Discussion of the relationship between income and subjective well-being has long taken as its basis a notion first developed by Richard Easterlin in the 1970s: that wealthier people within a country or region are generally happier than poorer people within the same country or region, but that people in poorer countries are not, on the whole, substantially unhappier than those in richer countries.  The Easterlin paradox is typically explained in terms of the difference between absolute and relative income: what matters most is not income in an absolute sense, but your income in relation to your neighbors.  Happier people are those who are wealthier in comparison to those around them.

Aside from the simple keeping up with the Jones s phenomenon, several explanations for Easterlin s hypothesis have been suggested. For example, perhaps people adapt to levels of wealth and therefore any increase in satisfaction that comes with increased wealth is short-lived.  It s also been suggested that absolute income may matter until a certain satiation point essentially, once basic needs are met, we experience diminishing returns on additional wealth.

Now the Easterlin Paradox is undergoing some serious scrutiny. At a recent talk hosted by the Center for Global Development, economist Justin Wolfers (University of Pennsylvania and Brookings) set out to demonstrate that not only does the Easterlin paradox defy rational explanation, but in fact, it never existed at all. Instead, absolute income plays a strong role in determining well-being, Wolfers asserts, and relative income is a less important influence than previously believed.

The conclusions he draws from his study, he states, are indisputable: income is tied to measures of subjective well-being at every level of analysis within a country or between countries, and even as a measure across time.  Growth, Wolfers states, is not a zero sum game as Easterlin concluded, but instead the log of absolute income is positively correlated with life satisfaction. He also throws the concept of a satiation point out the window, suggesting that no country is rich enough to have hit a satiation point, if such a point exists.

This must be bad news for those who seek to wrest the idea of prosperity away from measures of growth sustainability economists for example, concerned with increasing consumption and resource scarcity, who view the link between consumption and well-being as threatening to our future prospects.  Wolfer s analysis, however, contains some potentially good news for development economists suggesting that there is a logarithmic relationship between well-being and income implies that sums of money matter more for subjective well-being in low-resource settings i.e. from a development perspective, you should theoretically get more happiness bang for your buck in poorer countries.

Wolfers has amassed an impressive amount of data, and this factor is part of how he explains the discrepancies between his accounts and Easterlin s.  But his conclusions are nevertheless far from controversial.

One challenge to happiness economists is the limited reliability of global surveys to measure self-reported perceptions, particularly when it comes to a concept as elusive as happiness. How do you quantify a state of well-being? One of the measures used in the survey asks respondents to evaluate where they stand, in terms of life satisfaction, on a 10-step ladder. During his presentation, Wolfers relayed a story about the difficulties of using the life satisfaction ladder question in cultures where no ladders exist (in which case the analogy became a mountain).  The anecdote raises the obvious question of response heterogeneity: do Nigerians mean the same thing as the Japanese when they say they are satisfied with life?

Outliers are another challenge despite increasing wealth over the past several decades, it is widely acknowledged that the U.S. has not seen increasing levels of reported happiness. A possible explanation is the growth in inequality, which skews the log of average income without necessarily making a survey respondent richer over time. The role of inequality is yet to be examined.

Nevertheless, Wolfer s work challenges long-standing assumptions in a way that is certain to push the field of happiness economics forward.  It is also likely to be rich fodder for philosophers to explore the multifaceted and slippery concept of happiness itself.

Image credit: Flickr: Collin Key