The Economics of Happiness

Peter Howley
Professor of Economics of Wellbeing

Studying what makes people happy has become a hot topic in economics in recent times. This stems from a dissatisfaction with the traditional approach to the study of human welfare, which is mainly concerned with indicators of material wellbeing. While material indicators of success such as absolute income, or overall earnings, matter for our happiness, they matter less than people generally think. One of the reasons for this is that we adapt quite quickly to any positive changes and establish a new norm.

What matters most?

What appears to matter more than absolute income, once certain basic requirements are met, is ‘relative income’. This means that we are prone to making comparisons with our colleagues and neighbours which highlight the role income equality plays in influencing our overall wellbeing. This is one explanation for what has become known as the Easterlin paradox, namely that average happiness has remained constant over time despite sharp rises in income per head. These findings also suggest that economic growth should not be the primary goal of economic policy, particularly if it deepens income inequality.

In addition to income, the benefits of employment have also been the focus for economists. Unsurprisingly unemployment is detrimental to happiness but what is interesting to observe is that the non-monetary aspects seem to matter far more than monetary ones. These effects can relate to stigmatisation in that individuals may experience social exclusion or simply feelings of guilt and shame from not working.

There is much evidence to suggest that happiness is beneficial for health and longevity. The reverse is also true in that people who experience disability often experience sharp drops in happiness. Happiness research has also pointed to the importance of social relationships. While the effects will vary from person to person, happiness depends greatly on both the quantity and quality of social relationships that people have with friends and family. These social ties are commonly referred to as social capital. Some researchers have posited that changes in the quality of social capital over time is one further reason why average happiness within countries has remained relatively stagnant, despite significant increases in economic capital.

New developments

Some of the most exciting developments in this field relate to research which demonstrates the importance of diet and public goods for our happiness and more generally mental wellbeing. As nations become richer, environmental features such as green space and air quality often come under increasing threat. With more tangible outcomes such as health, labour productivity and even cognitive performance, the benefits of environmental amenities such as access to green space and clean air have long been established.

More recently however, researchers in this field have demonstrated the importance of environmental amenities not just for our physical health but also for our mental wellbeing.

Political attitudes and behaviour

Tracking changes in people’s self-reported wellbeing can also help us better understand and predict political outcomes. There is a vast body of empirical literature to suggest that governments are much more likely to be re-elected when the economy is doing well. Over and above this there is increasing evidence that suggests the happier you are the more likely you are to vote for parties already in power.

Similarly, some recent research by my colleagues and I suggests that self-reported wellbeing data may help us better understand voting behaviour in the UK referendum on EU membership (Brexit). The desire to ‘take back control’ over immigration policy was one of the main reasons put forward to explain voting patterns. In our work, we find that the socio-demographic groups most likely to vote ‘leave’ were also the groups most likely to feel adversely affected in self-reported wellbeing terms by immigration. It is important to note, however, that there is a rich empirical literature which suggests that immigration is positively associated with economic wellbeing. At the same time immigration could lead to a reduction in the happiness of certain individuals based on a belief that immigration is harmful, irrespective of whether this is true or not.

The happy peasant and unhappy millionaire

There is much to be gained from making subjective indicators of wellbeing, such as happiness, as opposed to income and economic growth, the focus for government intervention. But we must be mindful of certain limitations. Workers, for instance, can often express happiness with their job even where job quality is poor. This is because we can adapt, at least partially, to unfavorable conditions. Relative position and expectations also matter a great deal for how we feel about the quality of our lives. Is it reasonable to compare the happiness of someone working for low pay with little job security who reports to be happy because they have developed strategies to cope, to a wealthy manager who reports to be unhappy due to his or her relative rankings? This has been commonly referred to as the happy peasant and unhappy millionaire paradox.

This is not to say that happiness as a driver for public policy isn’t important. Rather, a complete picture of societal wellbeing can only be achieved through the consideration of both objective and subjective indicators. Fortunately, there are many recent positive developments such as the National Wellbeing Programme when it comes to the integration of happiness and other subjective indicators of wellbeing into public policy. The Office for National Statistics (ONS) has, since 2011, started to measure various subjective wellbeing indicators which will allow the UK government and other actors to study the evolution of happiness over time.

There is, however, still much to do to bring happiness research to the fore in policymaking circles and even to permeate the public consciousness. We see so much debate between political groups as to the merits of various proposed strategies for enhancing traditional measures of economic success. Comparatively little debate relating to how best we can foster overall societal wellbeing and happiness. The two do not always go hand in hand.

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Further reading on the Economics of Happiness