Money can buy happiness, but only to a point

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They say money can't buy happiness. Of course, they're wrong.

A substantial body of economic research says otherwise: Statistically speaking, household income is strongly related to both emotional well-being and a person's evaluation of their own quality of life.

Will getting a raise this season make you less nervous, stressed or sad? It depends on how much you're already making, according to a recent study from an economist at the Weatherhead School of Management at Case Western University.

Each dollar makes a big difference in reducing negative emotions for people in the 20th income percentile, but those returns fall off by the 80th income percentile and disappear at around $200,000, according to the study.

The paper looked at the level of negative emotion reported by participants in the Panel Study of Income Dynamics — a long-running longitudinal survey of thousands of Americans. People were asked how often they experienced negative feelings like nervousness, hopelessness or restlessness in the last 30 days (K9 scores).

Previous studies have found a correlation between money and happiness, but the Case Western study used the data on individuals over time to demonstrate that income can cause a reduction in negative emotions. It also found that an increase in income can reduce the incidence of serious mental illness (defined as a score of 10 or higher).

"We know from the results that changes in family income are important drivers of people's emotional lives," said David Clingingsmith, the author of the paper and an associate professor of economics at the Weatherhead School of Management. While it may also be true that having high anxiety or sadness could lead to lower income, the study shows that that's not the whole story, said Clingingsmith.

The difference the marginal dollar makes in reducing negative emotions starts to fall off around $70,000, is very low by $160,000 and hits zero around $200,000.

Those results are remarkably similar to the correlations reported in a 2010 study that found that people don't get happier after $75,000 a year.

That study analyzed data from the Gallup Organization in the Gallup-Healthways Well-Being Index (GHWBI). It's a lower number because researchers in that case used a single person's income rather than the family income used by Clingingsmith.

While the 2010 study found that three different measures of positive emotion (or lack of negative emotion) saw rapid improvement that slowed to nothing around $75,000, it also looked at a fourth metric that continued to rise far after that point.

That metric was "life evaluation" — a scale that asks the respondent to rate his or her life from 0, "the worst possible life for you," to 10, "the best possible life for you." It can be thought of as a measurement of how a person judges the success of their own life, rather than the feelings they experience while living it.

That measure seems to be more sensitive to socioeconomic status, the authors noted. People naturally compare their lives and incomes to others', and even if they experience no negative emotions they may yearn for and be more satisfied with higher pay far beyond the level they would need to avoid pain or afford leisure.

"That comparison between yourself and other people is really important for one's sense of well-being," said Clingingsmith. "If I'm a trader and making $300,000 at a firm where everyone else is making $450,000, that may feel different."

So why do these studies matter? In one sense, people already know that their happiness is related to their income, but the details of how exactly that relationship works are important.

Income is often used as a convenient proxy for well-being in economics, but not every dollar of income has the same end effect. If the marginal dollar means nothing for the emotional well-being of an extremely wealthy person, but has a huge effect for a poorer person, then taking $1,000 from the top percentile and giving it to the lowest percentile will have a large net effect on happiness, based on these findings.

"A little bit of marginal taxation doesn't hurt people who are up high as much as it benefits those down low through redistribution or spending on programs," said Clingingsmith.

And for individual people, learning more about the relationship between income and happiness could help them find their own personal sweet spot — where income leads to life satisfaction without requiring additional sacrifices. There's still a lot of economics work that needs to done to fully understand that relationship.

"We earn income because there are things we want to do — we want to live our lives, support our families, have experiences and so forth," said Clingingsmith. "We need to keep in mind what people's ultimate ends are for the things they are striving to do, and what this paper shows is it's not as straightforward as you might think."