Home > Behavioural Economics > Does Income cause Happiness?

Does Income cause Happiness?

Easterlin ParadoxThere has been a lot of research regarding how higher income = higher levels of happiness. Increasing your income increases your utility (satisfaction). But the more you have, your utility increases, but at a diminishing rate. At low levels of income increasing your income has a big effect on your utility. However when you have a high income more money does increase your utility, but not as much as when you started off with low levels of income.

Introducing this diminishing returns framework into an analysis of happiness also suggests that increasing the income to the poorer members of society increases society’s total happiness by more than if the income of the wealthy increases by the same amount – see graph. Research has shown that a lack of money brings both emotional misery and low life evaluation; similar results were found for anger. Beyond $75,000 in the contemporary United States, however, higher income is neither the road to experienced happiness nor the road to the relief of unhappiness or stress, although higher income continues to improve individuals’ life evaluations.”  The research does not imply that a financial increase will not improve the quality of life, but suggests that above a certain income level, people’s emotional wellbeing is constrained by other factors, such as temperament and life circumstances. The take home message of the research is that high incomes don’t bring you happiness, but they do bring you a life that you think is better.  The Easterlin Paradox concerns whether we are happier and more contented as our living standards improve. In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives? It is an interesting paradox to study when you are writing about measuring economic welfare and the standard of living.

What is it?

1) Within a society, rich people tend to be much happier than poor people.

2) But, rich societies tend not to be happier than poor societies (or not by much).

3) As countries get richer, they do not get happier.

Easterlin argued that life satisfaction does rise with average incomes but only up to a point. One of Easterlin’s conclusions was that relative income can weigh heavily on people’s minds.

What about the other way around – Happiness causes Income?

An article by Scott Sumner (Library of Economics and Liberty) looked at this area and suggested that culture has an impact on happiness. According to Sumner peole who care about the welfare of others tend to be happier – this leads to more efficient policies, less corruption, acquiring governments handouts when they are not entitled e.g. the informal economy.

Denmark

1) They have one of the highest levels of public integrity in the world
2) If you exclude the the two “size of government’ categories from the 10 categories used by the Hertitage foundation. Denmark has the most free economy in the world. Therefore it is a free market with a strong welfare state. As Sumner points out “not much (selfish) rent seeking” behaviour. Happy people aren’t selfish?
3) Denmark ranks leads the world in many happiness rankings

Euphoria v Income

China currently ranks extremely high in level of satisfaction but doesn’t exhibit an extremely high level of “euphoria” for everyday life. Can researchers distinguish between peoples incomes and euphoria? Think of the euphoria in the east of the collapse of the Berlin Wall or Spain winning the Football World Cup when they had over 25% unemployment. Ultimately a lot is dependent on when the research is carried out and culture of the people. You might not have much but newly regained freedom or being the best football team in the world gives immense pleasure.

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