Definition
Life satisfaction refers to the overall assessment of one’s quality of life, according to their chosen criteria, reflecting long-term fulfillment. More specifically, it is how people evaluate their life as a whole, rather than their current feelings. Happiness, on the other hand, often denotes a more immediate, emotional state characterized by feelings of pleasure and contentment. Life satisfaction and happiness are often referred to as two forms of well-being. This view underscores that well-being is influenced by a complex interplay of personal, social, and environmental factors and clarifies why the relationship between these aspects and income is routinely explored by scholars. As scholars show, the relationship between well-being and income is also connected to consumption. Scholars note that higher income often leads to an increased carbon footprint (see Carbon Footprint Versus Household Income). This may lead to cognitive dissonance and less well-being for people with strong environmental values, as they navigate the balancing act of allowing every individual to have their basic needs fulfilled and live a good life while not exceeding the ecological limits of the planet.
History
Income’s relationship to life satisfaction, happiness, and/or well-being has long been a point of both fundamental and applied research. Income provides the financial means to meet basic needs, access healthcare, enjoy leisure activities, and achieve financial security, all of which contribute to happiness and life satisfaction. Diener and Tov (2009), among others, have consistently shown a positive correlation between income and happiness, particularly when comparing different countries or individuals within a country. Easterlin (1974) highlighted that richer individuals tend to report higher levels of happiness and well-being, although this correlation has diminished over time and was less pronounced when comparing richer and poorer countries. Overall, higher income is also related to increased consumption, impacting many today and leaving an ecological debt for future generations. Finding a balance within sustainable consumption, reaching satisfaction but remaining mindful of choices, is critical.
In 2010, Kahneman and Deaton challenged the belief that higher income universally leads to greater well-being, by distinguishing between life evaluation (life satisfaction) and emotional well-being (happiness). In their work, higher income was associated with higher evaluative life satisfaction, indicating that individuals with more money tend to perceive their lives more positively. However, above US$75,000 (in 2010), a further increase in income does not increase happiness. In contrast, low income gives rise to both low life satisfaction and low emotional well-being. Kahneman, together with Killingsworth and Mellers (Killingsworth, 2021; Killingsworth et al., 2023), however, corrected these findings as rooted in a methodological error and demonstrated that there is no upper threshold for increasing both life satisfaction and happiness with greater income. They attribute that phenomenon to two factors, that is, social comparisons and a sense of greater stability conferred by higher income (see Box 51.1). They also showed that for the unhappiest, an increase in income staves off unhappiness only to a point.
Current research indicates that while higher income can enhance life satisfaction, the incremental gains (in absolute values) diminish as income rises beyond a certain level. Literature focuses on the diminishing marginal utility of income. For example, an increase in income for a person living in poverty can substantially enhance their well-being by providing access to basic necessities. However, the same extra income will have a smaller impact for someone already enjoying a comfortable lifestyle. Additional income for the latter may equate to increased consumption, but of non-necessities, having a smaller impact on overall happiness. Finally, factors such as relative income comparisons, social relationships, and cultural context play substantial roles in mediating how income impacts life satisfaction and happiness, and whether individuals choose sustainable consumption.
Different Perspectives
Literature on the relationship between income and life satisfaction relates to a variety of debates. Among the most robust are those about relative income and social comparison, social inequality, spending habits and financial security, and psychological and social factors (see Box 51.1).
Box 51.1. Factors that mediate the income-happiness relationship
Relative income and social comparison
Happiness is not solely dependent on absolute income but is also influenced by relative income – how one’s income compares to others. Social comparison theory posits that individuals assess their well-being relative to those around them. Hence, if a person’s income is significantly lower than their peers, their life satisfaction may decrease, even if they have ample access to all of life’s necessities. Conversely, having a higher income compared to peers can boost self-esteem and happiness, even if in absolute terms that income is not fully sufficient for basic needs.
Societal inequality
Related to relative income, societal inequality is another driver of human unhappiness. Generally, in their drive to establish and maintain their social position, people tend to aspire to be like those “above” them and to distance themselves from those “below”. In a highly unequal society, that drive is exacerbated, leading to a perpetual hedonic treadmill and general anxiety. Epidemiologists Wilkinson and Pickett have shown in their 2010 and 2024 studies that high income inequality in a society leads to general unhappiness and many social ills, such as poorer health of the population, lower educational achievements, and weaker social cohesion. Thus, while income is important, it is the income disparity that more profoundly affects overall societal well-being, exacerbating social tensions and driving up consumption.
Spending Habits and Financial Security
How individuals spend their money and what they consume also plays a role in happiness. Research indicates that spending on experiences, such as travel, brings more lasting happiness than material purchases. Experiences provide lasting memories and enhanced social bonds, both of which are important for well-being. Moreover, financial security and investing for the future contribute to long-term life satisfaction. Conversely, financial stress can undermine happiness, regardless of income level.
Psychological and Social Factors
Psychological and social factors also mediate the income-happiness relationship. Personality traits, such as optimism and resilience, can influence how an individual perceives their financial situation and overall happiness. Additionally, strong social networks are consistently linked to higher life satisfaction, often outweighing the impact of income alone. People who report strong social connections and support are generally happier, regardless of their income level.
