Happiness Adaptation to Income: Evidence from Canada

Using longitudinal data from the Canadian National Population Health Survey (1994-2009), this study examined the short run and long run effects of a one-time increase in income on individual happiness. To control for the unobserved individual specific heterogeneity, this study utilized an individual specific fixed effects method. In the estimation, this study uses three specifications: without controlling year effects and province fixed effects; controlling year effects, but not province fixed effects; and controlling both year effects and province fixed effects. In all of the specifications, current income has a significant positive effect on individual happiness. However in all specifications, the sums of the lags were negative, suggesting a presence of adaptation effects. In other words, this study suggests that an increase in income temporarily increases people's happiness, but the effects wear off as people get used to new levels of income. The study also estimated the happiness model separately for male and female samples. In both cases, this study found evidence of adaptation of happiness with respect to changes in income.