Understanding the Role of Income in Personal Happiness: A Comprehensive PSM Analysis in the United States (Article)

This study examines the relationship between income and individual happiness in the United States using propensity score matching (PSM) analysis. Results reveal that income has a significant impact on individual happiness, with higher income levels associated with increased happiness. The research uses the General Social Survey (GSS) 2022, which marks the beginning of a shift to a mixed-mode survey, incorporating the delivery of both face-to-face and online questions. Employing the general principle of core hypotheses, the analysis aims to understand the causal relationship between income and happiness. The results suggest that improving income could be an effective strategy for increasing individuals’ levels of happiness. The study underlines the importance of considering income as a factor that promotes individual well-being and happiness.

1.  INTRODUCTION

Happiness, a key aspect of individual well-being, has been widely studied in the US context, particularly in relation to income. Notable research has associated higher income with a reduction in daily sadness, as demonstrated by the results of Stevenson and Wolfers (2008). However, the impact on daily happiness appears to be negligible, suggesting that while increased income may alleviate some emotional distress, it may not contribute significantly to overall happiness.

Furthermore, research has shown a significant link between income and suicide rates, with lower rates observed among people who do not pay income tax compared to their tax-paying counterparts (Deaton & Stone, 2014). This raises interesting questions about the psychological implications of tax obligations and the potential role of financial burdens in influencing mental wellbeing. Nevertheless, the influence of income on overall happiness shows a diminishing effect, particularly above a baseline threshold (Easterlin, 2005). This means that the pursuit of additional income may not significantly improve the overall sense of happiness or life satisfaction once basic needs are met. Furthermore, the impact of external conditions, such as income, on happiness is relatively small compared to the influence of individual thoughts and behaviours (Lyubomirsky et al., 2005). With these considerations in mind, this article explores the relationship between income and individual happiness in the United States, using data from the General Social Survey (GSS) 2022. To assess this impact, the study adopts an econometric modeling approach, employing, in particular, the exact matching method. This method was chosen to create a balanced control group, facilitating a fair comparison between individuals with different levels of happiness while taking into account potential selection bias.

The rationale for using this methodology is rooted in seminal work on propensity score matching, in particular the studies of Rosenbaum & Rubin (1983). The article highlights the relevance of this approach in answering a crucial question: how do individuals’ happiness levels differ according to their income levels? The aim of adopting this method is to ensure a rigorous comparison, to control for selection bias, and to provide information on the nuanced relationship between income and happiness.

This article is structured to provide an in-depth analysis of the relationship between income and happiness. Section 2 presents a comprehensive review of the existing literature, highlighting previous research on the topic. Section 3 then presents the data used for this study, together with stylised facts about income and happiness. Section 4 describes the methodology used for this analysis, including the choice of matching method. Section 5 focuses on the balance check after matching, which ensures the validity of the comparison between the two groups. Section 6 presents and discusses the study’s findings in detail. Finally, the article concludes with Section 7, which summarises the main findings of the study, suggests avenues for future research, and offers recommendations for public policy and interventions aimed at improving individual well-being.

2.  LITERATURE REVIEW

In the United States, a higher income is associated with a decrease in daily sadness but has no impact on daily happiness (Stevenson & Wolfers, 2008). The initial observation suggests that in the United States, a higher income is linked to a decrease in daily sadness (Stevenson & Wolfers, 2008). This association could be attributed to the alleviation of financial stressors and the increased ability to meet one’s basic needs, which contributes to a more stable emotional state. Similarly, Clark et al. (2017) provided evidence from survey data in the US, Australia, Great Britain, and Indonesia. They found that social relationships and mental and physical health are key determinants of happiness. These adult factors affecting happiness are in turn influenced by the child’s developmental pattern; the best predictor of an adult’s life satisfaction is their emotional health as a child.

In another line of research, Paul (2022) examined the effects of happiness on income and income inequality. Using data from an Australian HILDA survey (2001–2014), Paul (2022) hypothesised that happiness impacts individuals’ ability to generate income, both directly by boosting work efficiency and indirectly by affecting their time allocation for paid work. Its findings demonstrate that happiness has a positive and significant effect on income generation and helps to reduce inequality. However, for another panel, FitzRoy and Nolan (2022) used a large sample of data from the British Household Panel Survey and Understanding Society, covering the period from 1996 to 2017. They applied regression techniques to examine the relative importance of income rank, relative income, and household income as predictors of happiness and life satisfaction. Their results show that all three factors are important, but their importance varies between different sub-groups. This in-depth analysis has led to a better understanding of the factors that influence happiness and life satisfaction. Similarly, D’Ambrosio et al. (2020) added a further perspective by examining the relationship between money and happiness. They found that permanent income and wealth are better predictors of life satisfaction than current income and wealth. Moreover, they found that the impacts of these factors vary along the distribution of well-being.

Easterlin (2023) studied how people assess their income situation in relation to the state of the economy. He found that when the economy is expanding and incomes are generally rising, people tend to assess their own income by comparing it with that of others, a phenomenon he calls ‘social comparison’. However, during a recession, when incomes fall, people tend to evaluate their income by comparing it with their previous maximum income. Easterlin (2023) also discovered an asymmetry in the way happiness responds to changes in income. When income rises, changes in income have, on average, no effect on happiness. However, when income falls below its previous peak, happiness decreases and increases with it. These results suggest that the way in which people evaluate their income, and therefore their happiness, depends on the state of the economy. Their findings suggest that the way people evaluate their income, and therefore their happiness, depends on the state of the economy. However, it’s crucial to note that the correlation with daily happiness appears to be non-existent. 

