The effects of income on happiness

Two aspects of the relationship between income and happiness have been studied. Firstly, does a higher income per capita increase happiness in society? Secondly, are people with high income in a country and at a particular point in time happier than those with low income?

Income level in society

Challenging evidence is provided for the relationship between income per capita and subjective well-being in society. In many cross-country studies, it is reported that, on average, people living in rich countries are happier than those living in poor countries. In contrast, there is the striking and curious relationship that has been mentioned above: per capita income in several countries has risen sharply in recent decades, but average reported happiness has been virtually constant, or has even fallen slightly over the same period. The positive relationship between income and happiness between countries may thus be produced by factors other than income as such. In particular, countries with higher per capita incomes tend to have more stable democracies than poor countries have. So it may well be that the seemingly observed positive association between income and happiness is in reality due to more developed democratic conditions.

In addition to democracy, there are many other conditions along with income which may produce the observed positive correlation between income and happiness. Just to name two more: the higher the income, the more parity between the sexes, and the more respect for human rights (Easterly, 1999). Thus, both parity between the sexes and respect for human rights may seemingly make happiness rise with income.

In order to address further the role of absolute income in happiness in and between countries, another empirical strategy can be applied: cross-sectional data for several periods of time can be combined in order to allow for a control of time-invariant country specific characteristics. These characteristics could comprise stable cultural differences, systematic distortions due to language differences and so on. Such an approach is followed in a study combining data for 49 countries in the 1980s and 90s from the first three waves of the World Values Survey. Separate base levels in subjective well-being for six groups of countries are taken into consideration in the estimation equation. It is found that national income per capita(measured in percentage of the value for 1997 in the US) has a very small effect on reported subjective well-being. A 10% increase in per capita incomes in a country with half the level of the US (and unchanged income distribution) raises average satisfaction with life by only 0.0003 score points on a scale from one to ten, and the gain disappears even before the US 1997 level of real per capita income is achieved (Helliwell, 2001, p. 15).

Another aspect to consider is whether, when income and happiness between countries are compared, causality runs from income to wellbeing, as implicitly assumed so far. An inverse causation can well be imagined (see, for example, Kenny, 1999). It might, for instance, be argued that the more satisfied the population is with its life, the more inclined it is to work hard, and therefore the higher is its per capita income. Or, happy people may be more creative and enterprising, leading again to higher income.

The available evidence suggests that across nations, income and happiness are correlated, but that the effects are small and diminishing. This indicates that, on the one hand, other factors may be more important inexplaining differences in reported subjective well-being between countries and, on the other hand, that there is more to the relationship between subjective well-being and the level of income than generally assumed in economics. One of the most important processes is that people adjust to past experiences. Human beings are unable and unwilling to make absolute judgements. Rather, they are constantly drawing comparisons from the past or from their expectations of the future. Additional material goods and services initially provide extra pleasure, but it is usually only transitory. Higher happiness with material possessions wears off. Satisfaction depends on change and disappears with continued consumption. This process or mechanism, which reduces the hedonic effects of a constant or repeated stimulus, is called adaptation. And it is this process of hedonic adaptation that makes people strive for ever higher aspirations. Aspiration level theory suggests that increases in income and aspiration levels are closely connected. The expected increase in happiness does not materialise. Rather, an increase in income is accompanied by an increasing aspiration level. This could explain why an ever increasing income level in rich countries does not contribute to additional happiness.

Date: 2014-12-21; view: 1037