More Money, More Happiness

More research on the economics of happiness


Money Happiness
Credit: lodrakon: Dreamstime

"I've been rich and I've been poor. Believe me, honey, rich is better," the vaudevillian Sophie Tucker quipped. Tucker's witticism will not strike most of us as controversial. Yet some really smart people are anxious to persuade the rest of us that more money can't buy us more happiness. Back in 1974, the economist Richard Easterlin famously argued that increasing average income did not raise average well-being. Later research agrees, noting the apparent "'paradox' of substantial real income growth in Western countries over the last fifty years, but without any corresponding rise in reported happiness levels." Basically, the argument is that as people grow richer they adapt to their new wealth and fall back to their earlier level of happiness; we're stuck on a hedonic treadmill in which amassing wealth turns out to be an empty endeavor.

Two economists at the University of Michigan, Betsey Stevenson and Justin Wolfers, reject the Easterlin Paradox. Their new article, published in the May American Economic Review—argues that more money does buy more happiness. As evidence, the two compare happiness measures between rich and poor countries and between rich and poor people within countries.

Even before the Stevenson and Wolfers paper, most researchers retreated from Easterlin's sweeping assertion that increasing average income will not increase average well-being. Instead they argue that higher income is associated with higher subjective well-being until "basic needs" have been met, at which point the Easterlin Paradox kicks in. For example, a 2008 study in the Journal of Economic Literature argues that "greater economic prosperity at some point ceases to buy more happiness." So what is the point at which more money no longer buys more happiness? In 2003, the economist Richard Layard compared happiness and per capita incomes between countries and concluded that the turning point came when a country has over $15,000 per head. He bumped the happiness satiation threshold up in his 2005 book Happiness: Lessons from a New Science, finding that "for countries above $20,000 per head, additional income is not associated with extra happiness." 

Stevenson and Wolfers parsed per capita income and well-being as measured by the Gallup World Survey for 155 countries. Gallup measures happiness in two ways. In one poll it asks people to rank their happiness on a 10-rung life satisfaction ladder, in which the bottom rung is the worst possible life and top rung is the best. In the second survey, people are asked on a 10-point scale how satisfied they are with their lives as a whole these days.

The researchers also probe to see if there is a break point at various income levels, and if the happiness gradient flattens, as Easterlin Paradox advocates suggest, as income rises. Stevenson and Wolfers found "no evidence of a satiation point": As the rich get richer, they get happier. Stevenson and Wolfers also found that each percent increase in income raises measured well-being by a similar amount. So whatever an increase in happiness doubling income from $5,000 to $10,000 yields, one can expect a roughly similar boost in satisfaction when income doubles from $50,000 to $100,000.

Income and well-being: within-country comparisons

                  (25 most populous countries; Gallup World Poll, Dec. 2007)

Stevenson and Wolfers also concluded that within countries, rich people are happier than poor people. Back in 1974, Easterlin looked at Gallup's happiness data by income in the United States. In 1963, 59 percent of people earning more than $15,000 per year ($115,000 today) said that they were very happy. This rose to 67 percent in 1966, but by 1970 it had fallen to 56 percent. Indeed, the percentage of Americans at all levels of income who claimed to be very happy dropped from 47 percent in 1963 to 38 percent in 1970, although per capita GDP had increased from $20,000 to $24,500. (Elsewhere Stevenson and Wolfers have suggested that social and demographic upheavals in the late 20th century America slowed the increase in the already high average level of happiness even as per capita income rose. Interestingly, they find that the happiness gaps between whites and blacks and between men and women has narrowed since the 1970s.) The general trend still seems to upward: The 2007 Gallup poll—before the financial crisis—found that 53 percent of all Americans counted themselves very happy, four points higher than the 1966 high cited by Easterlin in 1974.

Measuring subjective well-being can, well, be subjective. After all, there is a difference between: "How satisfied are you with your life?" and "How happy are you these days?" And this just what the Gallup data cited by Stevenson and Wolfers shows. Of those Americans making between $75,000 and $100,000, 69 percent are "very satisfied" with their lives, compared to 60 percent who are "very happy." For the record, 100 percent of the 8 fortunate folks making over $500,000 per year in survey reported being both very happy and very satisfied. On the other hand, only 45 percent of folks making between $20,000 and $30,000 are very satisfied, and 43 percent reported being very happy, and of those making below $10,000 are 35 percent are very happy and 24 percent are very satisfied.

So what kind of "happiness" is more money buying; good moods or life satisfaction, or both? An intriguing 2010 study by Princeton University researchers Angus Deaton and Daniel Kahneman used data from the Gallup-Healthways Well-Being Index, a daily survey of 1,000 U.S. residents, to get at this question. They report that daily experienced happiness—lower stress, not feeling blue, a positive affect, and so on—tops out at an annual income of around $75,000. Deaton and Kahneman speculate, "Perhaps $75,000 is a threshold beyond which further increases in income no longer improve individuals' ability to do what matters most to their emotional well-being, such as spending time with people they like, avoiding pain and disease, and enjoying leisure."

Deaton and Kahneman also cite a 2010 study in Psychological Science suggesting that "money impairs people's ability to savor everyday positive emotions and experiences." In one part of the study, researchers recruited subjects for a supposed chocolate taste-test experiment. While filling out a questionnaire, half were exposed to a picture of money and the control group half to a neutral photo. Those who glimpsed the money wolfed down their chocolates in 32 seconds, whereas control group members spent 45 seconds enjoying their morsels. The researchers conclude, "Our findings provide evidence for the provocative and intuitively appealing—yet previously untested—notion that having access to the best things in life may actually undermine one's ability to reap enjoyment from life's small pleasures." Perhaps so, but I still enjoy quaffing 18-year-old Laphroaig more than the cheap White Horse blend I used gulp down in my penurious twenties.

Nevertheless, Deaton and Kahneman agree with Stevenson and Wolfers that more money evidently enables people to buy the experiences and conveniences that increase overall life satisfaction. There is no income threshold when it comes to procuring more of this kind of happiness. It is certainly wonderful and valuable to enjoy the moment, but real and lasting pleasure comes from a life well-lived. More money can't guarantee a satisfying life, but research shows that it sure does help.