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Does More Money Make You Happier? Why so much Debate?

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Abstract

Easterlin’s famous paradox questioned standard economic assumptions about a fundamental relationship in economics: that between happiness and income. In recent years there has been renewed debate about the paradox. In this essay, I highlight some of the methodological issues and challenges underlying that debate. I focus on the sensitivity of the results to the method selected, the choice of micro or macro data, and the way that happiness questions are defined and framed, all of which result in divergent conclusions. I also note the mediating role of the pace and nature of economic growth, institutional frameworks, and inequality. What is most notable is the remarkable consistency in the determinants of individual happiness – including income – within countries of diverse income levels and, at the same time, how happiness is affected by cross-country differences that are related to average per-capita income levels, such as political freedom and public goods. Income clearly plays a role in determining both individual and country level happiness. Still, assessing its role relative to other more difficult to measure factors as countries develop in new ways and at different rates will remain a challenge for the foreseeable future.

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Notes

  1. See Easterlin (1974and 2003); Blanchflower and Oswald (2004); Frey and Stutzer (2002a); and Graham and Pettinato (2002b).

  2. This finding holds for people who are, on average, happier, but not necessarily for those that are the happiest in every sample. See (Diener and Biswas-Diener 2008); and Graham et al. (2004).

  3. Deaton gets a positive and significant coefficient on a squared specification of the income variable. Stevenson and Wolfers split their sample into those countries above and below $15,000 per capita (in year 2000 U.S. dollars), they get a slightly steeper slope for the rich countries than for the poor ones.

  4. Blanchflower and Oswald find a correlation coefficient of .50 for the two questions in Europe and the United States; Graham and Pettinato find one of .55 for Latin America, where the questions were used inter-changeably in various years of the Latinobarometro poll. See Blanchflower and Oswald (2004); and Graham and Pettinato (2002a, b).

  5. This question is limited, at least in econometric terms, as 96% answer yes to the yes-no question.

  6. For detail on the exact question phrasing and distribution of responses, see Graham (2010), Chapter 3.

  7. In each country, Gallup includes a categorical question on total monthly household income, with respondents given choices within brackets expressed in local currency. The number of brackets is different in each country, and in Latin America it ranges from four brackets to 20. We relied on an adjustment to the Gallup income variable in which each household was assigned a normalized random value within the bracket that they self-reported. Income was transformed to U.S. PPP dollars and then divided by household size, resulting in a monthly per capita household income variable which is normally distributed across the sample. See Gasparini et al. (2009). While the most common adaptation for scale is to divide total household income by the square root of the number of people in the household. The Gasparini et al. adaptation divided income by the number of household members. As a check, we adjusted the same income variable by the square root of household size and got essentially the same results.

  8. In theory, these two should be identical. In practice, with substantial misreporting at the top and with a very fat left tail (with far fewer few observations on the right/top) the log of the average may place higher relative weight on the households at the bottom of the distribution and smooth out the effects of the outliers on the right.

  9. We used both the simple, un-weighted scale of asset ownership, and then a principle-components-analysis (PCA) based index in which the assets that are more unequally distributed across households are weighted more. Our results are essentially identical using alternative methods; the results on wealth reported in the tables are those based on the PCA approach. For more detail on the particular assets in the index and its construction, see Graham et al. (2010b).

  10. We use the following model: average happiness (as measured by each separate question) in country i   = f (average log of per capita income or wealth in country i +characteristics of the average individual in country i ).

  11. The model is: individual happiness = f (household log income or wealth +personal controls +country dummies). We ran the model sequentially, first looking at just happiness and income or wealth, then adding the country dummies, and finally adding the personal controls.

  12. See the appendix to Stevenson and Wolfers (2008).

  13. I thank both Justin Wolfers and Charles Kenny for thoughtful conversations on this point.

  14. For more detail, see Graham and Pettinato (2002b).

  15. See Graham and Felton (2006); Luttmer (2005); Luttmer’s work is based on U.S. PUMA’s, geographic units which are established in census data, which proxy for neighborhoods; and Kingdon and Knight (2007).

  16. In related research, Graham et al. (2011) show that better reference group health is positive for health satisfaction, controlling for individual levels of health. Signaling effects seem to dominate over comparison effects, most likely because there are positive externalities related to being surrounded by healthier people.

  17. For additional details see Alesina et al. (2004). Benabou and Ok (1998); and Graham and Young (2003).

  18. Because there is not a good income variable in the Latinobarometro, the authors use an index of assets to proxy for wealth/income. See Graham and Felton (2006).

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Authors and Affiliations

  1. The Brookings Institution, University of Maryland, Washington, DC, USA

    Carol Graham

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  1. Carol Graham
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Correspondence to Carol Graham.

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The author is Senior Fellow and Charles Robinson Chair at the Brookings Institution and College Park Professor at the University of Maryland. This essay draws heavily on a paper she co-authored with Soumya Chattopadhyay and Mario Picon for an October 2008 Princeton Conference on International Differences in Well-Being. The authors would like to thank Peyton Young, Andrew Felton, and Charles Kenny, as well as the participants and reviewers from the Princeton conference for very helpful comments. Also see Graham et al. (2010a).

This manuscript is adapted from Happiness around the World: The Paradox of Happy Peasants and Miserable Millionaires (authored by Carol Graham and published by Oxford University Press in 2009). Available direct from Oxford University Press at: http://www.oup.com/uk/catalogue/?ci=9780199549054

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Graham, C. Does More Money Make You Happier? Why so much Debate?. Applied Research Quality Life 6, 219–239 (2011). https://doi.org/10.1007/s11482-011-9152-8

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