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Happiness = richer than neighbors

By Judy Martel · Bankrate.com
Monday, June 3, 2013
Posted: 6 am ET

Call it the "keeping up with the Joneses effect." Many people report that they would be happier if they earned more money, but for the middle class in particular, it's not so much a specific number that matters, but whether they are doing better financially than their neighbors.

A study that includes U.S. Census income data and surveys comparing income levels to happiness found that a widening gap in income is also pointing to differences in how Americans equate happiness with money.

Authored by Enrichetta Ravina, assistant professor in the finance and economics division at Columbia University, and Karen Dynan, a vice president and senior fellow at the Brookings Institution, the study reveals that, in particular, those in the middle class and slightly above (the merely affluent) say their level of happiness depends on how much they have financially, compared to those around them.

Ravina explains that individuals who earn less than the median U.S. Census income do not equate a higher income level to happiness. One reason, she believes, is that they are more focused on day-to-day needs and don't compare themselves financially to their neighbors. At the other end of the scale, the wealthiest 10 percent of the population also don't define their happiness in terms of income.

The middle class and the merely affluent, on the other hand, have enough resources to cover the necessities and are envious of the rich, she says. As a result, she adds, they often seek to interact and relate to wealthier individuals by buying their way up the wealth scale with more visible purchases such as flashy cars.

Danger in keeping up with the Joneses

Comparing themselves to their wealthier neighbors means that, as the wealth gap between the rich and the poor continues to widen and swallow the middle class, the middle class could take on more debt to compete with consumption of the wealthy. A similar scenario occurred during the years leading up to the recession, when easy credit made it possible for people to spend beyond their means.

Aside from taking on more debt, other options for those at the wrong end of the wealth gap could include giving up conspicuous consumption and putting less effort into moving up the wealth scale, or working a second job, Ravina says.

In Europe, for example, income inequality has existed for longer than it has in the U.S., but there's little mobility within the wealth scale. One reason is that countries in Europe have more social safety nets for citizens compared to the U.S., so the inequality is felt less, Ravina says.

The U.S. is also known for conspicuous consumption and for a desire to move up. The widening income gap will require a dose of reality. "Eventually, people have to face that they are falling behind," Ravina says.

And that's a problem they won't be able to solve by living beyond their means.

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