Are there good reasons why income comparisons can influence happiness?

One of the findings of happiness research is that when people are asked how satisfied they are with life as a whole their answers often depend partly on comparisons of their income levels with those of other people. Thus, for example, some people whose income level has risen may report that their life satisfaction has gone down if their incomes have not kept pace with the growth in average incomes in the community in which they live.

Many of us tend to assume that those who allow interpersonal income comparisons to influence how they feel must be either be feeling envious or gaining pleasure from others being less fortunate than themselves. Either way, the most obvious solution is for them to get over comparing themselves to others.

However, there are some good reasons why people compare their incomes with those of others when considering how satisfied they are with their own lives. Consider an imaginary person who responds to the life satisfaction question by considering how her (his) life is unfolding compared with her expectations. She had clear expectations about some important aspects of what life might hold – for example, she knows what she expected married life would be like and whether it is turning out to be as she had expected. At the same time, although she had no idea what rate of increase in income she could expect to receive, she nevertheless has a strong view that her income has not increased in line with her expectations. She has come to this view because at an earlier stage of her career she had good reason to expect that her income would rise at about the same rate as the average incomes of the people she was working with at that time. The fact that her income has not kept pace with the average rate of increase in the incomes of her former work colleagues does not make her feel envious of them. She just feels disappointed that she has not been able to live up to her own expectations in this regard.

In this example the individual is using a comparison with incomes of a specific reference group merely as a source of information. There is research evidence that in some countries this information effect is positive and dominates any negative comparison effect. Research by Claudia Senik suggests that in transition countries (Russia, Hungary, Poland and three Baltic countries) the life satisfaction of individuals rises when the income of their reference group -people with the same skills and occupation - increases (see here). Her explanation is that in these countries people consider that their own future prospects to be better when the income of their professional peers rises. By contrast, in EU countries increases in incomes of the reference group tend to reduce life satisfaction - people tend to assess how well they are doing relative to their reference group. The difference seems to stem from the greater income volatility and uncertainty of the transition countries.

The important point is that when people use income comparisons in assessing how satisfied they feel we should not assume that they perceive themselves to be involved in some kind of rat race. They may merely be using comparisons to consider their own expectations.