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.
What happens when everyone knows how much you earn?
A Boulder, Colorado firm, has voluntarily decided to let workers check a spreadsheet and see what others take home. One employee said she likes it, even when she discovers someone earns more. “I am also grateful to know there’s no back-door deals…” By contrast, paycheck transparency can be tough to handle when someone feels an associate should not earn more. As another employee said, “I have a colleague who’s making a little less than me who comes to me and says ‘I don’t think you deserve to make more than I am making…’”
Through required CEO employee ratio disclosure, the Dodd-Frank Wall Street Reform and Consumer Protection Act takes a step beyond voluntarily sharing salary information to mandatory disclosure. With Dodd-Frank, the SEC is charged with writing rules to insure a pay comparison between CEO compensation and median employee salary. The goal? Transparency could create social pressure to narrow huge gaps between CEO and employee pay.
Thinking of the impact of knowing your “neighbor’s” salary, we can ponder economist Richard Easterlin’s happiness research. Easterlin says that as wealth accumulates, it bestows increasingly less extra satisfaction. Believing that pleasure from wealth is relative, he concludes that 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. Here, 2 economists challenge Dr. Easterlin’s conclusions.
Sources: Thanks to Marketplace.org’s “Payday” series. Discussing pay disclosure, their programs here and here were fascinating. To check the current status of the executive employee salary ratio rule, this SEC website has the information. You might also want to look at California’s mandatory pay disclosure rule for public employees. California state workers protested when the Sacramento Beepublished salary information from public records.
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.