The relationship between income and well-being has long been an area of interest to thinkers and philosophers, from Epicurus who believed that wealth and joy were not compatible, to modern economists, who often see income and consumption as being synonymous with happiness. Researchers have now studied this topic scientifically, using definitions of well-being with an empirical basis.
Subjective well-being (SWB) “is a broad category of phenomena that includes people’s emotional responses, domain satisfactions, and global judgments of life satisfaction” (Diener, Suh, Lucas and Smith, 1999).
SWB is typically measured through self-report questionnaires, of which multi-item measures such as the satisfaction with life scale (Diener, Emmons, Larson & Griffin, 1985) show the greatest internal reliability (coefficient alpha of .87) and test re-test correlations (2-month stability coefficient of .82).
The validity of the construct so operationalised has been established through correlations with objective measures such as observer report and smile frequency (Pavot, Diener, Colvin, and Sandvik, 1991), and left prefrontal cortex activity (Davidson, 2004). Single-item measures of SWB display reduced reliability and validity, but correlate highly with multi-item measures (Sandvik, Diener and Seidlitz, 1993).
Income has been measured against SWB in a number of ways, depending on the level of comparison. GNP is typically used for between/within-nation comparisons and for comparisons of countries over time, and personal income or windfalls are typically used in studies of individuals, through both self-report and more objective measurement.
A positive correlation between income and SWB makes intuitive sense. Higher income would allow people to more comfortably meet their basic physical needs and would confer status advantages. Beyond this, the greater freedom of action and consumption that income provides could allow for greater self-actualisation and more successful goal pursuits. This article will review the extant research on the income-SWB relationship at each of the above levels, and discuss the limitations and future directions of this line of inquiry.
Within-nation comparisons typically result in small but significant correlations between income and SWB. Diener and Oishi (2000) compared 19 nations, finding a mean correlation coefficient of 0.13, and Lachman and Weaver (1998) found similar results in a study of the United States (0.18). It should be noted, however, that the large sample sizes used in these studies make statistically significant findings highly likely.
Although correlations are modest in national samples overall, Biswas-Diener and Diener (2001) suggest that the relationship between income and SWB is stronger in areas of high poverty, reporting a correlation of 0.45 when their analysis of an Indian sample was focused very poor areas of Calcutta.
Following this, Diener and Biswas-Diener (2002) split the World Values Survey II data into groups: those scoring above, and those scoring below neutral on life satisfaction scales. They then calculated the odds ratio that a person in the lowest income category would be in the highest satisfaction category, finding it to be 0.80.
Again, this is a suggestion that income may have more impact on SWB in poorer areas. Taken together, these studies suggest that the overall income-SWB correlation is small, but that this is not indicative of the societal impact of the relationship. The association of these two variables may be non-linear, with a stronger association at lower levels of income.
The seminal work on national-level comparison was conducted by Richard Easterlin (1974). Easterlin reinterpreted data by Cantril (1965), arguing that the positive correlations in Cantril’s data relied too heavily on two countries (India and the United States) for their outcomes.
Easterlin also included Gallup’s World Values Survey III in his overall analysis, again finding little association between the two variables. Later studies found similar results: Deiner and Suh (1999) found that wealthier countries tend to be happier, and Deiner (2000) found lower happiness in poorer countries. Other studies have supported these findings (Diener et al, 1993; Veenhoven, 1991; Diener, Diener and Diener, 1995).
In some studies, the pattern of the national-level SWB-income relationship appears similar to the within-nation comparisons. Myers (2000) presents data from the World Bank and the 1990-1991 World Values Survey, suggesting that after GNP per capita reaches around $9,500, the correlation with SWB weakens and further increases in GNP have a diminishing impact on happiness.
A number of theories have been proposed to explain the apparent curvilinear relationship between income and well-being. Easterlin (1995) suggests a social comparison model, whereby absolute wealth matters little, and what is important is an individual’s financial standing in comparison with their peers. Between-nation data could be explained as a phenomenon of mass media, transmitting the high-life of economically prosperous nations to those in development or transition phases.
A second explanation for these data is habituation.
Habituation theory suggests that human happiness oscillates around a ‘set-point’, thought to have a genetic basis (Frederick and Loewenstein, 1999).
According to this theory, external circumstances and events will only influence SWB for a certain time period, after which happiness will gradually move back towards the set point. Habituation has been documented in lottery winners, who experience dramatic boosts in well-being on the dawn of their newfound economic status, only for the pleasure of the new lifestyle to fade over time (Brickman, Coates, and Janoff-Bulman, 1978).