Research shows that individuals have lower suicide rates or are “happy” when they do not pay income taxes compared to those who do (Deaton & Stone, 2014). The passage highlights a notable finding that individuals who do not pay income taxes exhibit lower suicide rates or report being “happy” compared to those who pay taxation (Deaton & Stone, 2014). This raises intriguing questions about the psychological and emotional implications of tax obligations. The financial burden associated with income taxes may play a role in individuals’ mental well-being. 

However, the impact of income on overall happiness is relatively weak, especially when income surpasses a basic minimum (Easterlin, 2005). Despite the positive correlation between higher income and reduced daily sadness, the passage suggests that the impact of income on overall happiness is relatively weak, particularly when income exceeds a basic minimum (Easterlin, 2005). This aligns with research indicating that, beyond a certain threshold, the pursuit of additional income may not significantly contribute to an individual’s overall sense of happiness or life satisfaction. In this context, Munir and Nazuk (2019) used a binary logistic regression framework to model the happiness index when converted to a dichotomous level. They collected primary data from various Pakistani regions (rural and urban) through a survey with a sample size of 763. Their results showed a positive and significant relationship for the big five traits (extraversion and neuroticism), confidence in the armed forces, life satisfaction, and age.

External conditions such as income have a relatively weak impact on happiness compared to thoughts and behaviours (Lyubomirsky et al., 2005). The passage underscores the idea that external conditions, such as income, have a relatively weak impact on happiness compared to thoughts and behaviours (Lyubomirsky et al., 2005). This aligns with psychological theories that emphasise the importance of individual mindset, coping mechanisms, and behavioural choices in influencing overall well-being. It implies that personal agency and internal factors play a crucial role in determining happiness. 

Income comparisons may challenge the law of diminishing marginal utility, which states that a higher income’s marginal utility can increase with others’ income, leading to a rat race or an arms race (Clark et al. 2008). This law suggests that as income increases, the additional satisfaction or happiness derived from each additional unit of income decreases. Income comparisons, however, may disrupt this principle by introducing relative considerations, potentially leading to a competitive pursuit of a higher income in comparison to others. 

Other studies have attempted to explain individuals’ happiness through additional sociodemographic characteristics, such as age (Diener & al., 1999; Blanchflower & Oswald, 2004) and gender (Louis & Zhao, 2002). For instance, research focusing on the relationship between age and subjective well-being suggests a convex “U” curve, corresponding to higher levels of individual happiness for both the youngest and oldest individuals, with lower subjective well-being observed in the middle age group (between 32 and 50 years) (e.g., Blanchflower & Oswald, 2004; Ferrer-i-Carbonell & Gowdy, 2007). Overall, while a higher income can alleviate sadness and reduce suicide rates, its impact on overall happiness is limited, and other factors such as personal relationships and positive behaviours play a more significant role in determining happiness.

The research exploring the relationship between income and happiness in the United States reveals intricate dynamics with various factors at play. Hutchinson’s et al. (2017) findings add a distinctive perspective, indicating that individuals who are exempt from paying income taxes tend to report higher levels of happiness. This observation raises questions about a potential link between the burden of taxation and individual happiness. In a similar vein, Liao (2021) and Dynan (2007) delve into the impact of social comparison on the income-happiness relationship. Liao specifically highlights the role of income inequality in influencing happiness, emphasising how disparities among individuals can affect their well-being. On the other hand, Dynan proposes that an individual’s happiness is shaped by how their socio-economic standing compares to others in society. This underscores the significance of relative income in determining subjective well-being.

Oishi’s (2011) contribution adds another layer to this discussion by highlighting the detrimental effects of income inequality on happiness, especially among individuals with lower incomes. Income disparities cause perceived unfairness and a lack of trust, which contributes to lower happiness levels. Together, these studies collectively underscore the multifaceted nature of the income-happiness relationship in the United States, emphasising the roles of income itself, the burden of taxation, and social comparison in shaping individual well-being. For China, Ye et al. (2023) estimated the causal effect of income on happiness using a unique dataset of Chinese twins. Their results show that individual income has a significant positive effect on happiness, with a doubling of income resulting in a 0.26 scale or 0.37 standard deviation increase in the four-scale happiness measure. Their results underline the importance of accounting for various biases when studying the relationship between socio-economic status and subjective well-being. An inverse line between income and happiness was studied by MA and MA (2021), who examined the influence of income on the subjective happiness of teachers in Chinese private universities. They established a model for measuring teachers’ subjective happiness, taking into account the specific characteristics of Chinese private universities. Using the structural equation model to analyse data collected from teachers at private universities in China, they found that income has a significant positive impact on teachers’ subjective happiness, in particular through the level of consumption and housing conditions.

Behera et al. (2024) examined the socio-economic factors that contribute to happiness in 166 developed and developing countries (51 developed, 115 developing). They used robust, two-factor fixed effects and panel-quantile regression for the empirical analysis. Their results show that per capita income, social support, and the freedom to make life choices have a positive impact on happiness, while exposure to air pollution has a negative impact. On the other hand, Kundu et al. (2024) examined the relationship between democracy, macroeconomic variables, and happiness in 83 countries (low- and high-income countries) from 2010 to 2016. They used a variety of panel data analyses, including the threshold panel model. Their results show that, although GDP per capita has no direct impact on happiness, it does establish the role of other variables in determining happiness. In higher-income countries, democratic quality and inflation have a significant impact on happiness. Furthermore, in low-income countries, inequality and government spending on health per capita have a negative and positive impact, respectively.