The Money-Happiness Connection
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Does money buy happiness?
Wealthier people are happier than poor people. Wealthier countries are happier than poor countries. As countries get richer, they get happier. The relationship between income and happiness is extremely strong.
What’s the nature of that connection? Does money actually make you happier?
I should give the usual “correlation isn’t causation” disclaimer here. When I say rich people are happier than poor people, I don’t know if it’s the money that’s making them happy. When I say rich countries are happier than poor countries, I don’t know whether it’s the greater money that makes the average American happy or whether it’s the greater opportunities. Maybe it’s democracy, rule of law, or having functioning markets and political and social institutions.
Saying richer countries are happier than poorer ones seems obvious. Has other research found otherwise?
There’s something called the Easterlin paradox [named after University of Southern California professor Richard Easterlin], which claimed that while rich people are happier than poor people, rich countries are not happier than poor countries, and as countries got richer, they did not get happier. Now, what we [Wolfers and fellow University of Michigan professor Betsey Stevenson] did was study more comprehensive data. We looked at surveys, including the Gallup World Poll, of 155 countries covering 95% of the world’s population. It turns out that rich countries are indeed happier than poorer ones, and as countries get richer, they get happier.
[Easterlin says that Wolfers has mischaracterized his findings, and that his paradox indeed asserted that rich countries are happier than poor ones. Easterlin also says that while happiness and income are correlated over short-term periods, the relationship disappears over the long run.]
Psychologist Daniel Kahneman and economist Angus Deaton, also drawing on Gallup data, famously concluded that happiness doesn’t really increase above incomes of $75,000 a year. How do you square that with your research?
Whenever people talk about happiness, they are imprecise in their language. I’m mostly analyzing questions that ask you how you think about your life overall, or how happy you are, taking all things together. These are questions that we think of as being “evaluative.”
The $75,000 number comes instead from measures of affect. Rather than being evaluative, they gauge what’s going on with you right now. They say, “How did you feel yesterday?” This is not asking you to judge your life as a whole. And Kahneman and Deaton found at very high incomes more money did not increase well-being. The increases above $75,000 were vanishingly small.
Back to your research: Is the relationship between money and happiness linear? Will I feel the same jump in happiness with each $1,000 raise?
No. If you think about how much extra well-being is associated with each dollar, it’s absolutely a situation with diminishing returns. But if you describe it in terms of the percent change in income, a 10% rise yields a roughly similar rise in well-being to everyone in the world. A 10% increase in a very poor country like Burundi is equivalent to a 10% increase in a very rich country like the U.S. But to get a 10% increase in Burundi doesn’t take a lot of dollars, whereas in the U.S. it takes a lot.
The U.S. economy has grown a lot since the 1970s, but you’ve found that happiness here hasn’t increased much. How can that be?
I never said that the only thing that changes happiness is income growth. Something else is going on in the U.S.
Average per capita income has grown, but that can be misleading. If you look instead at the median—the income of someone making less than what half the population makes and more than what the other half does—income has barely risen over the past 40 years, once you adjust for inflation. Income has actually fallen for those at the lower end of the scale. If income has barely grown for most people, we shouldn’t be surprised that happiness has barely grown for most people.
So how can we fix that?
We can do it through the minimum wage or the tax system. We can do it through the benefit system as well. Things like the earned income tax credit. Remember, an extra dollar doesn’t buy much extra happiness for a millionaire, but it buys quite a lot for a working-class person.
Raising the federal minimum wage is politically difficult. So is making the tax system more progressive.
Compulsory education up to an age older than 16 could also work. Research shows that education and skills not only increase income later in life but also increase happiness.
What about the personal implications of your research? Are you happier now that you make more money than you used to?
Unquestionably, yes. When I was in graduate school and I went into a store, I was always looking at the prices. I was constantly calculating. You ask yourself, “Can I afford to buy this box of cereal?” You think, “If I buy more of this, maybe I can afford less of that.” You’re making these tradeoffs and you’re constantly aware of these tradeoffs. And it’s tiring.
The first thing I did when I had a well-paying job is I stopped looking at those price tags. Now I never really feel stressed about money. Even if I lost my job tomorrow, I have my degree, and I can get another job. I get to live free from stress and worry and the constant calculating of tradeoffs that I had earlier in my career.
So would I be happier if I became a hedge fund manager?
Don’t let an economist bully you into believing money’s all that matters. And don’t let a psychologist bully you into believing that money is completely unimportant. How you manage that tradeoff is going to require a lot of experimenting and thinking and introspection. People choose occupations based not just on money, but also on meaning. There’s nothing in my research that says that’s a bad idea.