The stronger association between income and SWB at lower income levels might be explained through the addition to the model of certain stimuli and circumstances to which people do not adapt. Supposing that habituation is an evolved mechanism to prevent complacency in goal seeking behaviour, non-habituation to events and stimuli with high potential survival value would be expected. This idea is supported by studies showing apparent non-habituation to noise or social conflict (Frederick and Loewenstein, 1999), and to basic need fulfilment (Diener, Diener and Diener, 1995).
However, there are limitations to such interpretations. Specifically, the cross-sectional nature of these studies does not allow a causal inference in either direction. It could be that happier societies are more productive, allowing greater economic output, or a third variable may be exerting a causal influence on both (eg, education or government quality). Thus the SWB-income relationship as well as the possible effects of habituation and comparison cannot be investigated fully without the addition of longitudinal data.
Time Series Studies
In the years following World War II, a large number of countries saw significant increases in income. For example, in the United States the median income in 1955 was lower than the per capita expenditure of the lowest fifth of the population in 1988. Likewise, Japan saw dramatic increases in income during the same period; yet many studies report that no discernible increase in SWB in either country. This pattern is typical of a number of nations (Blanchflower and Oswald, 1997; Diener and Oishi, 2000; Biswas-Diener and Diener, 2002).
The apparent discordance between the cross-sectional and longitudinal evidence is known as the income-SWB paradox, or the ‘Easterlin Paradox’ after its discoverer, Richard Easterlin (1974, 1995). The paradox states that at any particular point in time, within-country comparisons of SWB and income will show a positive correlation; however, over time, national increases in income do not equate to national increases in SWB.
The most cited explanation for the Easterlin Paradox is habituation. As explained earlier, SWB includes a cognitive evaluation, as well as an affective component. Easterlin (1995) suggests that as the income of a country rises, so do the material norms on which these evaluations are made – what was once a luxury becomes a necessity. As Easterlin notes:
“raising the incomes of all does not increase the happiness of all, because the positive effect of higher income on subjective well-being is offset by the negative effect of higher living level norms brought about by the growth in incomes generally” (Easterlin, 1974, p108).
Although this explanation is compelling, a number of criticisms can be raised about the longitudinal evidence. One concern is that differences in how people perceive and respond to well-being questionnaires may change over time. Also, a lack of homogeneity in survey procedure could lead to measurement error; for example, the time of year, or the questions immediately preceding the well-being scale could bias results in either direction.
Thirdly, there is the question of sample bias within the data collection process. Data is presumably collected from literate individuals, who are more likely to be better educated and living in urban areas. Deaton (2008) maintains that in the World Values Survey, participants in poorer countries were specifically chosen for their comparability with people in richer countries.
It may be that data was only collected from relatively wealthy individuals; people on the flat section of the proposed income-SWB curve, for whom habituation theory would predict little or no benefit in well-being from the increases in income we have seen over time.
A further persuasive critique of the time-series evidence comes from Stevenson & Wolfers (2008). They refute the idea of habituation, suggesting a positive correlation between SWB and income. Their exegesis is founded on two primary assumptions: firstly, that earlier data was based on a small number of industrialised nations; and secondly, that SWB is linearly related to log income, rather than absolute income.
Throughout their analysis, Stevenson and Wolfers consistently report a positive, linear correlation between SWB and log income for countries in various stages of development. The question of whether to represent absolute income or the logarithm of income is one that is rarely discussed in the extant literature, and requires further research.
Although Stevenson and Wolfers’s argument would seem to rest on the suitability of log income to define the SWB-income relationship, Easterlin and Angelescu (forthcoming) has suggested an alternative explanation to Stevenson and Wolfer’s analysis. They note that the data showing significant correlations all cover relatively short time periods.
They suggest that income and SWB correlate at national level in the short term, even going as far as to say that the shortest time period analysed in their own study – 12 years – may possibly be classed as short term. When longer periods are analysed, they reports, the correlation between income and SWB disappears.
In many cases, positive correlations in Stevenson and Wolfers’ study were found in periods following recession. This pattern cannot fully be explained by habituation, which would predict adaptation to the declining living conditions. An alternative explanation may be prospect theory (Tversky and Kahneman, 1991), which states that people are more sensitive to losses than they are to gains.
Thus, the non-adaptation to drops in income – people do not reduce material desires as quickly as they increase them, and the positive correlelations are a result of SWB returning to the adapted level after a drop. This explanation was also suggested by Hagerty and Veenhoven (1999), who noticed greater income-SWB correlations in short-term than long-term longitudinal studies.
