Effects of Happiness on Income and Income Inequality

This paper examines the effects of happiness on income and income inequality. We postulate that happiness impacts upon the income generating capacity of individuals directly by stimulating work efficiency, and indirectly by affecting their allocation of time for paid work. These direct and indirect effects of happiness on income are tested in a regression model and the implication of these effects for income distribution is explored using an inequality decomposition framework. An empirical exercise based on Australian HILDA panel survey data (2001–2014) reveals that happiness has a positive and significant effect on income generation and contributes to the reduction of inequality.