Money buys happiness for some people some of the time

This post is the concluding entry in an ongoing series on the link between income and happiness. See Part 1 and Part 2.

In two previous posts, we looked at the competing theories regarding income and happiness. Basically, some economists see little correlation between wealth, as measured by income, and happiness. Others suggest that a relationship does exist, though the extent to which the relationship is a positive one after basic needs are attended to remains a source of debate.Let’s look at the work of those economists proposing a positive correlation – those who think that money really does buy happiness. The main disagreement seems to be the existence of a satiation point, or some level of income beyond which happiness is unaffected by further wealth increases.

Those who subscribe to what could be called the “modified Easterlin Paradox” claim that after the satiation point is reached, happiness displays no appreciable growth (or minimal growth at best) when income is increased.

As we discussed last time, Betsey Stevenson and Justin Wolfers aren’t buying this theory. According to their recent study, no satiation point has yet been identified, and well-being correlates with income in a positive, linear-log relationship. This means that while an additional dollar of income is more beneficial to happiness for a poor person than a rich one, no “nirvana” level of income exists beyond which happiness ceases to climb.

Daniel Kahneman and Angus Deaton attack the problem of determining whether this satiation point exists by breaking “happiness” into two parts – life satisfaction and emotional well-being. The difference between the two is pretty intuitive. Life satisfaction is derived from an evaluation of one’s overall position in life, whereas emotional well-being describes the hedonic quality of one’s emotional experiences (i.e. how frequent and intense one’s feelings of joy, sorrow, etc. are).

When they examined the data, Kahneman and Deaton found an intriguing pattern. Sure enough, income bought happiness in the form of life satisfaction…and with no satiation point in sight. Emotional well-being, however, is another story. After income reaches approximately $75,000 emotional well-being plateaus.

What could explain this difference? For one thing, people could be encouraged by social norms to evaluate life satisfaction in the context of relative wealth, interpreting their higher income as an indicator of higher positioning on the life satisfaction “ladder.” Emotional well-being, perhaps less tethered to social convention, stabilizes after the first $75,000.

So while the literature continues to embrace the notion that income increases well-being, some questions remain regarding how we define the components of that well-being and how the happiness impact of additional wealth affects rich and poor people differently.

But if we step back and examine the larger picture, a bigger question arises – how much do these patterns matter, practically speaking?

A log-linear relationship exemplifies the diminishing happiness returns from money. [Image: Creative Commons]

Stevenson and Wolfers claim that there’s no satiation point – but their log-linear analysis finds that, as one would predict, the additional marginal dollar matters less in terms of happiness, to a millionaire than someone at the poverty line. Kahneman and Deaton argue that for a major component of happiness – emotional well-being – a satiation point is indeed present. So either income increases happiness just a little for those with high incomes or it fails entirely to augment happiness in the emotional sense. That’s pretty darn close to a distinction without a difference – especially for those far below the $75,000 range.

In sum, we have a rather academic argument that’s interesting to discuss but not all that relevant in terms of the average person’s life.What will remain important is the plight of those in poverty and our social imperative to make sure a ladder to the middle class exists. No matter which theory gains consensus in the academic literature, it appears that boosting income for those with the least has the largest impact on happiness and well-being.

The technicalities of this debate are far less important than creating opportunity for upward mobility among the poor.