What does income inequality in America have to do with happiness? And more generally, what is the right way to think about the relationship between money and happiness? A recent study by Wharton’s Matthew Killingsworth offers some surprising answers.
The shape of the relationship between money and happiness is remarkably systematic. Killingsworth’s research, based on more than 1.7 million real-time reports from over 33,000 U.S. workers, challenges the notion that money stops adding to happiness beyond a certain point. From $10,000 per year to over $500,000 per year, average happiness rose perfectly linearly with the logarithm of income.
If this highly precise shape reveals the “price” of happiness in dollars, what are the implications for the rest of human life? It suggests that each extra dollar matters slightly less for happiness as incomes grow. For example, an extra $10,000 is predicted to have a much bigger impact on happiness for someone earning $25,000 a year than on someone making $200,000. Additional dollars have diminishing returns.
Yet, incomes increase fast enough in size to completely offset this. So for an individual, bigger incomes are associated with a steady and non-diminishing rise in happiness, even for the well-off. “From an individual perspective, there doesn’t appear to be any diminishment in the benefit of a larger income,” said Killingsworth. Moreover, a proportional change in income, like a 10% raise, is predicted to have the same benefit to happiness regardless of income level.
Closing the Income Inequality Gap Could Make Americans Happier
However, the study also reveals that to increase happiness across society, it’s more effective to raise the incomes of those earning the least. When dollar trade-offs are made between people with different incomes — as could occur in philanthropy, tax policy, or compensation decisions — the returns for total happiness are likely to be much larger when lower-income people benefit. The reason is that a given dollar matters exponentially more when you have fewer of them.
“The people who would benefit the least from additional dollars have gained the most, while the people who would benefit the most from additional dollars have gained almost nothing.”— Matthew Killingsworth
For instance, if a company spent the same amount of money to give bonuses or pay raises to people earning $40,000 per year instead of those earning $4,000,000 per year, the returns for happiness are predicted to be 100 times, or 10,000%, larger. Companies sometimes do the opposite, giving large bonuses to the highest paid workers. There may be good reasons for this practice, but from the standpoint of total happiness, it comes as a cost.
This finding suggests that policies aimed at raising the incomes of lower earners could do far more to improve overall happiness than simply giving bonuses to the wealthy or cutting taxes for the highest earners.
“When we have to make financial trade-offs between people, focusing on policies that help the poorest could create far more collective happiness than boosting the fortunes of those who are already well-off,” Killingsworth noted.
Why Income Inequality Persists in America
The study also highlights a key tension between individual and collective happiness, which could help explain why income inequality persists — not only in America but other countries as well. “If additional money brought diminishing happiness gains to the wealthy, we’d expect them to eventually stop chasing higher incomes,” Killingsworth said. Yet his study shows that even the wealthiest continue to find joy in earning more, which keeps the desire for higher earnings — and the cycle of inequality — alive.
This also sheds light on why happiness levels in the U.S. have stagnated in recent decades, despite economic growth. The richest individuals have benefited the most from rising incomes in recent decades, while lower earners have seen the slowest income growth, even in percentage terms.
“From the perspective of society’s happiness, the impact of economic growth in recent decades seems to have played out in exactly the wrong way. The people who would benefit the least from additional dollars have gained the most, while the people who would benefit the most from additional dollars have gained almost nothing,” he said.
In short, while evidence suggests that money can steadily increase individual happiness, making society happier as a whole may benefit from a more strategic approach, with a special emphasis on lifting up those who have the least.
