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Keeping up with the Joneses

People with high incomes tend to be more satisfied with their situation than people with low incomes, according to many studies on the subject. But that does not mean that happiness is proportional to wealth. Not at all. According to new evidence presented at the IDB, what matters more to people than the amount of money they have is how much everyone else has. Relative wealth is what matters in terms of happiness, then.

The economic ladder question matters a lot, explained Brooking Institution's economist Carol Graham, speaking at IDB headquarters. According to her study on economic inequality and happiness, the perception of where you rank in the ladder is more important than the average income or income wealth on happiness.

During a recent seminar on infrastructure, discussing inequality and public policy, Graham tried to answer the question of how much does inequality matter.

Graham underscored that “inequality really matters to people's happiness in the region, making the rich feel better off and the poor worse off.”

It is not clear that more money makes people happier, but certainly having sufficient income makes people happier and the poor tend to be less happy. But once money covers or surpasses life's basic needs, Graham explained, happiness is related to other factors such as social pressure, economic competition, career levels, life aspirations and even choosing the right lifetime partner.

For instance, young people actually are not the happiest people. There is a U shape curve between age and happiness, with lower 40s as the low point for Europe and the United States and 51 for Latin America and the Caribbean. After that people are happier as long as they are healthy and married, so happiness may be a matter of a happy finding.

Graham found some effects in urban and regional areas that play a role determining people's happiness. The study found that people that live in big cities rank higher in income levels, but the relative differences affect them more on happiness.

The study across countries in Latin American and the Caribbean, says that as countries get wealthier overtime, happiness does not necessarily increase. Data on average country-level happiness showed no clear relationship between income and happiness.

In the region, even some of the poorest countries scored high on happiness. A lot of them are quite poor countries, quite unequal, and yet score very high on the happiness ladder, according to statistics from Latinobarometro, a polling organization for Latin American countries.

There are other country-level factors or measures that matter to people. Although average wealth does not matter, individual wealth and how far people are from the average income do matter. For instance, if you live in a city where people are wealthier on average, you are less happy.

The cases of Honduras and Chile explain this relative effect on happiness. According to the study, poor Hondurans are 0.5 percent happier than poor Chileans because the gap between a poor Honduran, who is poorer by half than a poor Chilean, and the average Honduran income is much smaller than the gap of a poor Chilean and a Chilean average income.

Graham did the same analysis for the rich and found the relationship stronger because there are more variants on the top of the income scale, so a rich Honduran is 1 percent happier on average than a rich Chilean just because of this relative effect.

With some mixed results, Graham pointed out a correlation between happiness and inequality. On average, medium unequal countries are the happiest while highly unequal countries are the least happy.

Does inequality matter to individual welfare in the region?

Yes. Inequality is seen as persistent advantages to the rich and disadvantages to the poor in Latin America and the Caribbean. Inequality makes the richer happier, and the poor less happy.

Graham stated her hypothesis on inequality having stronger effects in Latin American countries than other countries in the world.

Inequality can be a signal of either mobility and opportunity or perceived injustice. But with the highest rate of inequality in the world, Latin America's inequality is seen as injustice.

Gender inequality, for instance, explains why men are happier than women in Latin America. Quite the opposite is seen in Europe and the U.S., where women are happier than men because of the extent of upward mobility that individuals have there. Graham also found that countries with highest levels of education were the happiest.

At the regional level, Graham concluded, the poor are 3 percent less happy and the rich 5 percent happier.