Chapter 14: Income and Happiness

Recent studies by Betsey Stevenson and Justin Wolfers, and by Angus Deaton, based on new data from the Gallup World Poll, find a consistent cross-country relationship between income and happiness,1 which seems to suggest that money does make people happier.

But how can this be? The Easterlin paradox showed exactly the opposite, did it not? How could two scientifically valid studies that control for other variable s, both coming from respectable and verifiable sources, arrive at diametrically opposite conclusions? This problem kindled an intense debate among academics, who have yet to come to a consensus.

As I was eagerly immersing myself in the study of happiness, I stumbled across the research of Carol Graham. In her two books, Happiness around the World: the Paradox of Happy Peasants and Miserable Millionaires (Oxford University Press, 2010) and The Pursuit of Happiness: An Economy of Well-Being (Brookings Institution Press, 2011), Graham provides a lucid analysis and valuable insights into the world of happiness studies. As she points out, it all depends of the question you are asking. Happiness is an umbrella term that describes a variety of feelings, not a single state of mind. In the Easterlin study people were asked an open ended question: "Generally speaking, how happy are you with your life?" – "Generally speaking, how satisfied are you with your life?" Instead, Gallup World Poll uses Cantril’s “ladder of life” question: “Please imagine a ladder with steps from zero at the bottom to ten at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step would you say you personally feel you stand at this time?” As you can see, these are very different questions – they create different contexts, and therefore mean different things. The first study measured Emotional Well-Being, which refers to the emotional quality of an individual’s everyday experience – the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant. The second measured Life Evaluation (or Satisfaction), as in the thoughts that people have about their life when they think about it. Both studies could give different results, and yet both be right.There would be no conflict between the two results since they each measured a different type of happiness.

It seems we solved the paradox and things are finally clear. Except that they are not. Another aspect to consider is the adaptation phenomenon. As demonstrated in the previous chapter, as we raise our standard of living, our expectations rise as well. Analogous to the phenomena of adaptation to lower living standards is what Lora and Graham refer to as the paradox of unhappy growth. They observed that respondents in countries with higher growth rates were, on average, less happy than those in countries with lower growth rates, once average levels of pro capita GNP were accounted for. As it happens, economic growth often accompanies increases in instability and inequality, which we know makes people very unhappy.2 Also, it appears that we are better at adapting to unpleasant certainty than we are to uncertainty itself. Graham continues:

“While there are clearly stable patterns in the determinants of happiness worldwide, there is also a remarkable human capacity to adapt to both prosperity and adversity. Therefore people in Afghanistan are as happy as Latin Americans – happier than the world average – and Kenyans are as satisfied with their health care as Americans. Crime makes people unhappy, but the more of it there is, the less it matters to happiness; the same goes for corruption. Obese people are less unhappy when the people around them also are obese. Freedom and democracy make people happy, but the less common those conditions are, the less they matter to happiness. The bottom line is that people can adapt to tremendous adversity and retain their natural cheerfulness, while they can also have virtually everything – including good health – and be miserable.”3.

As you can see, things start to get very complicated.

While these studies looked at how the economic factors play a role in people’s happiness between different countries, one could wonder what happens to people within the same country? Is there a correlation? Of which kind? And how significant is it?

Nobel laureate economist Daniel Kahneman and his colleague Angus Deaton at Princeton University recently published a paper in the Proceedings of the National Academy of Sciences4 that addresses just that. They reported on their analysis of more than 450,000 responses to the Gallup-Healthways Well-Being Index, a daily survey of 1,000 US residents conducted by the Gallup Organisation. The study concluded that their life evaluations – that is, their considered evaluation of their life against a stated scale of one to ten – rose steadily with income. So the research shows that, within a country, income does correlate positively with Life Satisfaction. However, there is a catch. Life Satisfaction does not increase proportionally with income, but with its logarithm. Here’s where the chapter on exponential growth gives us a big help again. Say you make $30,000 a year. An increase of $30,000 gives you a great bump in the rise of the ladder of Life Satisfaction. But as you climb up the ladder, you have to exponentially increase the amount of money you make in order to make a dent on your Life Satisfaction curve. Therefore, for a person making $100 million, another million or two will not matter that much, but a billion will.

On the other hand, their reported Quality of Emotional Daily Experiences (experiences of joy, affection, stress, sadness, or anger) levels off after a certain level. Income above $75,000 annually does not lead to more experiences of Emotional Happiness (or Well-being), nor to further relief of unhappiness or stress. Below this income level, respondents reported decreasing happiness and increasing sadness and stress, implying the pain of life’s misfortunes, including disease, divorce, and being alone, is exacerbated by poverty.

Subjective well-being (SWB), per capita gross domestic product (GDP), and different types of societies – Inglehart, Foa, Peterson, and Welzel (2008)

In conclusion, it appears that money can buy you Life Satisfaction, but not Emotional Well-being. Lack of money can cause both dissatisfaction and unhappiness.

Where does this lead us? As we have started to see, this happiness business is getting more complicated than expected, so before jumping to conclusions there are a few things to understand about it.



2Does Inequality Make Us Unhappy?, Jonah Lehrer, 2011. Wired.

3The Pursuit of Happiness: An Economy of Well-Being, Carol Graham, 2011. Brookings Institution Press. p. 22.

4High income improves evaluation of life but not emotional well-being, Daniel Kahneman and Angus Deaton, 2010. Proceedings of the National Academy of Sciences.

You're reading the free version of a book that required more than one year of work. You can show your support by purchasing a copy on Amazon (Kindle/Paperback), iBookstore, PDF or ePub direct download. All files are rigorously DRM-free. Want to support my work, but don't want to buy the book? Send a donation via Bitcoin (1LeUniaxmEqYh6WJQ9ktuSYonkLG5HvcbZ) or PayPal :)

Get new chapters every week for free!