Income and Happiness

Much ink has been spilled over the relationship between income and happiness. Mass media has popularized the finding that there are positive but diminishing returns to income.1 In other words, increases in income cause happiness to grow only up until a certain point, the point at which basic needs are met. Above this point, increased income does not contribute to more happiness.

Well, the story is slightly more complicated than that.

Studies have shown different results when they studied logarithmic changes in income rather than changes in the absolute dollar amount. When plotted logarithmically, life satisfaction does indeed rise proportionally with income.

Simply put, while a millionaire may not receive the same happiness boost as a pauper if both receive ten dollars, if both individuals have their incomes doubled, their increases in happiness will be comparable.2

A further nuance within the research is the different effects of income on emotional well-being (positive and negative emotions) versus life satisfaction (self-evaluation of one’s life as a whole). The difference between these two terms is crucial, as we have discussed in more depth in our article on Subjective Well-Being.

A Gallup poll surveying one thousand U.S. residents showed that life satisfaction rises proportionally when plotted against income (logarithmically again). However, emotional well-being showed no further increases above an annual household income of about USD$75,000.2

Meanwhile, a household income below $75,000 is associated with both low life satisfaction and low emotional well-being. Furthermore, the researchers found that low income intensified the negative emotions associated with hardships such as divorce and ill health.

Researchers have also found that rising aspirations can offset the benefits of increased income.3 At a given level of income, those with higher expectations and aspirations have lower well-being.

One thing that influences aspirations are the people that surround you, and increased income does not lead to increased well-being if comparison groups also have a similar increase in income.1 So, stop comparing yourself with the Joneses.

Furthermore, it seems that people who are deeply invested in the importance of money and material possessions score lower in both emotional well-being and life satisfaction.4

The evidence above points towards the idea that perceived financial satisfaction is more important than absolute income.

Cross-culturally, researchers have found that financial satisfaction plays a bigger role in life satisfaction in poorer nations compared to richer nations. In richer nations, having the freedom to direct your own life becomes more important than money.

It is hypothesized that in poorer nations, people may be more preoccupied with basic survival needs, thus placing more importance on income. However, in richer nations, many people take basic survival for granted, and a shift of values occurs as people place more importance on personal growth or self-actualization.5

Culture also helps to moderate the relationship between lower income and lower subjective well-being. For instance, homeless people in Calcutta scored higher in life satisfaction compared to homeless people in the U.S., despite better objective circumstances in America.4

In summary? It’s complicated.