Money Can Buy You Happiness - Relatively

To be rolling in money makes you
happy - but only if others have less

The research of sociological researcher Glenn Firebaugh, Pennsylvania State University, and graduate student Laura Tach, Harvard University, 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).

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. "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."; Source: American Sociological Association