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Happiness, income and status

June 10th, 2007

Lots of people (including Kevin Drum, Brad DeLong and Tyler Cowen have jumped in on this post by Will Wilkinson about this NBER study of habituation to changes in income and status. Wilkinson and most commentators focus on the findings regarding the subgroups on the right and left of the political spectrum, which I’ll come to, but it’s worth mentioning the general findings first.

Most people (in the German sample population) initially react more, as regards self-reported happiness, to a change in income than to a change in occupational status, but gradually get habituated to changes in income. This is consistent with the standard view of the happiness literature, that income changes don’t have a big effect on happiness, so that people in rich countries aren’t on average much happier than those in poor countries. Moreover, by looking at the same people over relatively short periods of time the analysis overcomes, to a significant extent, the objection I’ve made previously, that the scale on which happiness is measured is inherently relative to some notion of what is reasonable to expect.

The point picked up by Wilkinson and others is that, while those on the left of the political spectrum follow the general pattern (as do employees, taken as a group) those on the right (and the self-employed) habituate to changes in occupational status, but not to changes in money income. This seems to correlate pretty well with the fact that people on the left tend to worry about relative notions like inequality, authority relations and so forth, while people on the right dismiss these concerns and favour policies that create opportunities for making money. As quite a few commentators point out, the direction of causation is unclear here.

Rather than duplicate all the excellent discussion, I’ll offer the possibility that those on the right may not be so different from the rest of us as they seem at first sight. Money is valued because it provides access to goods and services, but it can also be used to keep score in a competition. It doesn’t seem likely, for example, that the late Kerry Packer’s lifestyle would have been much different if he had been say, Australia’s tenth-richest man instead of the richest, but it’s hard to believe that this shift would have been a matter of indifference to him. On the other hand, in this kind of competition, the way in which the money is made (occupational status) may be of secondary importance.

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  1. Don Arthur
    June 10th, 2007 at 21:54 | #1

    “Money is valued because it provides access to goods and services, but it can also be used to keep score in a competition.”

    That’s an interesting point. The study’s status measure relied on occupational titles. But occupation alone is a crude measure of how highly regarded a person is by others.

    I wonder if the measure is less revealing when it’s applied to groups like the self employed?

  2. Andrew Norton
    June 11th, 2007 at 08:32 | #2

    A point made by Wilkinson (and many others) is that there are multiple status systems, which form more-or-less spontaneously in most groups. We now have rankings of bloggers, a form of status that would have been impossible a decade ago. Most of this is invisible to social science, which puts its emphasis on the things it can measure easily rather than the things that are necessarily most important.

    Money is interesting here, because it is easier for social scientists to measure than for ordinary people. I know the occupations of lots of people but the income of very few – to the extent that I am interested I would estimate through my impression of how much a person in that occupation would earn, not by asking (which can be rude).

    The relative income studies assume that we know a lot about the income of those around us, but apart from those like the Packers who make it to the rich 200 list in general we do not. At best we can infer from visible consumption.

  3. Ken Lovell
    June 11th, 2007 at 11:05 | #3

    ‘At best we can infer from visible consumption.’

    People do plenty of inferring though, otherwise a lot of car maufacturers and fashion houses would be out of business.

  4. Jill Rush
    June 11th, 2007 at 12:20 | #4

    Anthropology has analysed this subject and has a number of studies to support this view. A range of societies show that poverty is relative to society. Therefore the wealthy person who has status in one society will be similar to the wealthry person in another society even if the first is only as wealthy as the poorest person in the second society.

    The important point is relativity in relation to power rather than actual wealth. Right and left may not be the salient point but the status in the society probably is.

  5. June 11th, 2007 at 16:00 | #5

    Essentially, then the problem comes down to the old one – “the poor will always be with us”. No matter how egalitarian you make a society in terms of actual economic outcome, there has always been a status ranking within the society once it gets above a certain size – and often that size is one person. If this is correct, the leftist tendency (as discussed above) to focus on status is a pointless waste of time. Achieving an improved economic outcome is the only thing that can be done. Accepting disparity of status then becomes akin to accepting that the Earth rotates around the sun.
    The trick (IMHO) is to try to achieve some equality of opportunity and let the normal processes in society sort out the rest, based on the achievements, needs and desires of each individual.

  6. Jill Rush
    June 12th, 2007 at 22:16 | #6

    Status is important. The thing is that income and status often go hand in hand as the person with income buys others. The poorest people in India and also the people with the least status are the unseeables closely followed by the untouchables.

    The worst thing about the last 11 years are the systems that have been introduced which are developing a servant/master society. Those born to rule are guided and helped to private schools.Then they can buy a meal ticket at university. Add Workchoices into this and the increasing disparity in wealth and Australia is a less egalitarian society with beggars, substance abuse and abandoned babies as a consequence.

  7. June 13th, 2007 at 23:10 | #7

    As you earn more you generally have to pay a higher proportion of your income in taxation. The higher marginal tax rates make normal people sad (a few perverse individuals feel estatic paying more tax but they are rare exceptions). When you add up the extra hapiness and the extra saddness you find that the saddness nearly cancels out the happiness and so as income rises you get diminishing returns in terms of happiness.

    Of course none of this can be proved unless we first reform the tax system.

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