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Research & Real-Life Social Experiment | What is the optimal income for happiness?

According to  Jasper Bergink, money seems to be the central topic for happiness researchers worldwide. Only last week I wondered how money affects me. This week, coverage from various international newspapers on a great new real-life experiment left me no choice but to discuss it again.

balnnNew York Times reported that after reading a research paper on wellbeing, Seattle CEO Dan Price decided to drastically redistribute salaries within his Gravity Payments company, raising the minimum to $70,000. He is paying for the increase by dropping his own salary from $1 million to $70,000, and by redirecting some of the company’s profits into the pay packet.

He made his decision after reading an academic article by Daniel Kahnemann and Angus Deaton.

The paper he read had two important findings: firstly, that low incomes are harmful to wellbeing, and secondly that the benefit of additional income seems to tail off for those making more than about $75,000 (roughly £50,000). This study is backed up by different datasets,within a Gallup poll and from different countries. As they acknowledge their study does not settle the eternal question whether money buys happiness. Indeed, an enormous number of studies has been dedicated to the topic, and findings are inconclusive.

According to Annie Quick in a new economic foundations post just as redistributing income is likely to improve wellbeing, a host of evidence suggests that higher staff wellbeing is in turn also associated with higher productivity and job performance. Price is also contributing to wider social changes which he and his business should benefit from. Improved wellbeing is associated with increased life expectancy, and more economically equal societies have been shown to have better health, higher social mobility, and less crime. A more equal distribution of incomes also contributes to a more stable economy – an outcome which is surely good for Price’s business as well as society as a whole. In particular, his decision to redirect profits towards wages may help avoid increasing financialisation, as those incomes are more likely to be spent in the productive economy, rather than invested in speculative assets which could lead to another financial crisis.

What is the optimal income for happiness?

How much happier are people with a large bank account than those who suffer through the last days of each month?

Scientists have done a lot of effort to investigate the relation between money and happiness.

The conventional wisdom in happiness economics states that, indeed, happiness levels rise with income, to a certain point. After this point, the impact on happiness of an additional euro, pound are dollar is virtually zero: more money does not mean more happiness.

But is it possible to exactly measure the cut-off point?

That is, can we measure what the ideal income is, generating the utmost unit of happiness?

How do Kahnemann and Deaton come to the figure of $75,000?

F1.mediumThey distill four indicators out of the Gallup data. Firstly, ‘positive affect’ measures how often people report happiness, enjoyment, and smiling and laughter; people were asked whether they experienced these (and other) emotions the day before their interview. Secondly, ‘not blue’ uses a similar technique, but regards the number of people who did not experience sadness and worry. Thirdly, ‘stress-free’ measures one question: whether the interview person experienced stress the day before. Finally, Kahnemann and Deaton extracted income data from the survey.

The table summarises the findings: all three factors increase when income increases. The factor ‘not blue’ shows the largest difference, indicating that sadness and worry are more strongly associated with lower incomes. But what the three characteristics have in common is that all of them at a certain point – at around $75,000 – increase only very marginally or even degree. An ideal point, possibly.

Eugenio Proto of Warwick University and Aldo Rustichini of the University of Minnesota claim to have the answer. Their  UK study based on figures for multiple countries from the World Value Survey, attests that life satisfactions reaches its maximum level at an income level of $30,000.

But Proto and Rustichini’s research reveals there is even more: after this point, people even become less happy. They  explain that this effect arises due to changes in what they label the ‘aspiration level’ of people with a below average income in rich countries.

When incomes rise, the gap between the have-lots and have-less become bigger. When surrounded by wealthier people, people have higher aspirations for their own life,  as the gap between reality and dreams increase, life satisfaction diminishes.

Their data set out the income level versus the likeliness of reporting the highest level of happiness. People in a country with an income per head of $5,600 are 12% less likely to report the maximum number than in a country with an income of $15,000. As incomes rise, the effect disappears. And after $30,000, the link even becomes negative.

Higher incomes aren’t necessarily a sign of progress. They might be caused by longer working hours, more overtime and less time for leisure, all factors that bring down happiness.

But maybe the real effect displayed by the study is the cost of inequality. Earlier studies have shown that it is not only the absolute figure of income that determines your happiness. It is also about your income relative to what you could make. If you make less than your friends, your colleagues, or than your did in a previous job, this might cause total misery.

 Jasper Bergink says: The moral of the story is simple: if countries care about our quality of life, they should seek to control income inequality.

A real-life social experiment

Dan Price’s  decision was not only a great and happy surprise for the half of his Gravity Payments staff who earned less than $70,000, but also is a very interesting social experiment.  In the New York Times article, people with a current salary in the $40,000s tell being concerned about rent increases and health bills. An increase should alleviate such worries, making an overall contribution to happiness. According to the article, the firm has 120 staff, with an average salary of $48.000. 70 staff see their salary increase; 30 people will have their salaries double. That also means that the differences between staff with different seniority and competences disappears.

How will this impact motivation?

According to  Jasper Bergink, there can be two possible directions. On the one hand, people may be less motivated to work harder. They are less incentivised to do so as they already have the guarantee of a raise.

On the other hand, the effects could be positive. Giving this raise is likely to increase overall well-being, and originates from the work environment, it would be expected to result in higher levels of happiness at work.

Jasper Bergink says: One of the main effects, I would expect, is that the unconditional raise could increase the trust of Price’s employees, which would be hoped to be repaid via a commitment to stay at the firm and perform well in exchange for this reward. That could lead, for instance, to better staff retention and strong self-motivation.

Happiness at work is associated with a range of positive outcomes at firm level, going from lower absenteeism, less sick leave, higher productivity, and overall job performance.

Annie Quick  concludes: For a long time, businesses have recognised the importance of wellbeing at work. For too long, however, this has been limited to employee engagement, gym membership, or a healthy eating policy. While these are important, Price’s decision highlights that taking wellbeing evidence seriously requires a major rethink.

“A Little Dose of Happiness” is ‘s newsletter of For A State of Happiness. (Visit the site to subscribe or Send an email to jasper -at- forastateofhappiness.com)

About Dr. Ev D'aMigo; PhD

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