Money and Happiness:Evidence from the Industry Wage Structure

There is a well-established positive correlation between life-satisfaction measures andincome in individual level cross-sectional data. This paper attempts to provide some evidenceon whether this correlation reflects causality running from money to happiness. I use industrywage differentials as instruments for income. This is based on the idea that at least part ofthese differentials are due to rents, and part of the pattern of industry affiliations of individualsis random. To probe the validity of these assumptions, I compare estimates for lifesatisfaction with those for job satisfaction, present fixed effects estimates, and presentestimates for married women using their husbands’ industry as the instrument. All thesespecifications paint a fairly uniform picture across three different data sets. IV estimates aresimilar to the OLS estimates suggesting that most of the association of income and wellbeingis causal....