Income and Life Satisfaction: Income Measurement Matters

ABSTRACT The relationship between life satisfaction and income is a key question in the economics of wellbeing. Most literature on the income coefficient in a life satisfaction regression focuses on issues of causal identification or the measurement of life satisfaction. However, the quality of income measures also has a material impact on the estimated relationship between income and life satisfaction. This paper uses administrative and survey data linked at the individual level to explore the impact of income measurement issues on the estimated relationship between income and life satisfaction. The self‐report income measure—collected in income bands—correlates more strongly with life satisfaction than does the more precise employer‐report measure. This relationship does not appear to reflect differences in the scope of income captured by each measure. We explore whether other factors such as respondent personality traits influence the estimated relationship between income and life satisfaction.