• Alex Savin
• March 25, 2022
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Income and happiness

“Money doesn’t bring happiness” says an old saying, but we sometimes doubt it. It is very easy to believe that all problems would be solved if we had more money, but it is also easy to forget that the best and the most important things in life cannot be bought with cash. Many kinds of research were focused on the connection between money and happiness, and here are their results.

Does Money Bring Happiness?

Material aspirations are initially fairly similar among income groups; consequently, more income brings greater happiness. Over the life cycle, however, aspirations grow along with revenue and undercut the favorable effect of income growth on happiness, although the cross-sectional happiness-income difference persists. People think they are less happy and will be more comfortable in the future because they project current aspirations to be the same throughout the life cycle while income grows. But since aspirations grow along with payment, experienced happiness is systematically different from projected happiness. As Richard A. Easterlin’s research has shown, the consequences and choices are based on false expectations.

Two studies provide evidence for social comparison effects of income on subjective well-being (SWB). The 1st study of 7,023 persons from nationally representative samples in the United States shows that the range and skew of the income distribution in a community affects a person’s happiness, as predicted by range-frequency theory. The 2nd study of 8 nations for 25 years shows that decreasing the skew (inequality) of the income distribution in a country increases average national SWB. Both studies strongly support the social comparison effects of income within a community, and both results are predicted by range-frequency theory.

Much micro-econometric evidence, cross-section, and panel show that income correlates positively with well-being. Yet the famous Easterlin paradox shows no change in average happiness at the country level, despite spectacular rises in per capita GDP. We argue that survey well-being questions are good utility proxy measures and resolve the Easterlin paradox by appealing to income comparisons: these can be to others (social comparisons) or oneself in the past (habituation). We review a substantial amount of econometric, experimental, and neurological literature consistent with comparisons and then spell out the implications for a wide range of economic issues.

The well-known Easterlin paradox points out that average happiness has remained constant despite sharp rises in GNP per head. At the same time, micro literature has typically found positive correlations between individual income and individual measures of subjective well-being. This paper suggests that these two findings are consistent with relative income terms in the utility function. Payment may be evaluated close to others (social comparison) or oneself in the past (habituation). We review the evidence on relative income from the subjective well-being literature. We also discuss the relation (or not) between happiness and utility and discuss some unhappiness research (behavioral, experimental, neurological) related to income comparisons. We last consider how relative income in the utility function can affect economic models of behavior in consumption, investment, economic growth, savings, taxation, labor supply, wages, and migration.

This research uses data from the World Values Survey to investigate how an individual’s self-reported happiness is related to (i) the level of her income in absolute terms and (ii) the level of her income relative to other people in her country. The main findings are that (i) both absolute and relative income are positively and significantly correlated with happiness, (ii) quantitatively, changes in relative income have much larger effects on happiness than do changes in total income, and (iii) the effects on happiness of both absolute and relative income are small when compared to the effects several non-pecuniary factors.

Happiness Needs Something More

Revolutionary developments in economics are rare. The conservative bias of the field and its enshrined knowledge make it difficult to introduce new ideas, not in line with received theory. Happiness research, however, has the potential to change economics substantially. Its findings, which are gradually being taken into account in standard economics, can be considered revolutionary in three respects: 

• the measurement of experienced utility using psychologists‘ tools for measuring subjective well-being;’ tools for measuring subjective well-being;
• new insights into how human beings value goods and services and social conditions that include consideration of such non-material values like autonomy and social relations;’ tools for measuring subjective well-being;
• Policy consequences of these new insights suggest different ways for government to affect individual well-being. 

In Happiness, Bruno Frey, emphasizing empirical evidence rather than theoretical conjectures, substantiates these three revolutionary claims for happiness research. After tracing the major developments of happiness research in economics and demonstrating that we have gained important new insights into how income, unemployment, inflation, and income demonstration affect well-being. Frey examines democracy and federalism, self-employment and volunteer work, marriage, terrorism, and watching television from the new perspective of happiness research. Turning to policy implications, Frey describes how government can provide the conditions under which people can achieve well-being, arguing that effective political institutions and decentralized decision-making play crucial roles. Happiness demonstrates the achievements of the economic happiness revolution and points the way to future research.

This article puts forward a new explanation to the general finding of a weak relationship between income and happiness based on the conceptual-referent theory of happiness (CRT). CRT studies what conceptual referent for joy a person has in mind when making a judgment about her joy. The theory states that the subjective evaluation of life is influenced by a person’s notion of what a happy life is. The approach stresses the importance of heterogeneity; this is: the conceptual referent is not the same for everybody. The paper shows that heterogeneity in the conceptual referent also extends to the relationship between happiness and income. Income is an important explanatory variable for some people, while for others, it is completely irrelevant, and this depends on the conceptual referent for happiness a person holds. The existence of heterogeneity in the conceptual referent for enjoyment and, consequently, in the explanatory structure of happiness has important implications for behavioral economics. Happiness pursuing persons are expected to behave differently if they have different notions of a happy life. The empirical analysis is based on a large database from Mexico.

Money and Happiness

It may have come as a surprise, but money doesn’t bring happiness to people. It does bring satisfaction and even temporary happiness, but happiness doesn’t have a price tag in the long run. Earning more money can lead people to want more money, and being surrounded by well-off people can lead us to aspire to a better standard; however, it does not guarantee happiness.