Does Absolute Income Matter?
Does Absolute Income Matter?
Abstract and Keywords
The answer to the question in the title is that abosolute income does matter. An important finding in the literature on well-being is that beyond a fairly low income threshold, measured well-being changes little as the incomes of population members rise over time. It is argued that despite the latter finding, one should be reluctant to conclude that absolute income has no bearing on human well-being.
One of the principal findings of the literature on human well-being is that within a country at a given point in time, measured well-being is strongly positively associated with relative income. A second important finding is that, beyond a fairly low income threshold, measured well-being changes little as the incomes of population members rise in tandem over time. In this chapter I briefly survey the relevant literature and attempt to explain why, despite the latter finding, we should be reluctant to conclude that absolute income has no bearing on human well-being.
Measuring Subjective Well-Being
The main method that psychologists have used to measure human well-being has been to conduct surveys in which they ask people whether they are: (a) very happy; (b) fairly happy; or (c) not happy.1 Most respondents are willing to answer the question and not all of them respond “very happy”, even in the United States, where one might think it advantageous to portray oneself as being very happy. Many people describe themselves as fairly happy, and others confess to being not happy. A given person's responses tend to be consistent from one survey to the next.
The happiness surveys also pose other questions. For example, they ask people to indicate, on a scale from 0 to 5, the extent to which they agree with statements like these:
“When good things happen to me, it strongly affects me.”
“When I get something I want, I feel excited and energized.”
“When I'm doing well at something, I love to keep at it.”2
(p.66) Many people respond to such statements with a 5 on the five-point scale, indicating strong agreement. Yet others don't seem to be able even to recall an episode that provoked feelings like the ones described. With remarkable consistency, the people who agree strongly with these statements are the ones who rate themselves as very happy in response to survey questions. Those who say they're not happy tend to disagree strongly with these statements.
Other psychologists attempt to measure emotional well-being by tracking the amplitude and frequency of electrical waves in different regions of the brain. Subjects with a preponderance of electrical activity in the left prefrontal region are much more likely to agree with the statements described above, and also much more likely to characterize themselves as happy in response to survey questions. But subjects with a preponderance of electrical activity in the right prefrontal region are far more likely to respond negatively in the earlier measures.3
People who say they're happy or who are revealed as happy by the various measures are also more likely to be rated as happy by their friends. And all the happiness measures are strongly correlated with observable behaviors that we associate with well-being.4 If you're happy, for example, you're more likely to initiate social contacts with your friends. You're more likely to respond positively when others ask you for help. You're less likely to suffer from psychosomatic illnesses—digestive disorders, other stress disorders, headaches, vascular stress. You're less likely to be absent from work, or to get involved in disputes at work. And you're less likely to attempt suicide—the ultimate behavioral measure of unhappiness. These happiness measures are consistent, valid, and reliable.5 In sum, it appears that human happiness is a real phenomenon that we can measure.
That fact permits us to investigate the factors that influence happiness. Much of the interpersonal variation in happiness is hereditary. If you're a child of happy parents, you're much more likely to be happy than if your parents were unhappy.
But although inborn factors are important, environmental factors also account for some of the variation in human happiness. People who have many close friends, for example, tend to be significantly happier than others, and also to live longer.
Income and Happiness
How does happiness vary with income? As noted earlier, studies show that when incomes rise for everybody, measures of well-being don't change (p.67)
Source: Veenhoven (1993).
The pattern shown in Figure 2.1 consistently shows up in other countries as well, and that's a puzzle for economists. If getting more income doesn't make people happier, why do they go to such lengths to get more income? Why, for example, do legal associates work 100 hours a week hoping to become partners in law firms? Why do tobacco company CEOs endure the public humiliation of testifying before Congress that there's no evidence that smoking causes serious illnesses?
It turns out that if you measure the income–happiness relationship in another way, you get just what the economists suspected all along. Consider Figure 2.2, which shows this relationship for the United States during a brief period during the 1980s. When we plot average happiness versus average income for clusters of people in a given country at a given time, as in the diagram, rich people are in fact a lot happier than poor people. It's actually an astonishingly large difference. There's no one single change you can imagine that would make your life improve on the happiness scale as much as to move from the bottom 5 percent on the income scale to the top 5 percent.
The patterns portrayed in Figure 2.1 and Figure 2.2 are not only consistent with the view that relative income is a far better predictor of happiness than absolute income, but they also seem to suggest that absolute income may not matter at all. Some social scientists who have pondered the significance of this finding have concluded that, at least for people in (p.68)
Source: Diener et al., (1993: 195–223).
