Absolute Income, Relative Income And Happiness

Classical economic theory generally believes that increasing in income level could enable consumer to reach a higher level of utility curve, and a higher degree of satisfaction, thus more income will lead to greater happiness. Since Easterlin, an increasing number of empirical researches on this topic presented a challenge for this prevailed theory. Studies have shown the lack of a long-term positive correlation between subjective well-being (SWB) and economic growth or income level in most developed countries and some developing countries from time-series data. Cross-sectional data analysis showed that higher income people have higher average happiness, but the correlation is not very strong. This phenomenon is called as the "happiness-income"myth, also known as the Easterlin Paradox, in memory of the pioneering contribution of Easterlin.Modern researches on subjective well-being general believe that the impact of income on subjective well-being is statistically significant, but with a rather small coefficient. This paper will further divide income into absolute income and relative income terms. Beside directly entry into an individual's utility function, theories that describe the relation between absolute income and subjective well-being are: consumer behavior theory, adaption theory and aspiration level theory; theories that describe the relation between relative income and subjective well-being are: range-- frequency theory, relative deprivation theory, social identity theory and optimal distinctiveness theory.This paper shows that based on empirical research of WVS data, both absolute and relative income will affect individual's subjective well-being, but the latter one has a greater degree of influence for China residents. Finally, this paper discusses the importance of subjective well-being research in our country, and provides a few relevant policy recommendations.