Tag Archives: Income

A $70k minimum wage: a real-life experiment in happiness economics

Money: it proves to be the central topic for happiness researchers worldwide. Only last week I wondered how money affects me. This week, coverage from various international newspapers on a great new real-life experiment left me no choice but to discuss it again.

A $70k minimum wage, based on scientific advice

Dan Price, CEO of the Seatlle-based Gravity Payments decided to raise the salary of all his staff to a minimum of $70,000. He made his decision after reading an academic article by Daniel Kahneman and Angus Deaton.  Analysing data on salaries and well-being within a Gallup poll under 450,000 US citizens, Kahneman and Deaton found that well-being does not raise anymore after a salary of around $75,000. As they acknowledge their study does not settle the eternal question whether money buys happiness. Indeed, an enormous number of studies has been dedicated to the topic, and findings are inconclusive. For instance, a UK study based on figures for multiple countries from the World Value Survey I cited in another post reported a figure already of $30,000 as a cut-off point.

How do Kahneman and Deaton come to the figure of $75,000? Whilst the article is very readworthy, let me give you a quick overview. They distill four indicators out of the Gallup data. Firstly, ‘positive affect’ measures how often people report happiness, enjoyment, and smiling and laughter; people were asked whether they experienced these (and other) emotions the day before their interview. Secondly, ‘not blue’ uses a similar technique, but regards the number of people who did not experience sadness and worry. Thirdly, ‘stress-free’ measures one question: whether the interview person experienced stress the day before. Finally, Kahneman and Deaton extracted income data from the survey.

The table summarises the findings: all three factors increase when income increases. The factor ‘not blue’ shows the largest difference, indicating that sadness and worry are more strongly associated with lower incomes. But what the three characteristics have in common is that all of them at a certain point – at around $75,000 – increase only very marginally or even degree. An ideal point, possibly.

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The graph comes from the publication (Kahneman and Deaton 2010)

 

A real-life experiment 

Price’s decision was not only a great and happy surprise for the half of his staff who earned less than $70,000, but also is a very interesting social experiment. In this almost communist version of capitalism, the impact on the firm is likely to be massive. In the New York Times article, people with a current salary in the $40,000s tell being concerned about rent increases and health bills. An increase should alleviate such worries, making an overall contribution to happiness.

One of the most curious about the impact on the internal dynamics and job satisfaction. According to the article, the firm has 120 staff, with an average salary of $48.000. 70 staff see their salary increase; 30 people will have their salaries double. That also means that the differences between staff with different seniority and competences disappears.

How will this impact motivation? There can be two possible directions. On the one hand, people may be less motivated to work harder. They are less incentivised to do so as they already have the guarantee of a raise. And a cynic could argue that there might be some frustration amongst those employees who are in the top bracket.

On the other hand, the effects could be positive. Giving this raise is likely to increase overall well-being, and originates from the work environment, it would be expected to result in higher levels of happiness at work. One of the main effects, I would expect, is that the unconditional raise could increase the trust of Price’s employees, which would be hoped to be repaid via a commitment to stay at the firm and perform well in exchange for this reward. That could lead, for instance, to better staff retention and strong self-motivation.

Happiness at work is associated with a range of positive outcomes at firm level, going from lower absenteeism, less sick leave, higher productivity, and overall job performance. Beyond that, higher and more equal wages of course of societal benefits, as the new economic foundations note in a blog post.

Once the shock of the raise is over, I hope that Price is monitoring the development of happiness at work over a longer time period. It’s a great case study and it will be wonderful to see what the real effects are. It’s not only useful for all companies in the US who may want to follow the example to increase equality on the work floor and happiness at work, but also for companies outside. Maybe then one day we can establish whether there really is an optimal income for happiness.

The optimal income for happiness

What is the optimal income for happiness? How much happier are people with a large bank account than those who suffer through the last days of each month? Scientists have done a lot of effort to investigate the relation between money and happiness.

The conventional wisdom in happiness economics states that, indeed, happiness levels rise with income, to a certain point. After this point, the impact on happiness of an additional euro, pound are dollar is virtually zero: more money does not mean more happiness. But is it possible to exactly measure the cut-off point? That is, can we measure what the ideal income is, generating the best happiness bang for the buck?

Eugenio Proto of Warwick University and Aldo Rustichini of the University of Minnesota claim to have the answer. Their research attests that life satisfactions reaches its maximum level at an income level of $30,000, or about the level of Equatorial Guinea using World Bank data (though French people aren’t necessarily the happiest ones).

But Proto and Rustichini’s research reveals there is even more: after this point, people even become less happy. They  explain that this effect arises due to changes in what they label the ‘aspiration level’ of people with a below average income in rich countries.

Simply speaking, when incomes rise, the gap between the have-lots and have-less become bigger. When surrounded by wealthier people, people have higher aspirations for their own life, often irrationally> as the gap between reality and dreams increase, life satisfaction diminishes.

Their data set out the income level versus the likeliness of reporting the highest level of happiness. People in a country with an income per head of $5,600 are 12% less likely to report the maximum number than in a country with an income of $15,000. As incomes rise, the effect disappears. And after $30,000, the link even becomes negative.

What does this mean? Of course, you may consider moving to Equatorial Guinea if you live in a richer country but make less than the holy number of $30,000. Jokes aside, there is more  at stake here. Higher incomes aren’t necessarily a sign of progress. They might be caused by longer working hours, more overtime and less time for leisure, all factors that bring down happiness.

But maybe the real effect displayed by the study is the cost of inequality. Earlier studies have shown that it is not only the absolute figure of income that determines your happiness. It is also about your income relative to what you could make. If you make less than your friends, your colleagues, or than your did in a previous job, this might cause total misery. The moral of the story is simple: if countries care about our quality of life, they should seek to control income inequality. Equal countries, like Denmark, Norway and Sweden are all in the top-five of happiest nations. At least, their high government spending seem to be good for something. Money can’t buy you happiness, the adagium goes, but maybe their high taxes do?