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

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  • Easterlin, Richard A.

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.

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  • Easterlin, Richard A., 2023. "Why does happiness respond differently to an increase vs. decrease in income?," Journal of Economic Behavior & Organization, Elsevier, vol. 209(C), pages 200-204.
  • Handle: RePEc:eee:jeborg:v:209:y:2023:i:c:p:200-204
    DOI: 10.1016/j.jebo.2023.03.005
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    More about this item

    Keywords

    Happiness; Life satisfaction; Subjective well-being; Social comparison; Hedonic adaptation; Financial hardship; Economic growth; GDP; Income; Easterlin Paradox; Recession;
    All these keywords.

    JEL classification:

    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • D60 - Microeconomics - - Welfare Economics - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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