The assumption is widespread in Western countries: income equality is bad. Policymakers from across the political spectrum often base their arguments on this idea, and in recent years it has become embedded in our cultural consciousness. But the relationship between income inequality and happiness turns out to be complicated, and often surprising. As new research by Professor Paul Ingram and Columbia Business School doctoral candidate Ivana Katic shows, people at all income levels are happier, on average, in countries with greater income inequality.
In the study, which accounts for a wide set of control variables, Ingram explored the various contingencies that determine whether an individual is relatively happy or unhappy in the face of income inequality. One of these contingencies is aspiration. “There’s a lot of evidence that suggests it is positive — for happiness and quality of life — to have high goals, to be in pursuit, to be engaged in efforts of self-improvement,” Ingram says. This is part of the reason why income inequality, according to various models, is not necessarily negative and can be positive for happiness. “If you’re in a place with more inequality, you have more skin in the game,” Ingram says. “There’s a big difference between winning and losing, and the motivation to win increases. And when the rich are richer, the pot of gold becomes more salient.”
However, while inequality itself can have a positive effect on life satisfaction, the researchers found that in countries with greater income inequality, a tendency to make social comparisons tends to reduce happiness; people are less happy when it is easy to see how much better the Joneses are doing. “Often, we look at our neighbors and make these comparisons; that’s one of the ways we decide how good our lives are,” Ingram says. “But in terms of well-being, it’s negative for us to be making those comparisons.” Therefore, people in countries that have more freedom of the press feel the effects of inequality more negatively, because social comparisons are readily available.
The researchers identified two other factors with strong links to inequality and happiness. In countries where people feel they have free choice, income inequality has a more positive impact on life satisfaction. “If you feel in control of your life, the fact that there’s more inequality suggests you can affect your own outcomes in a positive way,” Ingram says. Separately, people who are part of a religious community are affected more positively by inequality. “A religious community provides a support network, which may counteract any potential negative effects of inequality on material life conditions,” he explains. “You have the possibility of help if you strive but fail.”
The study is a comparison of levels of relative happiness, given current conditions, and is based on data from 1981 to 2008 from the World Values Survey, which includes responses from more than 250,000 participants in 87 countries. An analysis of changes in income equality might produce different results, the authors note; within a given country, an increase in inequality might decrease overall life satisfaction, for example. Furthermore, it is always better to be at the top than at the bottom of the income distribution. In countries where the top and the bottom of the income distribution are more distant — in other words, where there is greater income inequality — the relatively wealthier individuals are happier than the relatively poor.
Their findings suggest the importance of understanding the basic mechanisms through which people assess satisfaction with their lives. The impact of income inequality and subjective well-being varies widely across places, and from person to person. As the authors conclude, what matters is not simply the level of inequality, but how it is perceived, particularly according to one’s status and opportunities.
Paul Ingram is the Kravis Professor of Business at Columbia Business School.