The Role of Health in Shaping the Relationship Between Income and Subjective Well-Being: A Study on German Panel Data

Abstract

Many may believe a higher income will make them happier. While this is true to some extent, studies show that subjective well-being (SWB) tends to increase at a decreasing rate. Included in many studies is not only the income of the individuals, but also the income of people in their surroundings, or the so-called relative income. Whereas most studies show that our SWB decreases as the income of others increases, some have found that individuals may believe it’s an indicator of a future increase in their own income, explaining this using the information and tunnel effects. Using German SOEP panel data, the role of health in the income-SWB relationship is explored in a fixed effect regression analysis. It is further explored whether or not the information and tunnel effects play a role in this relationship. The results suggest that people with better health have a negative effect on the absolute income-SWB relationship, and a positive effect on the relative income-SWB relationship. This implies health plays a great deal in an individual’s SWB in relation to both their and others' income.