Income / Wages
Income/Wages
How much is enough?
. Here is a relevant story that helps to explain the question of how much is enough. A professor takes an empty jar and fills it with golf balls. He asks the class if the jar is full. They respond: yes. Then the professor puts pebbles in the same jar to fill the remaining space. His students agree that it is now full. Then the professor puts sand in the jar to fill the remaining space. His students, now somewhat less sure of their answer, decide that the jar is now full. Finally, the professor puts water in the jar which fills up the remaining space.
. This example demonstrates how people feel about their income. When is it enough? Is it ever enough? What amount does one need to have maximum utility and happiness? And does money really make you happy?
. Contrary to thought, the majority opinion is that money cannot bring happiness and it can create problems. But do people really act on that belief?
. Income only gives you the tools to make you happy. However, what many people do not consider is that in the long-run, the stress you get from a higher salary job could and usually does cause mental and physical problems that cost more than the salary that one earns. Studies show that the average person is willing to take that chance for the instant gratification of having a higher salary.
. This chart shows that, while income in the U.S. rises throughout the years, happiness fluctuates. This means that there is presumably no correlation between income and happiness.
Why could this be? Well, this could be for a number of reasons. For example, if a person, who we will call Bob, obtains an increase in salary, Bob will tend to spend more. Let’s say the Jones’ family bought a nice car. When Bob’s salary increases, he will want to buy a car that’s better, because it is human nature to want to feel superior to others. This can happen with anything as minimal as a better cell phone or a better pair of shoes. Therefore, the responsiveness to positional goods is increasing as salary increases. Since there will always be something else that Bob can buy, happiness is obviously not dependent on income.
. Many researchers believe that money does bring happiness up to a certain point, but after enough money is made to live securely, people, contrary to what they make themselves believe, do not get happier as their income rises.
Happiness in comparison to others:
. People want to have a higher income, but is that really what makes them “happier?” Studies show that people would rather have a lower income as long as it is higher than everyone else’s income. As income rises, the norm that everyone wants to reach rises as well.
Job Security:
. The feeling insecure about one’s job is a major source of unhappiness. The world is so competitive that people will always want your job. As competition increases, security decreases. However, higher income does not mean higher job security, if there is no contract between the employer and the employee.
. For example, a lawyer will make more money in a private law firm than in a Federal or State government position. However, many lawyers will readily choose a government position instead of a private law firm. This is because government positions are inherently more secure than private practice. Therefore, lawyers who work for the government may be more conscious of job security and are willing to sacrifice salary for job security.
Raises/Bonuses:
. Raises and bonuses do not give you long term happiness and do not mean that your job is secure. It is merely instantaneous happiness.
. Daniel Kahneman, a psychologist and Richard Thaler, an economist, both known for their work in behavioral finance, developed an interesting theory about raises and bonuses and the happiness that both bring. In their opinion, bonuses bring more happiness than raises. Why is that? Let’s use Bob as an example again. There are two options if an employer wanted to raise Bob’s income by ten percent. If an employer increases Bob’s income by ten percent, Bob would be happy, but only for a limited amount of time. Soon after Bob’s income rises, Bob will get used to that income and wish he had more. Now, let’s examine the second possible scenario of raising Bob’s income by ten percent. Bob’s employer could keep Bob’s salary fixed and pay a bonus to equal the ten percent increase every so often, for example every year. This bonus would raise Bob’s happiness level every time he receives it. Bob has routine expenses that his paycheck covers. With a bonus, he could buy more that brings him pleasure or have greater savings. If it was just a salary increase, he would probably have new routine expenses which would not bring him any extra happiness.
