Subjective Well-Being and Income:
Is there any Evidence of Satiation?
Betsey Stevenson
Justin Wolfers
CESIFO WORKING PAPER NO. 4222
CATEGORY 13: BEHAVIOURAL ECONOMICS
A
PRIL 2013
An electronic version of the paper may be downloaded
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CESifo Working Paper No. 4222
Subjective Well-Being and Income:
Is there any Evidence of Satiation?
Abstract
Many scholars have argued that once “basic needs” have been met, higher income is no
longer associated with higher in subjective well-being. We assess the validity of this claim in
comparisons of both rich and poor countries, and also of rich and poor people within a
country. Analyzing multiple datasets, multiple definitions of “basic needs” and multiple
questions about well-being, we find no support for this claim. The relationship between well-
being and income is roughly linear-log and does not diminish as incomes rise. If there is a
satiation point, we are yet to reach it.
JEL-Code: D600, I300, N300, O100, O400.
Keywords: subjective well-being, happiness, satiation, basic needs, Easterlin paradox.
Betsey Stevenson
The Gerald R. Ford School of Public Policy
University of Michigan / USA
betseys@umich.edu
Justin Wolfers
Department of Economics &
The Gerald R. Ford School of Public Policy
University of Michigan / USA
jwolfers@umich.edu
This draft: April 16, 2013
A shorter version of this paper will appear in the American Economic Review, Papers and
Proceedings in May 2013. The authors wish to thank Angus Deaton, Daniel Kahneman, and
Alan Krueger for useful discussions and The Gallup Organization, where Wolfers serves as a
Senior Scientist, for providing data. The views expressed herein are those of the author(s) and
do not necessarily reflect the views of the National Bureau of Economic Research.
1
In 1974 Richard Easterlin famously posited that increasing average income did not raise
average well-being, a claim that became known as the Easterlin Paradox. However, in recent
years new and more comprehensive data has allowed for greater testing of Easterlin’s claim.
Studies by us and others have pointed to a robust positive relationship between well-being and
income across countries and over time (Deaton, 2008; Stevenson and Wolfers, 2008; Sacks,
Stevenson, and Wolfers, 2013). Yet, some researchers have argued for a modified version of
Easterlin’s hypothesis, acknowledging the existence of a link between income and well-being
among those whose basic needs have not been met, but claiming that beyond a certain income
threshold, further income is unrelated to well-being.
The existence of such a satiation point is claimed widely, although there has been no
formal statistical evidence presented to support this view. For example Diener and Seligman
(2004, p.5) state that “there are only small increases in well-being” above some threshold. While
Clark, Frijters and Shields (2008, p.123) state more starkly that “greater economic prosperity at
some point ceases to buy more happiness,” a similar claim is made by Di Tella and MacCulloch
(2008, p.17): “once basic needs have been satisfied, there is full adaptation to further economic
growth.” The income level beyond which further income no longer yields greater well-being is
typically said to be somewhere between $8,000 and $25,000. Layard (2003, p.17) argues that
“once a country has over $15,000 per head, its level of happiness appears to be independent of its
income;” while in subsequent work he argued for a $20,000 threshold (Layard, 2005 p.32-33).
Frey and Stutzer (2002, p.416) claim that “income provides happiness at low levels of
development but once a threshold (around $10,000) is reached, the average income level in a
country has little effect on average subjective well-being.”
2
Many of these claims, of a critical level of GDP beyond which happiness and GDP are no
longer linked, come from cursorily examining plots of well-being against the level of per capita
GDP. Such graphs show clearly that increasing income yields diminishing marginal gains in
subjective well-being.
2
However this relationship need not reach a point of nirvana beyond
which further gains in well-being are absent. For instance Deaton (2008) and Stevenson and
Wolfers (2008) find that the well-being–income relationship is roughly a linear-log relationship,
such that, while each additional dollar of income yields a greater increment to measured
happiness for the poor than for the rich, there is no satiation point.
In this paper we provide a sustained examination of whether there is a critical income
level beyond which the well-being–income relationship is qualitatively different, a claim referred
to as the modified-Easterlin hypothesis.
3
As a statistical claim, we shall test two versions of the
hypothesis. The first, a stronger version, is that beyond some level of basic needs, income is
uncorrelated with subjective well-being; the second, a weaker version, is that the well-being–
income link estimated among the poor differs from that found among the rich.
Claims of satiation have been made for comparisons between rich and poor people within
a country, comparisons between rich and poor countries, and comparisons of average well-being
in countries over time, as they grow. The time series analysis is complicated by the challenges of
compiling comparable data over time and thus we focus in this short paper on the cross-sectional
relationships seen within and between countries. Recent work by Sacks, Stevenson, and Wolfers
2
We should add a caveat, that this inference of “diminishing marginal well-being” requires taking a stronger
stand on the appropriate cardinalization of subjective well-being (Oswald, 2008).
3
We should note that the term “modified-Easterlin hypothesis” is something of a misnomer, as Easterlin himself
is not among those claiming a satiation point. Instead, Easterlin and Sawangfa (2009) make the even stronger claim
rising aggregate income is not associated with rising subjective well-being at any level of income. While incorrect, it
is not uncommon, however, to attribute the “modified Eaterlin hypothesis” to Easterlin, and indeed, his citation for
the IZA Prize says that: “Societies with higher material wealth are on average more satisfied than poorer ones, but
once the participation in the workforce ensures a certain level of material wealth, guaranteeing basic needs,
individual as well as societal well-being as a whole are no longer increasing with a growth of economic wealth.”
3
(2013) provide evidence on the time series relationship that is consistent with the findings
presented here.
To preview, we find no evidence of a satiation point. The income–well-being link that
one finds when examining only the poor, is similar to that found when examining only the rich.
We show that this finding is robust across a variety of datasets, for various measures of
subjective well-being, at various thresholds, and that it holds in roughly equal measure when
making cross-national comparisons between rich and poor countries as when making
comparisons between rich and poor people within a country.
I. Cross-Country Comparisons
We begin by evaluating whether countries at different levels of economic development
have different average levels of subjective well-being. Our measure of economic development is
the log of real GDP per capita, measured at purchasing power parity.
4
We will follow four
approaches in our analysis: following Layard (2003), we will define “rich” as those people or
countries with income greater than $15,000 per capita; alternatively, following Di Tella and
MacCulloch, we will contrast the income-happiness gradient in each half of the income
distribution (with the median income “cutpoint” estimated separately, depending on the specific
population we are studying). We will also consider lower and higher cut-points of $8,000 and
$25,000. Finally—and perhaps more satisfyingly—we will, where possible, show scatter plots
and non-parametric fits of the income-happiness data over the full range of variation, allowing
the reader to assess visually if this relationship changes beyond any particular income level.
4
For most countries GDP comes from the World Bank’s World Development Indicators. Detailed information
about how we fill in missing data is available in Sacks, Stevenson, and Wolfers (2013).
