Does happiness depend on what one earns or what one spends?

There has been much research into the relationship between economic circumstances and subjective well-being has focused on the relationship between income and life satisfaction. It is usually found that income has a small beneficial effect on the life satisfaction of people within a country at a given time, although effects of changing Gross Domestic Product (GDP) within countries over time are smaller or absent and effects of income on affective well-being are sometimes smaller than effects on more cognitive/evaluative measures.

Consumption is correlated with income, but at any given point in time a person’s consumption level may differ greatly from their income level due to saving behaviour and taxation. Income may under-predict consumption (e.g., for poor households that receive food stamps or for households that borrow money to spend) or over-predict consumption (e.g., for wealthier households that typically save more). This difference confirms that current income alone is a poor proxy for consumption of goods and services.

Results from a 2020 paper entitled Consumption Changes, Not Income Changes, Predict Changes in Subjective Well-Being show that consumption changes, not income changes, predict changes in life satisfaction – see Fig 2 below from the paper. There has been much recent interest in the possibility that public policy interventions and nonmarket goods might be evaluated, at least in part, in terms of their effects on population well-being. Their analysis suggests that the increases in consumption that would be required to compensate for the negative effect of specific life events on life satisfaction (consumption equivalents) would differ. Click the link below to read the full paper.

G. Brown and J. Gathergood (2020). Consumption Changes, Not Income Changes, Predict Changes in Subjective Well-Being.