Daniel W. Sacks, Betsey Stevenson and Justin Wolfers, “The New Stylized Facts About Income and Subjective Well-Being.” Emotion 12(6): 1181- 1187, 2012 [pdf].
• The Easterlin Effect (or Paradox) suggests that while within a country at a point in time, richer people are happier than poorer people, that in that same country over time, rising incomes do not lead to more happiness, nor are richer countries happier than poorer countries.
• A potential explanation of the Easterlin Effect is that people care about their relative income standing, and only compare themselves with their current compatriots.
• Sacks, Stevenson, and Wolfers examine lots of data from many countries over many years, and find that there is essentially no evidence in support of the Easterlin Effect. Higher income is associated with higher happiness, whether the comparisons are made within a country, across countries, or over time.
• The main measure that they use for subjective well-being employs a ladder analogy; people assess their lives on a ladder with steps 0 to 10, higher numbers meaning more satisfaction.
• There is a declining marginal impact of income on happiness – an additional 100 dollars brings a larger dollop of happiness to a poor person than to a rich person. Further, the lack of support for the Easterlin Effect does not rule out the possibility that relative income might have a small influence on well-being.
• The US remains a puzzle, as over the last 40 years, average income has nearly doubled, while happiness has slightly declined. Part of the answer might be that the increase in average happiness masks the fact that income inequality has increased, which means that many people did not share in the income gains.