Income Expectations and Happiness: Evidence from British Panel Data

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.