Mediating and Moderating Variables
A number of studies have attempted to identify the mechanisms behind the income-SWM relationship. One important moderating variable may be the value that people give to money; for example, Kirkcaldy (1997) found a negative correlation between SWB and the importance given to money, and likewise, Myers (2000) and Sirgy (1997) report that people who place a higher importance on money than other goals tend to be less satisfied with their lives.
This relationship appears to hold even when financial aspirations are met (Kasser and Ryan, 1993, 1996), however, the research on financial values has not been studied in poor countries, or in countries in recession, where financial success may lead to greater basic need fulfilment than in richer countries.
A number of studies have investigated the mediating effect of financial satisfaction. This is a similar line of inquiry to the above: Tang (1995) reports that those placing a higher value on money do tend to have a higher dissatisfaction with their income, but the two variables are distinct constructs. The suggestion here, is that it could be a person’s satisfaction with their financial situation that brings happiness, rather than the absolute level of income itself. There is some evidence for this conclusion.
Generally, financial satisfaction does tend to correlate more strongly with income than SWB (Douthitt et al, 1992), and Schyns (2000) found a full mediation of income on SWB by financial satisfaction in a German sample, but a direct pathway in Russia. The most compelling evidence comes from a larger analysis by George (1992), who reviewed a number of papers and concluded that there is both a direct effect of income on SWB, and an indirect path through financial satisfaction.
Another moderator of the income-SWB relationship may be the way in which people use their income. Dunn, Aknin and Norton (2008) found that spending income on other people predicted happiness in cross-sectional and longitudinal studies, and in a further study, participants randomly assigned to the task of spending money on others experienced greater happiness than a group told to spend it on themselves.
Another study by Van Boven and Gilovich (2003) found that so-called ‘experiential purchases’ such as a meal out or theatre tickets resulted in greater happiness than material purchases. As well as the benefit of the experience itself, there is also a potential for longer-term satisfaction; experiential purchases build ‘memory capital’, and reflecting on positive memories has been shown to increase SWB (Bryant, Smart and King, 2005).
While the national-level studies provide high power and reliability, this comes at a cost of decreased control. GDP is an indication of the wealth of a society, and does not take into account how that wealth is distributed within the society. Additionally, the wealth of a society covaries with a number of other variables that may influence SWB, such as equality, education, human rights, and so on.
To further define the income-SWB relationship, convergent evidence from smaller groups and individuals must be provided. However, studies of income change in individuals have found ambiguous results. Some longitudinal studies have found decreases in well-being alongside higher income (eg Diener et al, 1993), while others have failed to find a relationship (eg Schyns, 2000).
It is difficult to create true experimental conditions in individual studies due to cost, but some quasi-experimental studies have measured the impact of lottery wins and other windfalls. These studies have generally supported the broad theories presented above; habituation theory in particular has been supported in a number of studies, for example Brickman, Coates and Janoff-Bulman’s (1978) seminal study of lottery winners. Equivalent research on sharp income drops is needed in order to further test prospect theory.
Conclusion and Future Directions
Does money bring happiness? There appears to be a small overall correlation between income and well-being at any given point in time. However, because of habituation, increases in income do not appear to equate to increases in well-being in the long term. Conversely, and perhaps because of the loss aversiveness predicted by prospect theory, decreases in income do appear to equate to decreases in well-being.
The income-SWB relationship is not purely a direct one, however, and it depends on the influence of a number of external factors that covary with income, both at national and individual levels. Furthering the complexity, a number of psychological factors appear to exert a moderating effect on the relationship.
The presented research suggests that increases in income will bring the most happiness to an individual who is: relatively poor; has just experienced an income drop; is satisfied with their new income level; and who spends their money on experiential purchases and on other people.
Income increase will have the weakest effect on an individual who is: relatively rich; living in an affluent country with a growing economy; has high aspirations and wants even more money; and spends their money on material goods for themselves.
However, limitations in the data limit the inferences that can be drawn from it. The data are disparate, and although these theories appear to converge on similar conclusions, dedicated studies need to be carried out, to test hypotheses that the above theories in combination would predict. Longitudinal studies are needed, covering a large breadth of nations and using multi-item measures of SWB, validated for cross-culture use. Objective measurements of SWB would also be a valuable addition to this data.
Further investigation into control and moderator variables from smaller studies is also important. Carried out with smaller groups and greater control, they are better placed to identify individual differences in peoples’ affective response to income and to the income of others, and following this, identify avenues of inquiry that can be used in applied fields to create a more optimum response to income, both at individual and national level
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