On its face, this should be a surprising conclusion, since there are so many seemingly useful things that having additional wealth would enable us to do. Would we really not be any happier if, say, the environment were a little cleaner, or if we could take a little more time off, or even just eliminate a few of the hassles of everyday life? In principle at least, people in wealthier countries have these additional options, and it should surprise us that this seems to have no measurable effect on their overall well-being.
There is indeed independent evidence that having more wealth would be a good thing, provided it were spent in certain ways. The key insight supported by this evidence is that even though we appear to adapt quickly to across-the-board increases in our stocks of most material goods, there are specific categories in which our capacity to adapt is more limited. It is in these categories that additional spending appears to have the greatest capacity to produce significant improvements in well-being.
The human ability to adapt to changed circumstances is one of the most remarkable features of our species. It spans the range of biological functioning, all the way down to molecular changes at the cellular level. Thus autonomic changes in pupil dilation, photochemical changes in the retina, and neural changes in the visual cortex of the brain allow us to see, (p.69) more or less normally, in environments whose actual physical luminosity varies by a factor of more than one million.7
Our power to adapt is no less impressive at the level of the entire organism. Asked to choose, most people state confidently that they would rather be killed in an automobile accident than to survive a quadriplegic. And so we are not surprised to learn that severely disabled people experience a period of devastating depression and disorientation in the wake of their accidents. What we do not expect, however, are the speed and extent to which many of these victims accommodate to their new circumstances. Within a year's time, many quadriplegics report roughly the same mix of moods and emotions as able-bodied people do.8 There is also evidence that the blind, the retarded, and the malformed are far better adapted to the limitations imposed by their conditions than most of us might imagine.9
We adapt swiftly not just to losses but also to gains. Ads for the New York State Lottery show participants fantasizing about how their lives would change if they won. (“I'd buy the company and fire my boss.”) People who actually win the lottery typically report the anticipated rush of euphoria in the weeks after their good fortune. Follow-up studies done after several years, however, indicate that these people are often no happier—and indeed, are in some ways less happy—than before.10
In short, our extraordinary powers of adaptation appear to help explain why absolute living standards simply may not matter much once we escape the physical deprivations of abject poverty. This interpretation is consistent with the impressions of people who have lived or traveled extensively abroad, who report that the struggle to get ahead seems to play out with much the same psychological effects in rich societies as in those with more modest levels of wealth.11
These observations provide grist for the mills of social critics who are offended by the apparent wastefulness of the recent luxury-consumption boom in the United States. What many of these critics typically overlook, however, is that the power to adapt is a two-edged sword. It may indeed explain why having bigger houses and faster cars doesn't make us any happier; but if we can also adapt fully to the seemingly unpleasant things we often have to go through to get more money, then what's the problem? Perhaps social critics are simply barking up the wrong tree.
I believe, however, that to conclude that absolute living standards do not matter is a serious misreading of the evidence. What the data seem to say is that as national income grows, people do not spend their extra money in ways that yield significant and lasting increases in measured satisfaction. But this still leaves two possible ways that absolute income (p.70) might matter. One is that people might have been able to spend their money in other ways that would have made them happier, yet for various reasons did not, or could not, do so. I will describe presently some evidence that strongly supports this possibility.
A second possibility is that although measures of subjective well-being may do a reasonably good job of tracking our experiences as we are consciously aware of them, that may not be all that matters to us. For example, imagine two parallel universes, one just like the one we live in now and another in which everyone's income is twice what it is now. Suppose that in both cases you would be the median earner, with an annual income of $100,000 in one case and $200,000 in the other. Suppose further that you will feel equally happy in the two universes (an assumption that is consistent with the evidence discussed thus far). And suppose, finally, that you know that people in the richer universe would spend more to protect the environment from toxic waste, and that this would result in healthier and longer, even if not happier, lives for all. Can there be any question that it would be better to live in the second universe?
My point is that although the emerging science of subjective well-being has much to tell us about the factors that contribute to human satisfaction, not even its most ardent practitioners would insist that it offers the final word. Indeed, it is easy to envision ways in which across-the-board increases in incomes might facilitate changes for the better that would be unlikely to have much impact on subjective well-being as currently measured. Of course, we must not simply assume that across-the-board increases in incomes will automatically lead to such changes. But neither should we be blind to this possibility. Whether growth in national income is, or could be, a generally good thing is a question that will have to be settled by the evidence.
