Income expectations and happiness: evidence from British panel data

Summary

We analyze the impact of households’ subjective current and future
financial measures on their well-being by using three waves of a
longitudinal data set—Understanding Society
-from the UK. We use a fixed-effects regression method to get rid of
individual heterogeneity, and find that even after controlling for some
demographic characteristics, including equivalent household income,
subjective measures of current and future financial well-being are still
significant correlates of life satisfaction in UK households. The same
results hold for income satisfaction and mental health. Our main
contribution however is showing that positive surprises in financial
expectations decrease the subjective well-being of the household’s, and
vice versa for negative surprises. This result shows that even though a
household’s expectations of its future financial situation may not be
accurate, any unexpected shock regarding household income could be
significantly correlated with subjective well-being.