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Proof that money does in fact buy happiness

May 1, 2013: 10:38 AM ET

A new study debunks the theory that money doesn't make you any happier once you've passed a certain income threshold.

Happy now?

Happy now?

FORTUNE – They say money can't buy happiness, but a new study suggests it actually can. In fact, the more money you have, the happier you are.

That might sound obvious to some people, but studies have historically shown there's more to happiness than money. In the 1970s, economist Richard Easterlin argued that increasing average income did not raise average well-being, a claim that became known as the Easterlin Paradox. Over the years, the paradox evolved into the notion that money does indeed buy happiness, but that effect fizzles once the income you earn is able to buy your basic needs -- food, shelter, and the like.

Somehow that idea carried into popular notion but was never really formally tested.

Now University of Michigan economists Betsey Stevenson and Justin Wolfers have examined data for more than 150 countries from sources including the World Bank and the Gallup World Poll. The husband-and-wife team found that the more money people have the happier they are, regardless of whether they're rich or poor. And contrary to earlier studies, there isn't a cutoff point where making more than a certain amount doesn't lead to more happiness.

Needless to say, happiness is a relative term. What does it mean to be happy, anyway?

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Even America's millionaires don't think of themselves as rich, as Fortune's Dan Primack has pointed out. So are they any less happy than poorer folks scraping by earning minimum wage?

Not exactly. It just takes more money to make the super-rich happier, Stevenson and Wolfers note in their study, which is to be published in the May 2013 American Economic Review. In fact, the study found zero unhappy millionaires. Their analysis adds to the collection of studies on happiness that have long interested economists.

To be sure, there are two kinds of happinesses: The day-to-day kind that focuses on your daily mood vs. what Princeton University economist Angus Deaton and famed psychologist Daniel Kahneman call "life assessment," which means broader satisfaction with your place in the world. In their 2010 study, they found that day-to-day happiness rises as people earn more money, but once they hit $75,000 a year, they don't get any happier. Admittedly that threshold seems arbitrary in places like New York City, where, as The New York Times recently highlighted, middle-class is a vague class, since incomes there vary so widely.

Nonetheless, according to Deaton and Kahneman, the more money people have, the more likely they'll feel they have a better life. This taps into the keeping up with the Joneses mindset: If I earn more, I could buy a fancier car than Mr. Jones next door. Or if I earn more, I may be able to donate more of my fortune than Warren Buffett or some other rich person.

Stevenson and Wolfer's study speaks to the latter kind of happiness, where fulfillment is infinite so long as your income rises.

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This makes a lot of sense. Money, while it can't always buy happiness, is an important means to achieving higher living standards. In the U.S., the average person earns $37,708 a year, according to the Organisation for Economic Co-Operation and Development. That's more than the average of $22,387 of the OECD's 34-member developed countries.

Overall, the U.S. ranks pretty high in the OECD's Better Life Index, which measures the happiness of countries based on, among other things, access to education and health care. Though Americans are generally happy, there are still a lot of unhappy folks if money does indeed buy happiness. There's a considerable gap between the richest and poorest -- the top 20% of the population earn about eight times as much as the bottom 20%.

So if happiness is what you want, look inward, rather than what your neighbors might have. Sounds obvious, but sometimes it takes a team of economists to prove it.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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