And there is in fact a rich body of evidence that bears on this question. One clear message of this evidence is that, beyond some point, across-the-board increases in spending on many types of material goods do not produce any lasting increment in subjective well-being. Sticking with the parallel-universes metaphor, let us imagine people from two societies that are identical in every respect save one: In Society A, everyone lives in a house with 4,000 square feet of floor space, whereas in Society B each house has only 3,000 square feet. If the two societies were completely isolated from one another, there is no evidence to suggest that psychologists and neuroscientists would be able to discern any significant difference in their respective average levels of subjective well-being. Rather, we would expect each society to have developed its own local norm for (p.71) what constitutes adequate housing, and that people in each society would therefore be equally satisfied with their houses and other aspects of their lives.
Moreover, we have no reason to suppose that there would be other important respects in which it might be preferable to be a member of Society A rather than Society B. Thus the larger houses in Society A would not contribute to longer lives, more freedom from illness, or indeed any other significant advantage over the members of Society B. Once house size achieves a given threshold, the human capacity to adapt to further across-the-board changes in house size would appear to be virtually complete.
Of course, it takes real resources to build 4,000-square-foot houses instead of 3,000-square-foot houses. Put another way, a society that built a 4,000-square-foot house for everyone could have built 3,000-square-foot houses instead, freeing up considerable resources that could have been used to produce something else. Hence this central question: Are there alternative ways of spending these resources that could have produced lasting gains in human welfare?
An affirmative answer would be logically impossible if our capacity to adapt to every other possible change were as great as our capacity to adapt to larger houses. As it turns out, however, our capacity to adapt varies considerably across domains. There are some stimuli, such as environmental noise, to which we may adapt relatively quickly at a conscious level, yet to which our bodies continue to respond in measurable ways even after many years of exposure. Indeed, there are even stimuli to which we not only do not adapt over time, but actually become sensitized. Various biochemical allergens are examples, but we also see instances on a more macro scale. Thus, after several months' exposure, the office boor who initially took two weeks to annoy you can accomplish the same feat in only seconds.
The observation that we adapt more fully to some stimuli than to others opens the door to the possibility that moving resources from one category to another might yield lasting changes in human well-being. I turn now to a summary of evidence that bears on this possibility.
Spending Categories that Matter
A convenient way to examine this evidence is to consider a sequence of thought experiments in which you must choose between two hypothetical (p.72) societies. The two societies have equal wealth levels but different spending patterns. In each case, let us again suppose that residents of Society A live in 4,000-square-foot houses while those in Society B live in 3,000-square-foot houses. I use these figures because each is significantly larger than the current average house size in the US (and by an even larger margin larger than the average dwelling in Europe), which means that most of you will be able to contemplate a move from A to B without having to imagine moving to a smaller house than the one in which you now live. If your current house is larger than 3,000 square feet, simply replace 3,000 with the size of your current house and suppose that the house in Society A is 1,000 square feet larger than that. (For example, if you currently live in a 6,000-square-foot house, let the houses in Society B be 6,000 square feet and those in A be 7,000.)
In each case, the residents of Society B use the resources saved by building smaller houses to bring about some other specific change in their living conditions. And in each case we shall ask what the evidence says about how that change would affect the quality of their lives.
Which would you choose: Society A, whose residents have 4,000-square-foot houses and a one-hour automobile commute to work through heavy traffic; or Society B, whose residents have 3,000-square-foot houses and a 15-minute commute by rapid transit?
The only difference between these societies is that they have allocated their resources differently between housing and transportation. The residents of Society B have used the same resources they could have employed to build larger housing to instead transform the nature of their commute to work. Let us also suppose that the cost savings from building smaller houses are sufficient to fund not only the construction of high-speed public transit, but also to make the added flexibility of the automobile available on an as-needed basis. Thus, as a resident of Society B, you need not give up your car. You can even drive it to work on those days when you need extra flexibility, or you can come and go when needed by taxi. The only thing you and others must sacrifice to achieve the shorter, less stressful daily commute to work of Society B is additional floor space in your houses.
A rational person faced with this choice will want to consider the available evidence on the benefits and costs of each alternative. As concerns the psychological cost of living in smaller houses, the evidence provides no reason to believe that if you and all others live in 3,000-square-foot houses, your subjective well-being will be any lower than if (p.73) you and all others live in 4,000-square-foot houses. Of course, if you moved from Society B to Society A, you might be pleased, even excited, at first to experience the additional living space. But we can predict that in time you would adapt, and simply consider the larger house the norm.
