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Money Doesn't Buy Happiness … or Does It? A Reconsideration Based on the Combined Effects of Wealth, Income and Consumption

  • Bruce Headey

    ()

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Ruud Muffels

    ()

    (Tilburg University)

  • Mark Wooden

    ()

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

The accepted view among psychologists and economists alike is that economic well-being has a statistically significant but only weak effect on happiness/subjective well-being (SWB). This view is based almost entirely on weak relationships between household income and SWB. But income is clearly an imperfect measure of economic well-being. Also needed are measures of wealth (net worth) and consumption. Wealth provides economic security as well as income, and consumption expenditure is the most valid measure of current living standards. The paper uses household economic panel data from five countries - Australia, Britain, Germany, Hungary and the Netherlands - to provide a reconsideration of the impact of economic well-being on happiness. The main conclusion is that happiness is considerably more affected by economic circumstances than previously believed. In all five countries wealth affects life satisfaction more than income. In the countries for which consumption data are available (Britain and Hungary), non-durable consumption expenditures also prove at least as important to happiness as income. In the latter part of the paper, we undertake longitudinal analyses of the effects of changes in economic well-being on changes in satisfaction levels. The aim is to reassess psychological adaptation theory, which has been invoked to explain very weak and even non-significant relationships between change measures. Results from panel regression fixed effects models indicate that changes in wealth, income and consumption all produce significant, though not large, changes in satisfaction levels.

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Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2004n15.

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Length: 31 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:iae:iaewps:wp2004n15
Contact details of provider: Postal: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia
Phone: +61 3 8344 2100
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Web page: http://www.melbourneinstitute.com/
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  1. Bruno S. Frey & Alois Stutzer, . "What can Economists Learn from Happiness Research?," IEW - Working Papers 080, Institute for Empirical Research in Economics - University of Zurich.
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  9. Arie Kapteyn & Peter Kooreman & Rob Willemse, 1988. "Some Methodological Issues in the Implementation of Subjective Poverty Definitions," Journal of Human Resources, University of Wisconsin Press, vol. 23(2), pages 222-242.
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  13. Boozer, Michael A., 1997. "Econometric Analysis of Panel Data Badi H. Baltagi Wiley, 1995," Econometric Theory, Cambridge University Press, vol. 13(05), pages 747-754, October.
  14. van Praag, Bernard M S & Hagenaars, Aldi J M & van Weeren, Hans, 1982. "Poverty in Europe," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 28(3), pages 345-59, September.
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  16. Paul Frijters & John P. Haisken-DeNew & Michael A. Shields, 2004. "Money Does Matter! Evidence from Increasing Real Income and Life Satisfaction in East Germany Following Reunification," American Economic Review, American Economic Association, vol. 94(3), pages 730-740, June.
  17. Hollander, Heinz, 2001. "On the validity of utility statements: standard theory versus Duesenberry's," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 227-249, July.
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