Richard Easterlin, an economist at the University of Southern California, was one of the first to explore the relationship between geography and happiness, focusing his research on two main questions:
- Are the richest people/countries the happiest?
- Do the people/countries who see their salary/revenue grow over time become happier over time?
If the answer to the first question is yes, then the answer to the second question should also be yes.
Easterlin did find a positive correlation between GDP and life satisfaction, but of course, correlation does not imply causation, and there could be reverse causation or some third unknown variable driving both GDP and life satisfaction. As is often the case with econometric analysis, a natural experiment that arose due to changes in the economic environment was used as a proxy for a randomised trial. Easterlin focused on Japan, which underwent a profound transformation in the second half of the 20th century. Despite starting off the 1940s as a relatively poor nation, from 1940 to 1970, Japan faced an annual GDP growth rate in excess of 10%, and by 1966, they had the second-largest economy in the world. If increases in wealth cause increases in happiness, the happiness of the Japanese population should have skyrocketed over this period. Instead, happiness levels stagnated while GDP exploded.
What do these results imply? Richer countries have better infrastructure, health care, and education opportunities, so wealthier countries offer more support and more stability. However, if a country experiences economic growth, and everyone’s incomes grow together, each individual perceives no relative increase in their income, and thus experiences no resulting increase in happiness. These findings lead to the so-called Easterlin Paradox: “at a point in time happiness varies directly with income both among and within nations, but over time happiness does not trend upward as income continues to grow.” This would imply that happiness is relative: dependant not only on an individual’s income, but the difference between their income and that of those around them.
While this would, in theory, explain the Easterlin Paradox, empirical evidence has improved elusive and inconclusive. Two recent events can, however, offer some insight: the Dutch Postcode Lottery and the Sacramento Bee.
Every week the Dutch Postcode Lottery chooses a zip code, and the residents of the neighbourhood draw who participated in the lottery receive 12,500 EUR and a BMW, and those who didn’t participate receive nothing. The winners are, on average, happier than the rest of their neighbours, but perhaps more revealing is the fact that the residents of the winning zip code who did not participate in the lottery, are significantly more likely to buy a car in the six months following the drawing.
In 2008, the newspaper The Sacramento Bee created a website allowing the employees of the University of California to look up the salaries of their colleagues. Those who discovered they earned less on average than their colleagues reported a lower level of satisfaction and a desire to quit their jobs. Interestingly, those who discovered they made more on average than their colleagues reported no change in their level of satisfaction. There are two possible explanations: people rely on social comparisons to determine their own happiness, and/or people adapt quickly to changes in salary and subsequently adjust their expectations and goals.
These events, however, may have more to say about the human psychology than about economic behaviour and its relationship with happiness. In fact, studies typically show that happiness rises with the log of income; as income grows, subsequent marginal increases in happiness due to increases in income decrease. Furthermore, working, a prerequisite to earning an income, makes people less happy and most people don’t consider the time spent at work as a source of satisfaction. Furthermore, in high unemployment areas, life-satisfaction is lower even for the employed, as they may increase higher stress due to fear of losing their job. Perhaps the most revealing, is the extremely low impact of income on life-satisfaction for those between the ages of 34 and 42.
The behaviour of economic agents working to maximise their happiness, then, does not fully coincide with the behaviour of those working to maximise their wages.
The graph shows that the most influential determinant of life-satisfaction is emotional health. In fact, “even after controlling for poverty, unemployment, or separation, mental health remains the major cause of unhappiness.” The United States of America is one of the most economically advanced countries in the world, as measured both by GDP and HDI, and yet, 22% of its total population is diagnosed with a mental illness. Furthermore, while the US has grown richer over the last 40 years, the happiness of Americans has not increased, and the rate of depression has increased by 18% between 2005 and 2015. By curing mental illness, a third of the total class of Americans who identify as “in misery” would disappear. This points towards a new goal for public policy: raising happiness. Happier people are more productive, exhibit less risky behaviour (like being more likely on average to wear a seatbelt), and live longer and in better health.
Increasing happiness is not only economically beneficent, but also more efficient: it is almost 20 times cheaper to treat people for mental health than to raise them above the poverty line.