Someone who moved from Society B to Society A would also initially experience stress from the extended commute through heavy traffic. Over time, his consciousness of this stress might diminish. But there is an important distinction: Unlike his adaptation to the larger house, which will be essentially complete, his adaptation to his new commuting pattern will be only partial. Available evidence clearly shows that, even after long periods of adjustment, most people experience the task of navigating through heavy commuter traffic as stressful.12
In this respect, the effect of exposure to heavy traffic is similar to the effect of exposure to noise and other irritants. Thus, even though a large increase in background noise at a constant, steady level is experienced as less intrusive as time passes, prolonged exposure nonetheless produces lasting elevations in blood pressure.13 If the noise is not only loud but intermittent, people remain conscious of their heightened irritability even after extended periods of adaptation, and their symptoms of central nervous system distress become more pronounced.14 This pattern was seen, for example, in a study of people living next to a newly opened noisy highway. Whereas 21 percent of residents interviewed four months after the highway opened said they were not annoyed by the noise, that figure dropped to 16 percent when the same residents were interviewed a year later.15
Among the various types of noise exposure, worst of all is exposure to sounds that are not only loud and intermittent, but also unpredictably so. Subjects exposed to loud, aperiodic noise in the laboratory experience not only physiological symptoms of stress, but also behavioral symptoms. These subjects become less persistent in their attempts to cope with frustrating tasks, and suffer measurable impairments in performing tasks requiring care and attention.16
It is plausible to suppose that unpredictable noise is particularly stressful because it confronts the subject with a loss of control. David Glass and his collaborators confirmed this hypothesis in an ingenious experiment that exposed two groups of subjects to a recording of loud, unpredictable noises. Whereas subjects in one group had no control over the recording, subjects in the other group could stop the tape at any time by flipping a switch. These subjects were told, however, that the experimenters would prefer that they not stop the tape, and most subjects honored this (p.74) preference. Following exposure to the noise, subjects with access to the control switch made almost 60 percent fewer errors than other subjects on a proofreading task and made more than four times as many attempts to solve a difficult puzzle.17
Commuting through heavy traffic is in many ways more like exposure to loud, unpredictable noise than to constant background noise. Delays are difficult to predict, much less control, and one never quite gets used to being cut off by others who think their time is more valuable than anyone else's. A large scientific literature documents a multitude of stress symptoms that result from protracted driving through heavy traffic.
One strand in this literature focuses on the experience of urban bus drivers, whose exposure to the stresses of heavy traffic is higher than that of most commuters, but who have also had greater opportunity to adapt to those stresses. Compared to workers in other occupations, a disproportionate share of the absenteeism experienced by urban bus drivers stems from stress-related illnesses such as gastrointestinal problems, headaches, and anxiety.18 Many studies have found sharply elevated rates of hypertension among bus drivers relative to a variety of control groups, including, in one instance, bus drivers themselves during their pre-employment physicals.19 Additional studies have found elevations of stress hormones such as adrenaline, noradrenaline, and cortisol in urban bus drivers.20 And one study found elevations of adrenaline and noradrenaline to be strongly positively correlated with the density of the traffic with which urban bus drivers had to contend.21 More than half of all urban bus drivers retire prematurely with some form of medical disability.22
A one-hour daily commute through heavy traffic is presumably less stressful than operating a bus all day in an urban area. Yet this difference is one of degree rather than of kind. Studies have shown that the demands of commuting through heavy traffic often result in emotional and behavioral deficits upon arrival at home or at work.23 Compared to drivers who commute through low-density traffic, those who commute through heavy traffic are more likely to report feelings of annoyance.24 And higher levels of commuting distance, time, speed, and months of commuting are significantly positively correlated with increased systolic and diastolic blood pressure.25
The prolonged experience of commuting stress is also known to suppress immune function and shorten longevity.26 Even spells in traffic as brief as 15 minutes have been linked to significant elevations of blood glucose and cholesterol, and to declines in blood coagulation time—all factors that are positively associated with cardiovascular disease. (p.75) Commuting by automobile is also positively linked with the incidence of various cancers, especially cancer of the lung, possibly because of heavier exposure to exhaust fumes.27 Among people who commute to work, the incidence of these and other illnesses rises with the length of commute,28 and is significantly lower among those who commute by bus or rail,29 and lower still among non-commuters.30 Finally, the risk of death and injury from accidents varies positively with the length of commute and is higher for those who commute by car than for those who commute by public transport.
In sum, there appear to be persistent and significant costs associated with a long commute through heavy traffic. We can be confident that neurophysiologists would find higher levels of cortisol, norepinephrine, adrenaline, noradrenaline, and other stress hormones in the residents of Society A. No one has done the experiment to discover whether people from Society A would report lower levels of life satisfaction than people from Society B. But since we know that drivers often report being consciously aware of the frustration and stress they experience during commuting, it is a plausible conjecture that subjective well-being, as conventionally measured, would be lower in Society A. Even if the negative effects of commuting stress never broke through into conscious awareness, however, we would still have powerful reasons for wishing to escape them.
