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Is the link between income and happiness an illusion?

FINANCIAL STANDARD
By Ng'ang'a Irungu | May 13th 2014 | 3 min read
By Ng'ang'a Irungu | May 13th 2014
FINANCIAL STANDARD

By Ng'ang'a Irungu

There has been a lot of debate in recent weeks on how much employees should be paid. But will more money make people happier? In other words, is there a positive correlation between an individual’s income and his or her subjective well-being?

This has been an ongoing debate among scholars since the early 70s. A large number of studies have found a positive correlation, but the cause of this has become the focus of debate.

Does income relate to subjective well-being because it helps individuals meet their needs, such as good health, nutrition and comfortable housing?

Good life

Or does money correlate with well-being because it is a valued resource in many cultures, and people make judgments of themselves and others based on how much of it they have?

According to the latter argument, also known as the Social indicators Research argument, happiness and income are correlated within countries because wealthier people are more likely to exceed some standard for the good life.

This standard depends on changeable cultural and social factors. As a result, people with comparable income (and presumably the same level of satisfaction of needs), may be happy or unhappy depending on their past income or the wealth of those around them.

Thus, if the average monthly income of an accountant in Company X is Sh100,000, one who earns Sh101,000 or Sh1,000 more than the average, is likely to be more satisfied.

The theoretical debate over income can be generalised to include any valued resource.

But does happiness rest on the fulfillment of certain basic and fundamental human needs, or does it depend on changeable standards that vary over time and culture?

Prof Richard Easterlin, a leading economist, has inspired a wealth of research on the nexus between well-being and income since the 1974 release of his book chapter, Does Economic Growth Improve the Human Lot?  He notes that economics places particular stress on the importance of life circumstances — particularly one’s income and employment situation — to well-being.

Indeed, the view that money makes you happier finds ringing endorsement in economic theory.

The implication is that you can improve your life satisfaction by getting more money, and that public policy measures aimed at increasing the income of society as a whole will increase well-being.

But Prof Easterlin disputes this argument. According to him, more money does not make people happier.

Non-monetary pursuits

He points out that because of the money illusion, we allocate an excessive amount of time to monetary goals and shortchange non-monetary pursuits such as family life and health.

In advancing this “relativity argument”, Easterlin noted that the differences in subjective well-being between rich and poor countries were small and inconsistent.

Second, he pointed out that from 1945 to 1970, subjective well-being in the United States did not change, even though real income (after taxes and inflation) had doubled.

Third, Easterlin came up with what has been labelled the “relativity hypothesis” from his review of within-country studies.

He concluded that higher incomes for a country have little effect on average happiness, because people evaluate their wealth, or lack of it, based on what others around them have.

That is, as the wealth of a nation increases, so does the social comparison standard of others’ finances, with no increase in happiness for the citizens.

People develop a standard of desirable income based on what others around them possess; if they are better off than this standard, they tend to be happier, and if they are worse off, they tend to be less happy.

A recent study by the Kenya Social Research Council (K-SORCO) found this correlation to be true.

In a survey of 10 Government departments and eight private companies, the researchers found out that most workers pegged their happiness to the positions of others within the organisation.

Thus, if there was a wide gap in earnings among workers within the same wage scale, there was bound to be unhappiness fuelled by unfavorable comparisons, which could in turn have damaging effects on peoples’ health and family life.

The writer is a researcher in clinical psychology.

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