The accepted view among psychologists and economists alike is that economic well-being
has a statistically significant but only weak effect on happiness/subjective well-being (SWB).
This view is based almost entirely on weak relationships between household income and
SWB. But income is clearly an imperfect measure of economic well-being. Also needed are
measures of wealth (net worth) and consumption. Wealth provides economic security as well
as income, and consumption expenditure is the most valid measure of current living
standards.
The paper uses household economic panel data from five countries – Australia, Britain,
Germany, Hungary and the Netherlands – to provide a reconsideration of the impact of
economic well-being on happiness. The main conclusion is that happiness is considerably
more affected by economic circumstances than previously believed. In all five countries
wealth affects life satisfaction more than income. In the countries for which consumption data
are available (Britain and Hungary), non-durable consumption expenditures also prove at
least as important to happiness as income.
In the latter part of the paper, we undertake longitudinal analyses of the effects of changes in
economic well-being on changes in satisfaction levels. The aim is to reassess psychological
adaptation theory, which has been invoked to explain very weak and even non-significant
relationships between change measures. Results from panel regression fixed effects models
indicate that changes in wealth, income and consumption all produce significant, though not
large, changes in satisfaction levels.