On the strength of the available evidence, then, it appears that a rational person would have powerful reasons to choose Society B, and no reasons to avoid it. And yet, despite this evidence, the United States is moving steadily in the direction of Society A. Even as our houses continue to grow in size, the average length of our commute to work continues to grow longer. Between 1982 and 2000, for example, the time penalty for peak-period travelers increased from 16 hours per year to 62 hours; the period of time when travelers might experience congestion increased from 4.5 hours to 7 hours; and the volume of roadways where travel is congested has grown from 34 percent to 58 percent.31 The Federal Highway Administration predicts that the extra time spent driving because of delays will rise from 2.7 billion vehicle hours in 1985 to 11.9 billion in 2005.32
Several of the next thought experiments ask you to choose between societies that offer different combinations of material goods and free time to pursue other activities. Each case assumes a specific use of the free time and asks that you imagine it to be one that appeals to you. (If not, feel free to substitute some other activity that does.) (p.76)
Which would you choose: Society A, whose residents live in 4,000-square-foot houses and have no time to exercise each day; or Society B, whose residents live in 3,000-square-foot houses and have 45 minutes available to exercise each day?
Again we have two societies that have different bundles from the same menu of opportunities. Residents of Society B could have built larger houses, but instead they spent less time at work each day and devoted the time thus saved to exercise. As before, we assume that there are no other relevant differences between the two societies. And imagine yourself to be someone who views exercise as neither more nor less intrinsically pleasurable than work.
Let us again take as given that no reduction in well-being will result from the mere fact that everyone lives in a smaller house in Society B. The only question, then, is whether the additional time available for exercise will result in a significant increase in well-being. And on this question, the evidence could hardly be more clear.
Thus numerous studies have documented a variety of positive physiological and psychological effects of regular aerobic exercise.33 Exercisers report more frequent and intense positive feelings and tend to have better functioning immune systems.34 Exercisers also have higher life expectancy and are less likely to suffer from heart disease, stroke, diabetes, hypertension, and a variety of other ailments.35
Evidence for the causal nature of these relationships is seen in the fact that subjects randomly assigned to exercise programs experience improved physical and psychological well-being.36 For example, people diagnosed with moderate depression who were randomly assigned to an aerobic exercise program experienced recovery rates comparable to others being treated by psychotherapy, and both groups fared substantially better than controls.37
Some critics have expressed concern that the psychological benefits found in many studies may really be the result not of exercise itself but of the fact that subjects experience a break in their normal routines. Some support for this possibility emerged in a study in which one group of 32 volunteers was assigned to an aerobic exercise program and another group of 32 to a hobby class.38 Both groups experienced measurable improvements in mood. But the breaks in routine that both groups enjoyed cannot be the entire explanation, since the mood improvements were significantly larger for the exercise group. Thus the exercise group experienced improvements in each of six mood indicators, all but two of (p.77) which were large and statistically significant. Although the hobby-class group improved on five of the six indicators, their improvements were smaller and only two were statistically significant.
Even programs of relatively light exercise, such as walking, yield significant physiological and psychological benefits. One experiment, for example, showed that premenopausal women randomly assigned to a supervised walking group experienced significant reductions in heart rate and blood pressure, and significant improvements in self-esteem relative to non-walkers.39
Despite the compelling evidence for the beneficial psychological and physical effects of regular exercise, and despite the evidence that no discernible increase in life satisfaction results when all have larger houses, it is difficult to insist that all rational persons would necessarily choose Society B over Society A. Indeed, many people are so averse to physical exercise that they would be willing to give up material goods in order to escape having to do it.
Many of these people might change their minds if they stuck with an exercise program for just a little while. For although people often report that exercise is an unpleasant experience at first, especially if they try to do too much too soon, most adapt to it quickly and come to think of it as pleasurable. In the end, however, even this knowledge may not tip the balance in favor of Society B for some people. If you are in this group, just think of Society B as providing a little more time for some other daily activity, or mix of activities, that you might like to pursue.
In any event, lack of time is the reason most frequently cited by people who say they wish they could get more exercise. Thus Jon Robison, co-director of the Michigan Center for Preventive Medicine in Lansing, says that most exercise regimens are doomed from the start because people try to cram an hour of exercise into a daily schedule that is too busy to begin with, and end up quitting because they can't find the time.40 Extra time is readily available, however, if we spend less time working to acquire goods. The evidence strongly suggests that our lives would be healthier, longer, and more satisfying if we all made that choice. Yet, the average American is in fact exercising less than in the past and spending more time at work.
