Rethinking the tunnel effect: income comparison and the dynamics of happiness in a changing economic landscape (2005–2018)

The tunnel effect explains how higher income of a reference group signals potential future income growth for individuals, fostering tolerance of inequality in a changing macroeconomic environment. This paper examines the interplay between economic growth, income comparison, and individual subjective well-being, providing empirical tests for the tunnel effect from the perspectives of reference groups, effect heterogeneity, and contextual moderators. Using data from 10 waves of CGSS spanning from 2005 to 2018, the mixed-effects model analysis reveals: (1) the tunnel effect exists, with reference group income positively impacting individual's happiness after controlling for personal income; (2) the tunnel effect is stronger among younger people, lower income group and rural residents; (3) economic growth, rather than economic uncertainty or inequality growth, enhances the tunnel effect—provinces with faster growth show a more pronounced effect. These findings bridge the individual well-being with macroeconomic environment, illustrating group heterogeneity and identifying macroeconomic conditions sustaining this psychological dividend.