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An Evaluation of Common Explanations for the Impact of Income Inequality on Life Satisfaction

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Abstract

This study explains how income inequality affects life satisfaction in Europe. Although research about the impact of income inequality on life satisfaction is inconclusive, authors suggest several reasons for its potential impact. In the literature section we discuss three types of explanations for the impact of inequality: pure aversion for inequality, aversion for inequality motivated by how an individual is personally affected by inequality and preferences for equality of opportunities. In order to test these explanations, we examine how three corresponding variables, respectively attitude towards redistribution, income and perceived mobility, interact with both actual and perceived income inequality in multilevel analyses using data from the European Values Survey. Our results reveal that there are significant differences between how people are affected by actual income inequality and how they are affected by perceived income inequality. The impact of perceived income inequality on life satisfaction depends on perceived mobility in society and income, while the impact of actual income inequality solely depends on perceived mobility. We conclude that traditional explanations often erroneously assume that people correctly assess income inequality. Moreover these explanations are more capable of clarifying the effect of perceived income inequality on life satisfaction than that of actual inequality.

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Notes

  1. Explanations could be grouped in other ways. See for instance Corneo and Grüner (2002) for an alternative classification.

  2. Marital status is measured with the following categories: Single, married or living together as married and divorced or widowed. Subjective health is measured on a 5 point scale with answers going from very good to very poor.

  3. The median income is assumed to be 100. The poorest class is ascribed an income below 60, the second class earns an income between 60 and 80, the following classes are attributed incomes between 80 and 110, 110 and 150, 150 and 200, 200 and 250 and the richest class earns more than 250. Based on these boundaries, each income class is assigned a specific income. These are respectively: 30, 70, 95, 130, 175, 225 and 300. These specific pay-off values could be the subject of further debate. The resulting Gini Coefficient is, however, quite robust to different pay-offs.

  4. Wang et al. (2015) found that the link between inequality and life satisfaction was not linear in China. We checked for a non-linear relationship between inequality and life satisfaction by including squared inequality. However, this did not improve our models, therefore we simply included a single variable for inequality, as is commonly done.

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Acknowledgements

The author would like to thank Elsy Verhofstadt, Luc Van Ootegem, Brent Bleys, Walter van Trier, the editor and the reviewers for their helpful comments and valuable suggestions on earlier drafts.

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Correspondence to Benjamin Schalembier.

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Schalembier, B. An Evaluation of Common Explanations for the Impact of Income Inequality on Life Satisfaction. J Happiness Stud 20, 777–794 (2019). https://doi.org/10.1007/s10902-018-9970-6

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