Which would you choose: Society A, whose residents have 4,000-square-foot houses and one evening each month to get together with friends; or Society B, whose residents have 3,000-square-foot houses and get together with friends four evenings a month?
(p.78) The question is again whether one use of time produces a larger impact on subjective well-being than another. Because the residents of Society A work longer hours, they can build larger houses but have less time to socialize with friends. Here again, the evidence suggests that whereas the payoff when all have larger houses is small and fleeting, the pleasures that result from deeper social relationships are both profound and enduring. People with rich networks of active social relationships are much more likely to call themselves happy, and are much more likely to be described as happy by friends.41 In the findings of one survey by the National Opinion Research Center, for example, persons who could name five or more friends with whom they discussed matters of personal importance were 60 percent more likely to feel “very happy” than others who listed no personal confidants.42 Another survey of 800 college graduates found that subjects whose values emphasized high income and occupational prestige were twice as likely as others to describe themselves as “fairly unhappy” or “very unhappy”.43
It might seem natural to wonder about the direction of causation in the link between social integration and subjective well-being. Does having close relationships make people happy, or is it just that happier people are more likely to enjoy close relationships? Without discounting the second possibility, I note that there is at least some evidence that social integration is an important causal factor. Thus one study found that soldiers assigned to small, stable, cohesive units scored significantly higher on several important measures of subjective well-being than did others assigned to large units with high turnover.44
Even more striking is the link between networks of close personal relationships and physical health. People who lack such networks tend to be less physically healthy, and confront a higher risk of dying at every age. For example, in a study of leukemia patients about to undergo bone marrow transplants, the two-year survival rate was 54 percent for those who experienced strong emotional support from family and friends, but only 20 percent for those who experienced little social support.45
A more broad-based study investigated whether the presence or absence of various kinds of social relationships—marriage, contact with friends, membership in churches and other organizations—predicted subsequent rates of death for a sample of 2,229 men and 2,496 women living in Alameda County, California. For both men and women across all age groups, people who were low or lacking in such relationships at the beginning of the study in 1965 were from 30 to 300 percent more likely to have died during the subsequent nine years.46
(p.79) Here, too, one might wonder about the causal link between mortality and social integration. Could the higher mortality of the less socially integrated subjects have been in part a reflection of the fact that pre-existing poor health caused them to be less socially integrated at the time of the initial interview? The results of a later study seem to rule out this interpretation. Based on a sample of 1,322 men and 1,432 women in Tecumseh, Michigan, investigators found essentially the same relationship between mortality and social integration even after controlling for the results of a physical examination conducted at the beginning of the study.47
In sum, the evidence is clear that closer social ties promote both physical health and subjective well-being. But close social ties cannot be achieved by waving a magic wand. Relationships take time, and as economists correctly insist, time is money. Is this money well spent? The answer is almost surely yes, if the alternative is to use that money to build larger houses for all. Here again, it appears that a rational person has compelling reasons for choosing Society B, in which everyone has a smaller house but more time to spend with friends. Yet, as a nation, Americans have been moving in precisely the opposite direction.
Which would you choose: Society A, whose residents have 4,000-square-foot houses and one week of vacation each year; or Society B, whose residents have 3,000-square-foot houses, and four weeks of vacation?
If we all lived in smaller houses, or drove less expensive cars, we could all take more weeks of vacation each year. The physical and psychological benefits of periodic breaks in routine have long been established.48 Thus studies of people on vacation find that they are less tired, irritable, and worried than at other times.49 Vacationers also experience reduced incidence of stress-related disorders such as indigestion, constipation, headaches, and insomnia.50
Vacations offer the opportunity to see new places, visit distant relatives and friends, take up a new sport, read books, lie on a beach, hike in the wilderness, or whatever the spirit moves you to do. Provided they are of sufficient duration, vacations have also been found to have restorative effects that persist long after people return to work. Citing evidence of these effects, German legislation encourages vacation leave to be taken “as a single, uninterrupted period unless pressing requirements of the establishment or of the employee make it necessary to split leave into parts”.51 The German legislation goes on to say that if the statutory minimum of 24 vacation days is split into parts, “one of the parts…shall comprise at least twelve consecutive working days”.52
(p.80) Despite the manifold advantages of longer vacations, few entry level-jobs in the US offer more than ten days of paid vacation a year, and many offer less. There appears little doubt that a package with a lower annual salary and a longer vacation allotment would increase subjective well-being by more than enough to offset an across-the-board move to slightly smaller houses. And yet Americans must work longer now than in the recent past to earn each day of paid vacation.
