Is There a Relationship Between Income Inequality and Happiness on a National Scale?

We’ve all heard Bernie Sanders talk about how the top 1% of earners in the world own more than half of all global wealth. Unfortunately, Bernie is not wrong. In recent years, income inequality has been growing globally at an ever-increasing rate.

It has been growing, however, at vastly different speeds in different countries. It seems that the way in which a country legislates has a real and important effect on inequality. In this piece, I’ll examine the possible relationship between income inequality and happiness by looking at figures from, among others, the World Happiness Report (WHR) and the World Inequality Report (WIR)

It is worth noting that happiness is a subjective and complex notion which surely depends on any number of factors outside of wealth. My aims here are simply to a) showcase some pieces of evidence (in the form of graphs from various sources) which suggest a link between inequality and happiness and b) to provide a largely theoretical discussion of the possible mechanisms for such a correlation and what the implications are if the correlation holds water.

Before I go any further, I’ll tell you a little about the measurements being used. For happiness (or more accurately ‘subjective wellbeing’), the figures come from so-called Cantril ladder answers. The Cantril ladder question is simply asking people to rate how happy they are on a scale of 1 to 10. On which rung of the ladder do you think you are? For inequality measurements, the Gini Coefficient is perhaps the most useful here. The Gini Index shows how much inequality there is in a country on a scale of 0 (perfect equality) to 1 (perfect inequality) by measuring the “average distance between the income or wealth of all the pairs of individuals” (WIR). Some graphs included in this report, however, use more tools than just the Gini.

Oishi and Kesebir. Link in sources.

Back in the seventies, the ‘father of happiness economics’ Richard Easterlin found that while people with a higher income in a given country were more likely to be happy, this relationship did not hold up on a national level. While the US is the wealthiest country on earth, it ranks just eighteenth in the 2018 World Happiness Report. Though there is a correlation between absolute wealth and happiness in the short term, it is by no means guaranteed that a country with a higher GDP will be happier than one with a lower GDP, nor is it guaranteed that an increase in the wealth of a country will positively affect the country’s ranking in the world happiness report.

From World Happpiness Report – Link in Sources

The above graph from the WHR shows that while average US income more than doubled over the studied period, happiness was the same if not lower in 2016 than it was in the early seventies. This is the Easterlin Paradox in motion.

There could, of course, be any number of reasons for the findings shown in the above graph (WHR figure 7.1). A possible explanation is the idea of diminished returns. This is the concept that as we acquire more and more wealth, the happiness that a given quantity of money brings us diminishes. If the till operator at a newsagent won ten grand on the lottery, for example, the money would transform their lives for the better. If Bill Gates or Donald Trump won the same amount, it is unlikely that they would even notice.

This idea could help account for the theoretical reasons why inequality should affect happiness. If, as the data shows, the majority of global wealth is being accumulated by people who already have plenty to spare, there will not be a huge ‘return’ of happiness. In a perfectly equal world, everybody requires the same amount to be satisfied.  In a perfectly unequal world, the majority of people require little to be satisfied but do not receive even that because all the money is tied up in the bank accounts of people who take their yachts for granted.

From World Inequality Report – Link in Sources

Easterlin’s hypothesis was that our happiness depends not on the absolute wealth of the country we live in, but rather where we rank in the social pecking order within the country. This is the idea of ‘keeping up with the Joneses’, which could also be a possible mechanism whereby inequality may affect happiness. In a perfectly equal world, people look around and see that everyone around them has the same amount of money they do. In a perfectly unequal world, the vast majority of people can look around and see some people who own more money than they could make in a hundred lifetimes at their salary. This is not to say that everyone would be unhappy because of petty jealousy. It is disheartening, however, if you are starving and see someone participating in an eating competition until they make themselves puke. Higher income inequality means more people starving and more people who have enough money to last a hundred lifetimes, lying dormant and useless in an offshore bank account.

From World Inequality Database – Link in Sources

Figures from the World Inequality Report show that while the income of the US population grew by a total of 63% between 1980 and 2016, the income of the top 0.001% in the US over the same period grew by a gargantuan 629%. When we look at the global rankings, we see that, for the most part, the most equal countries are also the happiest and the least equal are the least happy. Some readers may immediately question here whether correlation implies causation or if external factors may be influencing the data. Happiness, after all is a slippery and complicated thing to measure. In the US, for example, low happiness levels relative to wealth may be due to such factors as high rates of gun violence, racism, obesity and mistrust of government.

From the Guardian – Link in Sources

However, if we look at the trends over time on a global scale, there is a link and it is important that we explain that link if we are to learn how best to organise society in terms of subjective wellbeing. Perhaps some countries have both high happiness and low inequality because they have effective governments with a knack for social policy. These governments may provide the infrastructure for happiness through effective legislation aimed at increasing public wellbeing. Might it not be their legislation in other areas which increases national happiness, thus making our apparent link redundant?

It makes sense to me to conclude, at least, that part of the effective policy required to increase national happiness is legislation designed to minimise income inequality. Raising the minimum wage. Raising taxes for the wealthy and using that money for social goods. This is what smart governments do. Legislation influences both the happiness of a country and its place in the Gini index. What is good for income equality may also be good for happiness.

Research Sources

Guidelines on Measuring Subjective Well-being – OECD

Income Inequality Explains Why Economic Growth Does Not Always Translate to an Increase in Happiness – Shigehiro Oishi and Selin Kesebir

Inequality index: where are the world’s most unequal countries?– The Guardian

Mapping Three Decades of Rising Income Inequality, State by State – Richard Florida

Money and Happiness: Rank of Income, not Income, Affects Life Satisfaction  – Christopher J. Boyce, Gordon D. A. Brown and Simon C. Moore

Purchasing Power Parities – OECD

Richest 1% own half the world’s wealth, study finds – Rupert Neate

The World Factbook – The CIA

World Happiness Report

Word Inequality Report

 

 Header Image Credit: Prazis Images (via Big Think)