Behavioral economists might be able to explain our response to income inequality.
In a paper on money and happiness, economist Richard Easterlin initially asks the reader how she feels if her income rises. Then he asks how she reacts when it stays the same.
His goal is to display that more than changes in your own income, it matters what happens to everyone else. If everyone else’s income remains the same when yours rises, then you feel pretty good. However, if your income remains the same when others make more, you feel less well off.
Perhaps this “Easterlin Paradox” (that explores the connection between money and happiness) explains the nation’s response to the rising incomes of the top 1%. Also, it relates to the monkey in this very funny video.
Easterlin’s paper on happiness is here, and the Freakonomics blog that present links to work that refutes it is here.
The jobs, income and wealth scene is a bit bleak. Unemployment has soared, many workers are earning less, the government owes a ton of money, the stock market has been down, up, and down again, housing prices have plummeted and 25% of us have lost more than half of our wealth.
Looking at close to a million Gallup replies on SWB (Self-reported Well-Being) between January 2008 and December 2010, a Princeton economist concludes that our “life evaluation” has almost returned to pre-Lehman Brothers bankruptcy 2008 levels. Data about each day’s emotions, though, reflect more of our joys, stresses and worries.
Should President Obama be happy about the Princeton study? Not necessarily. Here, an economist talks about the connection between election results and macroeconomic statistics.
One footnote: Gallup had to eliminate political questions from its survey because the mere mention of politics made respondents unhappy.
The Economic Lesson
Economists disagree about what matters to people when they decide how well off they are. Some say macroeconomic data like unemployment and GDP statistics affect our outlook. Others cite the impact of stock market data, even from people who own no securities. Economists also study the difference between “living life” and “thinking about life.” They point out that you can feel dismal about parts of your daily life and still perceive a bright future.
An Economic Question: Do you believe that well-being studies should affect economic policy? Explain.
Although the unemployment rate is 9.2% for the entire labor force, it is 4.4% for college grads (and 10% for high school graduates, no college).
But which college graduates earn more? It depends on your undergraduate major. Counseling psychology or petroleum engineering? The difference is $91,000 a year. The median income for a counseling psychologist is $29,000 while for a petroleum engineer, $120,000. Divided by group, engineering, computers and mathematics are at the top while education, psychology and social work are at the bottom.
And finally, will more money make you happy? At the Aspen Institute, where happiness researchers have gathered, the money can make us happy group seems to have the most convincing research. (Here, you can watch the debate.)
The Economic Lesson
Happiness researchers frequently cite the Easterlin Paradox which implies that once we reach a certain level of wealth, more wealth does not lead to more happiness because of our quest to outdo our neighbors. On the other hand, economist Justin Wolfers used data to prove that people in rich countries are happier than those in poor countries and the rich are happier than the poor.
An Economic Question: Do you believe that “happiness” or “satisfaction” research is valid? Explain.
It is possible, after all, that money can make us happy.
A recent Brookings paper from 3 University of Pennsylvania researchers concluded that people experience greater “subjective well-being” or life satisfaction when they are more affluent. Comparing rich and poor individuals in countries, they found that the rich were happier. Looking from one nation to another, they concluded that people in nations with a higher per capita GDP were more satisfied than those in lower per capita GDP countries. And finally, with economic growth their third focus, they observed that people became more satisfied with their lives as the GDP increased.
You might enjoy this CNBC interview of the researchers who concluded that money does make us feel better.
How do you measure happiness? You could look at the World Values Survey a recent Gallup World Poll, or Eurobarometer information to see data that researchers have used. For example, they actually found that in richer countries, people smile more. (But they did not experience more love.)
The Economic Lesson
Not everyone agrees that money brings happiness.
For economist Richard Easterlin, measuring the connection between money and happiness takes us to diminishing marginal utility. Easterlin says that as wealth accumulates, it bestows increasingly less extra satisfaction. Believing that that pleasure from wealth is relative, he also expressed the Easterlin Paradox. As long as you have more than your neighbor, you feel good. Consequently, rich or poor, people just need to have more than someone else to feel good.
If you want to know whether money relates to happiness, you might first decide what makes you happy. A Gallup World Poll of 136,000 people in 132 countries from 2005-2006 focused on 2 variables: “life satisfaction” and “enjoyment of life.” Those people who use how much money they have earned as a “scoreboard,” profess to greater life satisfaction because of higher earnings. By contrast, happiness on the “enjoyment of life” scale, which included laughter, friends, and meaningful family connections did not relate to money.
This Gallup Poll is one of many happiness studies we have posted during the past several years. In one previous post, high income people experienced more happiness than low income individuals. We can, though, qualify the high income earners’ happiness with a study that concluded income increases had no impact on happiness. Qualifying it further, we also found a study that contradicts the first one. Then, yet another study asserts that lower quintile earners are happy when upward mobility is feasible. Also, however, a different study demonstrated that happiness comes from earning more than your “neighbor”. Consequently, people preferred lower earnings over higher earnings when the lower number exceeded an associate’s income. Finally, researchers concluded that overworked women, more recently, have become less happy than men.
The Economic Lesson
Thinking economically typically requires looking at the margin. The margin is that imaginary line where we find something extra. For example, marginal revenue is extra money that a business receives for each additional sale. When a business sells a computer, the price of the computer becomes its marginal revenue. For happiness studies, we are at the margin, asking if extra money (at the margin) means extra happiness (at the margin).