Money can buy you happiness but only relative to your peer’s income

Financially richer people tend to be happier than poorer people, according to sociological researcher Glenn Firebaugh, Pennsylvania State University, and graduate student Laura Tach, Harvard University. Their research is focused on whether the income effect on happiness results largely from the things money can buy (absolute income effect) or from comparing one’s income to the income of others (relative income effect). They present their research in a session paper, titled “Relative Income and Happiness: Are Americans on a Hedonic Treadmill?,” at the American Sociological Association Centennial Annual Meeting on August 14.

Firebaugh argues that, in evaluating their own incomes, individuals compare themselves to their peers of the same age. Therefore a person’s reported level of happiness depends on how his or her income compares to others in the same age group. Using comparison groups on the basis of age, the researchers find evidence of both relative and absolute effects, but relative income is more important than absolute income in determining the happiness of individuals in the United States. This may result in a self-indulgent treadmill, because incomes in the United States rise over most of the adult lifespan.

“If income effects are entirely relative, then continued income growth in rich countries today is irrelevant to how happy people are on the whole,” says Firebaugh. “Rather than promoting overall happiness, continued income growth could promote an ongoing consumption race where individuals consume more and more just to maintain a constant level of happiness.”

Firebaugh tested what he refers to as the hedonic treadmill hypothesis, which uses a comparison of age-based cohorts. The hedonic treadmill requires a specific type of relative income effect–one where “keeping up with the Joneses” means continually increasing one’s own income, because we can be sure that the Joneses are increasing theirs.

The researchers’ measured the age, total family income, and general happiness of 20- to 64-year-olds using analysis from the 1972-2002 General Social Survey. They controlled for health, education, effects of getting older, race, and marital status. Happiness was measured using a self-report response of “very happy,” “pretty happy,” or “not too happy.”

While income is important in determining happiness, Firebaugh’s data found that physical health was the best single predictor of happiness, followed by income, education, and marital status. The researchers found a relative income effect–the richer you are relative to your age peers, the happier you will tend to be.

“We find with and without controls for age, physical health, education, and other correlates of happiness,” said Firebaugh, “that the higher the income of others in one’s age group, the lower one’s happiness. Families whose income earners are in jobs with flat income trajectories are likely to become less happy over time. Thus the relative income effect observed here implies adverse effects for some individuals over the working years of their life cycles.”