference. Those at the top are also affected by relative income, which means that when those at the bottom rise their income, these guys at the top will reduce their happiness. Because part of their happiness comes from comparison with those at the bottom. And so there is this effect and this is like an externality. When you are getting a lot of people out of poverty, you are also affecting those who were benefiting from being in a very good, relative status, no? And the other issue is whether absoluteness prevails at low income. The typical poverty issue, which is let's take people really at the bottom. Are they more absolute? Is the absolute income effect greater? We find no difference. It's not significant, it's this variable here. So even at very low income, the relative effect is important. And we've run other studies and we find the same. Conclusions, while comparisons matter, they are important because we are people in society, we are not individuals out of context. The relative income is more important than the absolute one. So when you get generalized increases in income, it's like education. If this is generalized, you do not get a smash income as it is your education that rises and other people's education do not. You have these externalities, people compare also at the top, compare with the bottom and get benefits from the status of being at the top. And they will be harmed hard by income rises at the bottom. Even the poor have this relative effect, even those with very low income. Systemic effects are important and this is something we do not take into consideration when we talk a lot about rising the income of those at the bottom. We think that what shows up in cross-section studies also will prevail in time series. Greater inequality has a cost for those at the bottom. This is one problem in Latin America, as you know about inequality in Latin America. If we get a lot of people out of poverty with economic growth that also increases the income of those at the top, even if they are out of poverty, they may be frustrated because the relative income may decline even if the absolute income is rising. And my final point is that there are epistemological considerations here. We need to move from individuals to persons who are in society. And I think inequality studies would benefit from subjective well-being because we have focused too much on normative studies of inequality. We say we don't like inequality because theories of justice, that's something we don't like. But here it is not what we like or we do not like but what people face, how people face inequality. So that's my point. Thank you. Thank you very much.