A theory is developed of why there is empirical evidence that people in developed economies are, on average, experiencing increasing income levels over time but are not reporting increasing levels of happiness. This paper argues that utility may be determined by measures of the average level of consumption across goods and the rate of change in the variety of consumption. If the preference structure follows this formulation, it is shown that a model of growth with expanding product variety obtains an equilibrium in which income will be increasing over time, but utility will be flat or slightly decreasing. This positive effect can be attributed to political outcomes closer to voters' preferences, as well as to the procedural utility of political participation possibilities. Moreover, the results of previous microeconometric well-being functions for other countries are generally supported.
Unemployment has a strongly depressing effect on happiness.
A higher income level raises happiness, however, only to a small extent. Bootstrap confidence intervals suggest that up to 90 per cent of the time the evidence is consistent with this assumption. Finally, we find that individuals declare themselves to be happier when the party they support is in power, even after controlling for economic variables. Our findings are hard to explain using median voter models but are to be expected in a partisan world. At a point in time those with more income are happier than those with less, and people think they were less happy in the past and will be happier in the future.