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 for most, Bernie is not wrong. In recent years, income inequality has been growing globally at an alarming and 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 definitely 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? An important point to mention is that the ‘0’ and the ’10’ on the scale are defined by the person being asked the question. One issue with this measurement is that answers may be more or less truthful depending on the culture in which they are being given. For example, it could be the case that Norwegian culture encourages people to exaggerate their happiness, skewing results.

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, Richard Easterlin, the ‘father of happiness economics’,  formulated what came to be known as the Easterlin paradox. He found that while the rich people within a country were generally happier than the poor, richer countries were not necessarily happier than poor ones. While the US is the wealthiest country on earth, for example, it ranks just eighteenth in the 2018 World Happiness Report. Easterlin also found that an increase in the wealth of a country did not bring with it an increase in happiness. These results were very surprising and seemed to contradict themselves. Some researchers, like Shigehiro Oishi and Selin Kesebir, think that the final missing variable which explains Easterlin’s paradox is income inequality.

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. 

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 most people won fifteen 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 debatable whether they would even notice.

Diminished returns could be one of 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 concept 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 million lifetimes at their salary. This is not to say that everyone would be unhappy because of petty jealousy but it is disheartening for someone who is starving to see someone else participating in an eating competition until they make themselves sick. 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 Database show that while the income of the Russian population grew by a total of 34% between 1980 and 2016, the income of the top 0.001% over the same period in Russia grew by a gargantuan 25,269%. 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 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 and obesity or any number of other problems.

From the Guardian – Link in Sources

However, if we look at the trends over time on a global scale, there seems to be 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. I for one favour going one step further and introducing a universal basic income, a move which would dramatically reduce the wealth gap if carried out correctly. That, however, is a topic for another post. 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 (2015)

Income Inequality and Happiness – Shigehiro Oishi, Selin Kesebir and Ed Diener (2011)

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)

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

    • For many, the opportunity to build a residual income is simply not present since the majority of wealth in their country is tied up in the bank accounts of the obscenely rich. Policy changes which I support such as the raising of minimum wage and increased corporate tax allow these people to build a residual income by whittling away at the disproportionately massive incomes of people who have inherited huge wealth or were given opportunities not afforded to the average person.

      Liked by 1 person

      • Everyone has the ability to build a residual income if they want to.
        All it takes is a little education and the desire to learn.
        We are living in one of the best times in history because the internet has created so much opportunity for everyone.
        We are in the information age where the ability to earn money on the internet is a normal way of life for a lot of people. We can work remotely here on the internet and build a life time residual income with internet business systems.
        With these business systems you can generate your own wealth and determine your own goals for your family and future.
        Thanks for your comment and have a super wonderful day.


      • You say all it requires is a little education and a desire to learn. Extremely low-income households, however, often do not possess the resources to access education which will increase their wages and must instead take jobs which require no experience (if they can get them) to provide income for necessities. As you say, the internet is helping some people to make money without having access to higher education. However, thanks to socioeconomic circumstances, 50% of the world’s population does not have internet access. Do you think someone who is struggling to put bread on the table can afford a computer, a modem and a monthly plan? These things some take for granted, others could only dream of. That is exactly the problem. As always, you have to spend money to make money and over time that means the rich get richer and the poor stay poor.
        Business systems online, for example, often require subscriptions to costly services to generate revenue. This requires an initial buy in that may be out of reach for many of the world’s citizens. While it may seem to someone who was able to determine their goals freely that such a thing is easy, it does not seem the same way to someone who had to drop out of school aged 15 because their family could no longer afford to provide for them.
        Thank you for your comments. I look forward to more discussions.

        Liked by 1 person

  1. Thanks for your reply, I am American and I believe our school system needs to be up dated to start teaching children more about money and how the economy works.

    We all know that the low paying hourly wage jobs are not paying people enough money to live so we need to start teaching children about residual income. Our schools are not preparing our children for real life because they don’t teach what really needs to be taught.

    I know that a lot of the problems we have in this world is because parents don’t know what they need to know so they don’t have the ability to teach their children. The reason the parents don’t know is because they went to public schools that did not teach them.

    I know this because my parents were poor and they taught me to be poor. The cycle would have continued if I would have been content to live a poor life, but I was lucky because the internet allowed me to gain the knowledge I needed to see the problem.

    We are living in the information age where everyone has the ability to learn anything they want to for free right here on the internet. It will take people setting a good example and being concerned enough to step up and help those young parents learn how to work to build a life time residual income.

    To save future generations we have to start educating the younger generations about a better type of income like residual income. We need to teach them so they don’t get stuck working the low hourly paying jobs in the first place.

    When we start teaching people how to become financially free with residual income our economy will be in a lot better shape.

    A better future starts with educating the younger generations to earn a better type of income is what I am saying. And it will take concerned citizens to do that by setting a good example for them right now.

    Thanks you the conversation, hope this helps you understand what I am talking about.
    Have a super wonderful day.

    Mark, the Residual Income Teacher


  2. Pingback: Money for Nothing: The Advantages of Universal Basic Income – Small Change

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