Can Money Buy Happiness? Yes, but Only $83,000 Worth of It.

Photo by Fabian Blank | Unsplash.com
Photo by Fabian Blank | Unsplash.com

Yearly household pre-tax income seems to predict happiness until about $83,000 (circa 2016), at which point higher tax brackets cease to predict greater happiness levels.

In a now famous study, Drs. Kahneman and Deaton gathered data on household income, emotional well-being, and life satisfaction from more than 450,000 citizens of the United States between 2008 and 2009. For simplicity’s sake we will refer to “emotional well-being” as “happiness,” even though in the experiment the term “emotional well-being” incorporated measures of happiness, enjoyment, smiling, and laughter.1

Drs. Kahneman and Deaton’s study revealed that an individual’s yearly household income positively predicted his or her degree of happiness until about $75,000 (circa 2008-2009), after which happiness was relatively unaffected by income.1 In contrast, measures of life satisfaction revealed that this separate measure tended to increase in tandem with income without an upper limit like that seen with happiness.1

It is important to clarify that the increased levels of happiness seen in higher income brackets were cross-sectional and not at an individual level. That is to say that the average individual who earned $65,000 per year tended to be happier than the individual who earned $55,000 per year. The research did not address the issue of raises and dynamic increases in income at the individual level. We will return to the issue of raises later in our discussion.

Capitalist societies have long thumbed their noses at the proverb asserting that money cannot buy happiness. Thus, it is of no surprise that the findings of Drs. Kahneman and Deaton’s research were widely publicized and frequently cited. In fact, their findings did not disprove this proverbial wisdom, they merely amended it. It seems that money does buy happiness, but only up to a point. It should be noted that Drs. Kahneman and Deaton’s work is supported by a large foundation of research stemming from the so-called “Easterlin paradox” of the 1970s. The Easterlin paradox, as it would come to be known, is a reference to the economist Richard Easterlin’s paradoxical observation that a country’s per capita gross domestic product does not, as had been suggested up until that point in economic history, predict happiness.2

Before we go any further, let’s update Drs. Kahneman and Deaton’s values for economic conditions in 2016. We will refer to the point at which greater income stops predicting greater happiness as the “income-happiness barrier.”

Photo by Nitish Meena | Unsplash.com
Photo by Nitish Meena | Unsplash.com

We estimated the income-happiness barrier to be around $83,000 in 2016 by adjusting for inflation and cost of living.3 Neuraptitude.org is currently based in Seattle, WA and we were interested in further adjusting the income-happiness barrier value for our geographic cost of living. We used Seattle’s estimated 25% above average cost of living to arrive at an income-happiness barrier of $104,000 for inhabitants of the Emerald City.4 For those readers interested in adjusting the income-happiness barrier for their city we would encourage you to use our citations for links to the appropriate algorithms.4

Although there seems to be an income above which happiness does not increase, $83,000 (or $104,000 for that matter) is no small amount. Only 25% of US households earn more than $83,000 per year.5 So, for at least 75% of the population, a higher income does seem to afford some degree of increased happiness.

How do we explain the $83,000 income-happiness barrier? One explanatory model is known as the necessity hypothesis.

The necessity hypothesis suggests that a portion of the income-happiness barrier can be explained by the income level at which food, shelter, and modest creature comforts can be afforded. The annual household cost of living in the US is currently somewhere in the area of $57,000. The income-happiness barrier value may thus be partially explained by the personal security provided by achieving a base income level to meet the cost of living. The supernumerary $26,000 between the cost of living and the income-happiness barrier may further enhance happiness by providing an increasing amount of discretionary spending. Perhaps the ability to make discretionary purchases, save for the future, or take vacations increases an individual’s happiness level in an enduring way.

Are there other explanations beyond necessity and discretionary spending power that can explain the income-happiness relationship?

Researchers have shown that where an individual’s income level falls in comparison to his or her peers is a better predictor of happiness than the actual dollar amount.6 It seems that people consciously or subconsciously compare their income level to peer group comparators and generate a mental rank order of income. Comparator groups studied have included geographic, age, gender, and education level peer groups. Thus, an individual’s happiness tended to be higher the higher they perceived themselves to be in the income rank order. In other words, if six lawyers in a peer group all made different levels of income, the lawyer who made the most and thus ranked the highest would have the greatest relative happiness level even if they all earned fantastic amounts of income well beyond the $83,000 income-happiness barrier.

The evidence from income rank order research suggests that at least a part of the happiness associated with higher levels of income can be explained by the social status it provides. This may help further explain the increased happiness found above the income necessity line.

What about the issue of raises and dynamic increases to an individual’s income that we deferred addressing in our earlier discussion?

It seems self-evident that a raise and the accompanying increase in income would trigger an increase in an individual’s happiness levels. Unsurprisingly, research has confirmed this assumption. What may surprise the reader is the expected duration of this increase in happiness. Immediately following a significant increase in income a person’s happiness increases dramatically and quickly. However, after about two years the person will have equilibrated to this new income level and his or her happiness will have returned to a level very close to baseline.2

Let’s turn from the relationship between money and happiness to some of the potentially negative influences of wealth. Maybe we can explain why happiness does not increase infinitely with increasing income.

