Why does happiness respond differently to an increase vs. decrease in income?

Richard Easterlin

Journal of Economic Behavior & Organization, 2023, vol. 209, issue C, 200-204

Abstract: The answer is that people's evaluations of their income situation are based on different considerations when the economy is expanding and when it is contracting. When, in the course of economic growth, incomes generally are rising, evaluations of one's own income—whether it is satisfactory –tend to be dominated by comparisons with the incomes of others—by “social comparison”. If one's income is just “keeping up with the Joneses”, happiness is unchanged. But in a recession, as incomes decline and people increasingly have difficulty satisfying consumption habits and fixed financial obligations acquired when incomes were higher, the benchmark for income evaluations shifts to comparisons with one's past experience– how current income compares with one's previous peak income. The greater the shortfall, the less one's happiness. The shift when income declines, from comparison with others to comparison with one's past experience, is typically forced on individuals by the growing pressure of meeting fixed financial obligations.

Keywords: Happiness; Life satisfaction; Subjective well-being; Social comparison; Hedonic adaptation; Financial hardship; Economic growth; GDP; Income; Easterlin Paradox; Recession (search for similar items in EconPapers)
JEL-codes: D60 I31 O10 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:209:y:2023:i:c:p:200-204

DOI: 10.1016/j.jebo.2023.03.005

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