Happiness- Income Puzzle: Understanding Easterlin Paradox


Delving into the tangled layers of happiness, the role of income emerges as a captivating element. However, the correlation between increased income and elevated happiness is not a straightforward ascent, as suggested by the Easterlin Paradox. Coined by Richard Easterlin in 1974, this paradox posits that, while happiness varies directly with income at a point in time, the long-term growth rates of happiness and income are not significantly linked. Social comparison dynamics play a pivotal role; initially, rising income brings happiness through comparisons, but as societal incomes elevate, the relative effect diminishes.

The Aspiration Level Theory suggests that increasing income prompts elevated aspirations, creating a cycle of diminishing satisfaction. Empirical studies in Australia between 2001-2005 showcased that while real income increased, happiness remained constant or slightly declined, emphasizing the impact of peer group income on happiness. However, the Easterlin paradox faces criticism for lacking statistically significant connections between happiness and economic growth over time.

Intriguingly, South Korea’s economic growth from 1980 to 2015 displayed a positive correlation between rising average happiness and real GDP per capita, challenging the paradox. This ongoing debate underscores the complexity of the happiness-income relationship, urging careful statistical analysis and a nuanced understanding of the intricate interplay between economic factors and well-being.

Vishleshan, Economics Department, Miranda House

Aadya Vidhatri

Preface

Have you ever pondered the intricate layers that compose the spectrum of happiness? Among these layers, the role of income stands out as a compelling aspect; Yet, as we ascend the ladder of income, does our happiness truly ascend proportionally? The answer, it appears, is both nuanced and multifaceted. While it is undeniable that an increase in income can alleviate financial stressors and provide access to better amenities, the correlation between elevated income and elevated happiness is not a linear trajectory.

Easterlin Paradox

This theory finds its cornerstone in the Easterlin paradox, ideated in 1974 by Richard Easterlin —a finding in happiness economics and consequently a part of neo-classical economics. 

Based on empirical evidence, the Easterlin Paradox states that at a point in time happiness varies directly with income, both among and within nations, but over time the long-term growth rates of happiness and income are not significantly related, that is a corresponding upsurge in overall happiness due to increase in income remains elusive. In other words, the direct linear progression that one might intuitively expect between increasing income and increasing happiness doesn’t conform to reality.

The crux of this paradox lies in the dynamics of social comparison. Initially, at a point in time, individuals with higher incomes experience a surge in happiness that is born from comparing their own financial standing to those who are less fortunate, leading to a perceptual enhancement of their well-being. Similarly, individuals with lower incomes also find contentment when contrasting themselves against those who are in financially worse-off circumstances.

However, over time, as the economy’s total output increases, incomes across the entire societal spectrum gradually rise. The incomes of the very comparison group that once provided the foundation for relative happiness also rise in tandem with general economic growth. This elevation of financial status within the comparison group leads to a reduction in the positive effect of happiness due to an increase in one’s own income. Hence, as a result, happiness on average remains unchanged—the nil time series relationship of the Paradox.

Theoretical explanations by the Aspiration Level Theory suggest that as income levels increase, so do individuals’ aspirations. Initially, increased income leads to increased satisfaction, but individuals adapt by elevating their aspirations. This gradual shift dampens satisfaction, creating a cycle of stagnation in overall well-being due to the persistent disparity between income and perceived sufficiency.

Between 2001-2005, real income in Australia increased, but happiness remained constant or slightly declined. Social comparison theory and adaptation theory were used to estimate happiness using HILDA survey data, showing that peer group income diminishes happiness. Increased income hurts the poor more than the rich, suggesting that redistribution of income may improve society’s overall well-being.

Nonetheless, the Easterlin paradox has not escaped criticism. Both a 2008 article published by the Brookings Institution and a subsequent 2012 study authored by economists Betsey Stevenson and Justin Wolfers emphasize that Easterlin failed to establish statistically significant connections between average happiness levels and economic growth over time. This raises the suspicion that Easterlin’s analysis incorporated data from non-comparable surveys rather than relying on more comparable ones, a factor pivotal to the paradox’s conclusions. Adding to the complexity, experts in Psychology and Sociology have unearthed statistical evidence that suggests a positive relationship between happiness and income across time.

Conclusion

As a result, the Easterlin paradox remains a highly debatable topic in the field of happiness economics. It necessitates careful statistical data analysis while avoiding the assumption that a statistically insignificant correlation is equivalent to zero. Even after many years of research, the happiness-income puzzle continues to be a conundrum that demands contemplation.

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