Resolution of the Happiness–Income Paradox

It is widely believed that happiness is strongly correlated with wealth and income, but according to the happiness–income paradox, this is not always true. The paradox predicates that there is a strong positive correlation between income and happiness nationally, but the correlation is essentially absent in international comparisons, or in a long-term longitudinal comparison. This paradox has been widely debated among economists and the controversy has persisted for several decades. In this article, the happiness–income paradox is explained in terms of ecological correlation due to spatial aggregation or data-grouping, change of reference classes, and confounding variables. The controversy is resolved when ecological correlations and third-variable effects are accounted for. At the individual level, happiness and income are correlated positively, but not as strongly as many believe. In international comparisons, happiness and income are, in general, quite strongly correlated as well, contrary to what Easterlin (Nations and households in economic growth: essays in honor of Moses Abramovitz, Academic Press, New York, 1974) claimed and similar to what others have found, but for different reasons. Long-term comparison is also related to ecological correlation, but it is related to the change of reference classes as well.