Which would you choose: Society A, whose residents have 4,000-square-foot houses and a relatively low level of autonomy in the workplace; or Society B, whose residents have 3,000-square-foot houses and a relatively high level of autonomy?
Because most of us spend the majority, or at least a large proportion, of our waking hours on the job, our satisfaction with our lives as a whole depends importantly on how satisfied we are with our jobs. A consistent finding in the industrial psychology literature is that job satisfaction increases with the degree to which workers enjoy autonomy and choice with respect to which tasks they do and the manner in which they perform them.53 In laboratory experiments, for example, subjects allowed to choose their own activities spent significantly longer times on task than did those to whom activities were assigned arbitrarily.54
Autonomy is of course not the only factor that influences job satisfaction. For example, workers tend to find greater satisfaction in jobs that provide greater opportunities to make use of their skills.55 And numerous studies have found that job satisfaction increases with the variety of tasks workers are called on to perform.56 The list is endless. Thus, if pay were the same, people would choose safe jobs over risky jobs; quiet jobs over noisy jobs; jobs with convenient parking over jobs without; jobs with security over jobs without; and so on.
Giving workers more autonomy sometimes results in greater productivity, sometimes not. Where it does, it will of course be in the interests of profit-seeking employers to grant additional autonomy. But beyond some point, greater autonomy usually comes at the expense of profits. And once this point is reached, workers can enjoy increased autonomy only by accepting lower salaries. The same holds true for other valued job characteristics. To the extent that workers become more productive the more they specialize, pay cuts will be necessary if workers are to enjoy more variety and the opportunity to utilize more fully the various skills they possess. Likewise, additional safety equipment, employment security, parking spaces, office privacy, and other amenities inevitably mean lower paychecks.
(p.81) For the purposes of this thought experiment, we assume that the only consequence of gaining these desirable working conditions is an across-the-board reduction from 4,000 to 3,000 square feet of housing space, a move that entails essentially no sacrifice in subjective well-being. Yet there is a lasting gain in well-being when everyone gains additional autonomy on the job—or when all gain additional variety or safety. Here again, the available evidence strongly favors the choice of Society B. Yet the combination of alternatives in Society B is just what we seem to be moving away from.
The choice in each of the thought experiments considered thus far has been between conspicuous consumption (in the form of larger houses) and what, for want of a better term, I shall call “inconspicuous consumption”—freedom from traffic congestion, time with family and friends, vacation time, and a variety of favorable job characteristics. In each case the evidence suggests that subjective well-being will be higher in the society with a greater balance of inconspicuous consumption.
The list of inconspicuous consumption items could be extended considerably. Thus we could ask whether all living in slightly smaller houses would be a reasonable price to pay for higher air quality, for more urban parkland, for cleaner drinking water, for a reduction in violent crime; or for medical research that would reduce premature death. And in each case the answer would be the same as in the cases we have considered thus far.
Although many forms of inconspicuous consumption—the use of rapid transit systems to alleviate traffic congestion, for example—entail expenditures in the public domain, many others do not. Spending additional time with family and friends, for example, is a form of private inconspicuous consumption.
Many private goods, such as automobiles, embody elements of both conspicuous and inconspicuous consumption. And if we fix the total amount spent on such goods, we confront a tradeoff between these two kinds of consumption. If we all buy faster or more luxuriously appointed cars (conspicuous consumption), the evidence suggests that we will experience little lasting improvement in subjective well-being. But the outcome will be different if we all buy safer, more reliable cars (inconspicuous consumption). In the case of safety, the distribution of the increase in well-being will be highly uneven: a small proportion of us will (p.82) escape the pain and suffering that follows a serious injury or the loss of a loved one. In the case of reliability, a large majority of us can escape the stress of repeated mechanical breakdowns.
My point in the thought experiments is not that inconspicuous consumption is always preferable to conspicuous consumption. Indeed, in each of the individual thought experiments, we might envision a minority of rational individuals who might choose Society A over Society B. Some people may simply dislike autonomy on the job, or dislike exercise, or dislike spending time with family and friends.
But if we accept at face value the evidence that there is little sacrifice in subjective well-being when all move to slightly smaller houses, the real question is whether a rational person could find some more productive use for the resources thus saved. Given the absolute sizes of the houses involved in the thought experiments, the answer to this question would seem to be “yes”.
