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Estimating the Influence of Life Satisfaction and Positive Affect on Later Income Using Sibling Fixed-Effects

  • Jan-Emmanuel De Neve
  • Andrew J. Oswald

The question of whether there is a connection between income and psychological well-being is a long-studied issue across the social, psychological, and behavioral sciences. Much research has found that richer people tend to be happier. However, relatively little attention has been paid to whether happier individuals perform better financially in the first place. This possibility of reverse causality is arguably understudied. Using data from a large US representative panel we show that adolescents and young adults who report higher life satisfaction or positive affect grow up to earn significantly higher levels of income later in life. We focus on earnings approximately one decade after the person’s well-being is measured; we exploit the availability of sibling clusters to introduce family fixed-effects; we account for the human capacity to imagine later socio-economic outcomes and to anticipate the resulting feelings in current wellbeing. The study’s results are robust to the inclusion of controls such as education, IQ, physical health, height, self-esteem, and later happiness. We consider how psychological well-being may influence income. Sobel-Goodman mediation tests reveal direct and indirect effects that carry the influence from happiness to income. Significant mediating pathways include a higher probability of obtaining a college degree, getting hired and promoted, having higher degrees of optimism and extraversion, and less neuroticism.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4008.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4008
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  1. Richard Layard & Guy Mayraz & Stephen J Nickell, 2007. "The marginal utility of income," LSE Research Online Documents on Economics 19745, London School of Economics and Political Science, LSE Library.
  2. Graham, Carol & Eggers, Andrew & Sukhtankar, Sandip, 2004. "Does happiness pay?: An exploration based on panel data from Russia," Journal of Economic Behavior & Organization, Elsevier, vol. 55(3), pages 319-342, November.
  3. Andrew E. Clark and Andrew J. Oswald, . "Satisfaction and Comparison Income," Economics Discussion Papers 419, University of Essex, Department of Economics.
  4. Glen R. Waddell, 2006. "Labor-Market Consequences of Poor Attitude and Low Self-Esteem in Youth," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 69-97, January.
  5. Gardner, Jonathan & Oswald, Andrew J., 2006. "Money and Mental Wellbeing : A Longitudinal Study of Medium-Sized Lottery Wins," The Warwick Economics Research Paper Series (TWERPS) 754, University of Warwick, Department of Economics.
  6. Cahit Guven, 2009. "Reversing the Question: Does Happiness Affect Consumption and Savings Behavior?," SOEPpapers on Multidisciplinary Panel Data Research 219, DIW Berlin, The German Socio-Economic Panel (SOEP).
  7. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
  8. Oswald, Andrew & Proto, Eugenio & Sgroi, Daniel, 2013. "Happiness and Productivity," CAGE Online Working Paper Series 108, Competitive Advantage in the Global Economy (CAGE).
  9. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series rwp04-029, Harvard University, John F. Kennedy School of Government.
  10. Ed Diener & Carol Nickerson & Richard Lucas & Ed Sandvik, 2002. "Dispositional Affect and Job Outcomes," Social Indicators Research, Springer, vol. 59(3), pages 229-259, September.
  11. Sonja Lyubomirsky & Chris Tkach & M. DiMatteo, 2006. "What are the Differences between Happiness and Self-Esteem," Social Indicators Research, Springer, vol. 78(3), pages 363-404, 09.
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