Estimating the influence of life satisfaction and positive affect on later income using sibling fixed-effects

Abstract

The question of whether there is a connection between income and
\npsychological well-being is a long-studied issue across the social, psychological, and
\nbehavioral sciences. Much research has found that richer people tend to be happier.
\nHowever, relatively little attention has been paid to whether happier individuals perform
\nbetter financially in the first place. This possibility of reverse causality is arguably
\nunderstudied. Using data from a large US representative panel we show that adolescents
\nand young adults who report higher life satisfaction or positive affect grow up to earn
\nsignificantly higher levels of income later in life. We focus on earnings approximately one
\ndecade after the person’s well-being is measured; we exploit the availability of sibling
\nclusters to introduce family fixed-effects; we account for the human capacity to imagine
\nlater socio-economic outcomes and to anticipate the resulting feelings in current wellbeing.
\nThe study’s results are robust to the inclusion of controls such as education, IQ,
\nphysical health, height, self-esteem, and later happiness. We consider how psychological
\nwell-being may influence income. Sobel-Goodman mediation tests reveal direct and
\nindirect effects that carry the influence from happiness to income. Significant mediating
\npathways include a higher probability of obtaining a college degree, getting hired and
\npromoted, having higher degrees of optimism and extraversion, and less neuroticism.
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