The effects of income and inflation on personal satisfaction: Functional measurement in economic psychology

Controlled experimental designs and functional measurement procedures were used to study how people perceive the effects of changes in major economic variables. In experiment I one group of subjects rated economic well-being and another group of subjects rated personal satisfaction for a variety of economic scenarios described by variations in salary, rate of increase in salary (annual raise), and annual rate of inflation. Stimulus interaction effects were found for each response scale showing that there is not a simple subtractive relationship between wage gains and inflation in determining perceived economic impact. Experiment 2 further investigated the interactive effects of raise and inflation on personal satisfaction. Results were discussed in terms of two complementary psychological processes: a “negativity effect” whereby unfavorable levels of raise and inflation have disproportionate weight, and a comparison of raise and inflation rate whereby personal satisfaction is incremented disproportionately when raise changes from below the inflation rate to above the inflation rate. Psychological concepts revealed in this study were related to economic concepts of “elasticity of demand” and “money illusion”.