Photo by Greta Punch | Unsplash.com
Photo by Greta Punch | Unsplash.com

Research has shown that increasing wealth is associated with a diminished capacity to savor experiences and emotions.7 It seems that as one’s purchasing power increases, the ability to savor said purchases decreases. This observation makes sense in that an individual who can afford only a single pastry will likely savor the treat longer than the more financially endowed individual that could purchase the entire display case.

Drs. Kahneman and Deaton cited this impairment in savoring ability as well as other deleterious effects of increasing wealth to posit a diminishing returns theory for the income-happiness barrier.1 In other words, it may be that at some point the stresses associated with increased wealth negate the happiness benefit of increased purchasing power, rank, etc.

Are there any better or worse ways to spend your money if you are seeking greater happiness?

Scientists have shown that the act of spending money on another person increases the spender’s happiness.This finding has been replicated in cross-sectional, observational, and experimental designs. This observation is not surprising given the shared experience of joy when giving a gift to a loved one.

In the beginning of our discussion we asserted that the point at which increasing income stops predicting greater levels of happiness in 2016 is $83,000. Let’s try to dissect this number with the knowledge we now possess.

A little more than two-thirds ($57,000/$83,000) of the income-happiness barrier amount can be explained by the security it affords in covering the basic cost of living in modern society. The remaining one-third of the income-happiness barrier can likely be explained by the additional discretionary spending/saving it allows as well as the social rank it bestows upon its earner. And if said earner spends his or her extra dollars on others, then all the better for the earner’s happiness.

The happiness plateau that lies beyond the income-happiness barrier can likely be explained by the happiness-negating consequences of wealth. These consequences include the decreased ability to savor emotions and experiences that we discussed earlier.

And finally, we should remember that an increase in salary may produce a sharp increase in happiness, but the effect is temporary and will likely wear off within two years of the raise.

So what should we do with all of this knowledge?

As we discussed earlier, around 75% of the US population fall below the income-happiness barrier. Thus, the vast majority of US households stand to benefit from increasing wages in regards to their happiness.

It was at this point in an earlier version of this article that we cited the expansion of increased minimum wage laws in various cities and states as a potential palliative step towards greater equality. However, upon further inquiry into the primary literature we must revise our earlier supposition. Although the debate among economists continues to this day, there appears to be a significant amount of evidence that minimum wage laws may actually lead to increased unemployment among the low-wage workers they are designed to help.9-11 The reasons are complex and beyond the scope of this article, but for those interested in learning more we would recommend Professor Thomas Sowell’s Basic Economics: A Common Sense Guide to the Economy12 in addition to our primary source references.

Obviously, US income gaps are vast and not easily patched with simple measures. In a country where the top 1% of earners account for 20% of the total national income,13 economic inequality is complex and multifaceted challenge.

Photo by Christian Joudrey | Unsplash.com
Photo by Christian Joudrey | Unsplash.com

We may also be able to use the research into savoring ability and wealth to increase our happiness without a concomitant increase in income. If we turn the research on it’s head we find that a relative scarcity bestows satisfaction and resultant happiness from experiences that might appear banal when viewed from a state of abundance. If dining out is a rationed form of entertainment, then we can truly savor those times when we do go out to a nice dinner. If vacations are few and far between, then the sandy beaches and the hot sun of a tropical respite will be all the more memorable.

There are certain financial realities inherent to the modern world. We must earn to live. But we don’t need to live to earn.

References

  1. Kahneman, D., & Deaton, A. High income improves evaluation of life but not emotional well-being. Proceedings of the national academy of sciences. 2010;107(38), 16489-16493.
  2. Clark, A. E., Frijters, P., & Shields, M. A. Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. Journal of Economic literature. 2008;95-144.
  3. The Cost of Living Calculator. Retrieved April 16, 2016, from https://www.aier.org/cost-living-calculator
  4. Cost of Living Calculator. Retrieved April 16, 2016, from http://www.payscale.com/cost-of-living-calculator/Washington-Seattle
  5. The United States. Retrieved April 21, 2016, from http://cost-of-living.careertrends.com/l/615/The-United-States
  6. Boyce, C. J., Brown, G. D., & Moore, S. C. Money and happiness rank of income, not income, affects life satisfaction. Psychological Science. 2010;21(4), 471-475.
  7. Quoidbach, J., Dunn, E. W., Petrides, K. V., & Mikolajczak, M. Money Giveth, Money Taketh Away The Dual Effect of Wealth on Happiness. Psychological Science. 2010.
  8. Dunn, E. W., Aknin, L. B., & Norton, M. I. Spending money on others promotes happiness. Science. 2008;319(5870), 1687-1688.
  9. Brown C, Gilroy C, Kohen A. The Effect of The Minimum Wage on Employment and Unemployment. Journal of Economic Literature. 1982;20(2):487-528. http://www.jstor.org/stable/2724487. Accessed November 30, 2016.
  10. Deere D, Murphy KM, Welch F. Employment and the 1990-1991 Minimum-Wage Hike. The American Economic Review. 1995;85(2):232-237. http://www.jstor.org/stable/2117924. Accessed November 30, 2016.
  11. Neumark D, Wascher W. Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment. The American Economic Review. 2000;90(5):1362-1396. http://www.jstor.org/stable/2677855. Accessed November 30, 2016.
  12. Sowell T. BASIC ECONOMICS: A Common Sense Guide to the Economy. Fifth Edition. New York, NY: BASIC BOOKS, A Member of the Perseus Books Group; 2015.
  13. Census.gov. Retrieved April 17, 2016, from http://www.census.gov/

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