And this suggests that the answer to the question posed in my title (“Does absolute income matter?”) is that it depends. Considerable evidence suggests that if we all work longer hours to buy bigger houses and more expensive cars, we do not end up any happier than before. As for whether increases in absolute income could buy happiness, however, the evidence paints a very different picture. The less we spend on conspicuous consumption goods, the better we can afford to alleviate congestion; the more time we can devote to family and friends, to exercise, sleep, travel, and other restorative activities; and the better we can afford to maintain a clean and safe environment. On the best available evidence, reallocating our time and money in these ways would result in healthier, longer, and more satisfying lives.
So Why Hasn't Subjective Well-Being Been Rising?
It might seem natural to suppose that when per-capita income rises sharply, as it has in most countries since at least the end of World War II, most people would spend more on both conspicuous and inconspicuous consumption. In many instances, this is in fact what seems to have happened. Thus the cars we buy today are not only faster and more luxuriously equipped, but also safer and more reliable. If both forms of consumption have been rising, however, and if inconspicuous consumption boosts subjective well-being, then why has subjective well-being not increased during the last several decades? (Recall that Japan's average (p.83) subjective well-being remained essentially unchanged during a period of more than fivefold growth in per-capita income.)
A plausible answer is that whereas some forms of inconspicuous consumption have been rising, others have been declining, often sharply, during the period in question. Thus, as discussed earlier, there have been increases in the annual number of hours spent at work in the US during the last two decades. Traffic has grown considerably more congested; savings rates have fallen precipitously; personal bankruptcy filings are at an all-time high; and there is at least a widespread perception that employment security has fallen sharply. Declines in these and other forms of inconspicuous consumption may well have offset the effects of increases in others.
The much more troubling question is why we have not used our resources more wisely. If in fact we could all live healthier, longer, and more satisfying lives by simply changing our spending patterns, why haven't we done that? As even the most ardent free-market economists have long recognized, the invisible hand cannot be expected to deliver the greatest good for all in cases in which each individual's well-being depends on the actions taken by others.
This qualification was once thought to justify collective action in only a limited number of arenas—most importantly, the regulation of environmental pollution. We now recognize, however, that the interdependencies among us are considerably more pervasive. For present purposes, chief among them are the ways in which the spending decisions of some individuals affect the frames of reference within which others make important choices.
Many important rewards in life—access to the best schools, to the most desirable mates, and even, in times of famine, to the food needed for survival—depend critically on how the choices we make compare to the choices made by others. In most cases, the person who stays at the office two hours longer each day to be able to afford a house in a better school district has no conscious intention to make it more difficult for others to achieve the same goal. Yet that is an inescapable consequence of his action. The best response available to others may be to work longer hours as well, thereby to preserve their current positions. Yet the ineluctable mathematical logic of musical chairs assures that only 10 percent of all children can occupy top-decile school seats, no matter how many hours their parents work.
That many purchases become more attractive to us when others make them means that consumption spending has much in common with a (p.84) military arms race. A family can choose how much of its own money to spend, but it cannot choose how much others spend. Buying a smaller-than-average vehicle means a greater risk of dying in an accident. Spending less on an interview suit means a greater risk of not landing the best job. Yet when all spend more on heavier cars or more finely tailored suits, the results tend to be mutually offsetting, just as when all nations spend more on armaments. Spending less—on bombs or on personal consumption—frees up money for other pressing uses, but only if everyone does it.
What, exactly, is the incentive problem that leads nations to spend too much on armaments? It is not sufficient merely that each nation's payoff from spending on arms depends on how its spending compares with that of rival nations. Suppose, for example, that each nation's payoff from spending on nonmilitary goods also depended, and to the same extent as for military goods, on the amounts spent on nonmilitary goods by other nations. The tendency of military spending to siphon off resources from other spending categories would then be offset by an equal tendency in the opposite direction. That is, if each nation had a fixed amount of national income to allocate between military and nonmilitary goods, and if the payoffs in each category were equally context-sensitive, then we would expect no imbalance across the categories.
For an imbalance to occur in favor of armaments, the reward from armaments spending must be more context-sensitive than the reward from nonmilitary spending. And since this is precisely the case, the generally assumed imbalance occurs. After all, to be second-best in a military arms race often means a loss of political autonomy; clearly a much higher cost than the discomfort of having toasters with fewer slots.
In brief, we expect an imbalance in the choice between two activities if the individual rewards from one are more context-sensitive than the individual rewards from the other. The evidence described earlier suggests that the satisfaction provided by many conspicuous forms of consumption is more context-dependent than the satisfaction provided by many less conspicuous forms of consumption. If so, this would help explain why the absolute income and consumption increases of recent decades have failed to translate into corresponding increases in measured well-being.
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(5.) Diener and Lucas (1998).
(17.) ibid., figures 5 and 6.
(25.) ibid., table 3.
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