Understanding human life satisfaction and happiness through the income lens has various limitations. First, cultural values and societal norms play a role in shaping the relationship between income and happiness. In collectivist cultures, where social relations are prioritized, the impact of individual income on happiness may be less pronounced, compared to more individualistic societies where personal achievement, consumption, and wealth are highly valued and well-rewarded. Second, during times of societal prosperity, higher incomes for everybody are likely to maintain the same relative happiness as during the periods of economic stagnation. Likewise, shifts in social norms regarding wealth and success can alter how individuals evaluate their income over time.
Third, it overlooks other critical aspects, such as mental health, job satisfaction, work-life balance, and engagement with such worldviews as Ubuntu or Buen Vivir and Buenos Conviveres. The characteristics of high-income jobs, which often bring about increased stress, long hours, and less time for personal relationships, can negate the benefits of higher income, again suggesting the benefits of sustainable consumption rather than extensive consumption. Finally, studies of the hedonic treadmill suggest that people quickly return to a baseline level of happiness following positive or negative changes in their circumstances, including changes in income. This phenomenon implies that while a pay raise may temporarily boost happiness, individuals often adjust their expectations, returning to their prior level of well-being over time.
Application
Applying the concept of Wellbeing versus Income involves designing measures that ensure financial stability and reduce inequality (see Box 51.2). This can be achieved through initiatives like progressive taxation, universal basic income, universal basic services and accessible healthcare, high-quality education, and other life amenities that enhance opportunities for success in life. These programs increase financial security and may lead to higher levels of happiness and well-being. Financial security allows individuals to meet basic needs without anxiety about financial instability and reduces the anxiety of becoming deemed socially inferior (see Money).
Establishing appropriate economic policies is crucial for life satisfaction and a stable and motivated workforce in a society. Implementing progressive taxation to fund social programs, such as unemployment benefits, helps reduce economic inequality, ensuring those with higher incomes contribute a fairer share of earnings (see Foundational Economics, Well-being Economy, Ecosocial Contract). This approach helps create a more equitable society where everyone can access the resources they need to thrive. Similarly, economic policies that ensure fair wages and promote job security increase job satisfaction and financial security. This fosters a more productive and committed workforce, contributing to overall societal well-being.
Implementing universal healthcare systems ensures all citizens have access to medical care without the fear of financial hardship or catastrophe. Good physical and mental health is foundational for life satisfaction, and universal healthcare plays a significant role in reducing health disparities and promoting overall well-being and resilience. Ensuring that medical care is accessible to everyone, regardless of financial situation, contributes to a healthier, more equitable society.
Providing opportunities for adult education and vocational training supports continuous personal and professional development. Lifelong-learning programs can improve job satisfaction, and cognitive functioning, and provide a sense of purpose, all of which enhance well-being. By encouraging continuous learning and skill development, individuals can adapt to changing job markets and pursue fulfilling careers, contributing to a more knowledgeable and resilient society.
Box 51.2 Life satisfaction/happiness – income nexus applications
Economic policies
Sweden and Austria’s progressive tax systems require higher-income earners to pay a larger percentage of their income in taxes. This allows tax revenues to fund social programs, including universal healthcare, heavily subsidized education, and unemployment benefits. As a result, citizens enjoy low levels of economic inequality and high levels of life satisfaction. Furthermore, access to essential services provides a safety net and ensures individuals from all economic backgrounds have opportunities to thrive.
Social policies
Between 2017 and 2018, Finland conducted a “basic income experiment”, providing unemployed citizens with a monthly income of 560 euros. Results showed improvements in mental health and stress levels; however, no significance regarding employment was registered. A similar study in the United States involving unconditional cash transfers failed to show improvement in financial, physical, or mental health. However, results showed increased entrepreneurialism and schooling, and additional effects – such as those on the children of the recipients – may yet be seen.
Healthcare policies
The Norwegian healthcare system exemplifies how universal healthcare can lead to a healthier, more equitable society by prioritizing accessibility, prevention, and early treatment. This system, funded primarily through taxation, ensures access to comprehensive medical care without financial hardship. Government investments in healthcare infrastructure and technology ensure facilities are equipped with the latest medical advancements and that urban and rural communities have access. This approach reduces health disparities and promotes overall well-being, as evidenced by Norway’s high life expectancy and low infant mortality rates.
Diener, E., & Tov, W. (2009). Well-being on planet earth. Psihologijske Teme, 19, 213–219.
Easterlin, R.A. (1974). Does economic growth improve the human lot? Some empirical evidence. In P.A. David & M.W. Reder (Eds.), Nations and households in economic growth: Essays in honor of Moses Abramovitz, pp. 89–125. Academic Press. https://doi.org/10.1016/b978-0-12-205050-3.50008-7.
Killingsworth, M.A. (2021). Experienced well-being rises with income, even above $75,000 per year. Proceedings of the National Academy of Sciences of the United States of America, 118(4). https://doi.org/10.1073/pnas.2016976118.
Killingsworth, M.A., Kahneman, D., & Mellers, B. (2023). Income and emotional well-being: A conflict resolved. Proceedings of the National Academy of Sciences of the United States of America, 120(10). https://doi.org/10.1073/pnas.2208661120.
Wilkinson, R.G., & Pickett, K.E. (2024). Why the world cannot afford the rich. Nature. https://doi.org/10.1038/d41586-024-00723-3