A major challenge in the research on happiness is estimating the effects of income. In part this is because people seem to evaluate money in ways that are not always consistent with economists—assumptions about rationality. We rely on the permanent income hypothesis (PIH)—which asserts that individuals have some sense of their future income and choose a level of consumption that reflects both current and future income—to explore the link between income and happiness. Using panel data from Russia, we estimate the effects of both average (proxy for permanent) income for the period and deviations from that average on happiness. We find that average income has a larger effect on happiness than does transitory income, which is broadly consistent with the PIH perspective. In addition, though, respondents evaluated the effects of transitory losses and gains differently. For those who had income gains, the greater the gain, the larger the effects on happiness. For those who suffered, losses, the amount of the loss had no additional negative effects on happiness in addition to the effect of losing per se. Our results are suggestive, but data which covers a longer period of time is necessary for a fuller exploration.
The Effects of Income Losses and Gains on Happiness: Do Temporary Trends Matter?
A major objective of the recent flurry of studies by economists of happiness or subjective well being is to develop a more accurate or at least more comprehensive “social welfare function” – a function that assesses the costs and benefits to society of various policy options. Lacking the ability to measure or compare levels of well-being across people, economists have used various proxies for happiness, the most common one being consumption. More recently, though, the availability of survey data including information on well-being has increased, as has the willingness of many economists to utilize data based on subjective questions – recognizing that a large margin of error must be accounted for. An increasing number of papers in economics replace happiness proxies with data on happiness itself, and thus attempt to get a clearer picture of policy tradeoffs in terms of the reported well-being of individuals.