Inequality and happiness

The evidence on higher levels of happiness in Nordic countries has been long and persistent. Could it have something to do with them having less social inequality (less envy and resentment) and more ethnic cohesion (although that is changing)?

Fred Argy commenting on my Happy Danes post.

As Will Wilkinson’s excellent recent paper on happiness research notes, it’s hard to find consistent results on the well-being consequences of income inequality. As Will argues, one reason for the mixed findings is that the effects of various factors on happiness are ‘culturally and ideologically mediated’. So the impact of income inequality will depend on how intrinsically important equality is seen to be, how justified the differences that are perceived to exist are seen to be, and how people perceive their own prospects. If people in Nordic countries value equality highly, and that is what their society produces, that might help explain why they do well in happiness and life satisfaction surveys.

This does not, however, mean that their model can be easily transposed elsewhere. Other countries with fairly low income inequality like Germany consistently do quite poorly in surveys of happiness and life satisfaction. A 2003 paper by Rafael Di Tella and Robert MacCulloch (can’t find a link) showed income inequality and happiness inequality trends over the period 1975 to 1995 and found that while income inequality rose in the US and Britain happiness inequality was stable or falling.

An important point that Will makes in his paper (and in his Policy article last year) is that while status does matter it is a mistake to focus so heavily on the relationship between income and status. It is only one dimension of status, and not necessarily the most important one. As he puts it:

…while the number of positions on any single dimension of status may be fixed, there is no reason why dimensions of status cannot be multiplied indefinitely. It does not in fact require a violation of mathematical law to produce more high-status positions, for it is possible to produce new status dimensions.

New dimensions of excellence and status often open up due to technological innovation. It was impossible to be a chart-topping pop star or a champion triathalete before there were radios and bikes. Liberal market societies not only create new technologies, they create proliferating forms of association, affiliation, expression, and identity at a sometimes alarming rate. Each musical genre, each hobby, each committee, each church, each club, each ideology, each lifestyle provides a new dimension—a new frame of reference—for positional competition. Environmental purists can compete with one another to conspicuously consume eco-friendly products (or conspicuously refuse to consume much at all), while punk rockers duke it out on grounds of anti-establishment authenticity, and economics professors knock themselves dead trying to get articles into esoteric journals no one else cares about.

So even where ‘social inequality’ matters, income inequality is not necessarily a good proxy measure, because it misses many dimensions of status that may actually matter more to people’s well-being.

8 thoughts on “Inequality and happiness

  1. A further consideration in response to Fred’s argument is to point out that, with greater income equality, so the opportunity for “higher ranking” individuals to gain happiness through exhibiting their income-derived status, or indeed by being envied, drops. Unless these effects are assymetrical (and, of course, I recognise they might be), the improvement in happiness among the poor would be offset by a reduction in happiness among higher income earners.

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  2. I would suggest to Fred Argy that being obsessed with how happy the Scandinavians are is perhaps the reason why other nations rank lower. Perhaps they are the Jones (or the Johannes).

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  3. Tom – As you suggest, the centre-left argument is that these effects are asymmetrical. Someone like Richard Layard from his utilitarian perspective argues that due to diminishing returns the dollars are of greater benefit to the poor than the rich. But he also argues that taxing what he sees as status-seeking would help even people who would acquire status if they kept going by helping them restore work-life balance, etc.

    An issue here I don’t recall seeing addressed is whether there are any effects related to where the money comes from. I think it would still be the case, at least in Anglo cultures, that money earned in the market -even if subsequently confiscated through tax – would accrue more status than a welfare handout, an inheritance, or proceeds from crime.

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  4. Thanks Andrew for your helpful and very professional piece. I am no expert on happiness research. I was genuinely asking the question because I was not sure what role inequality played.

    As to what it all means for Australia, I will give you my gut feelings (for all it’s worth) based on my fairly modest reading of the literature (including some papers from a very recent OECD conference on happiness which are now on their web site).

    1. Australians do not value equality as highly as the Nordics or even the Germans) but beyond a point they will rebel if it threatens social tension and unrest and their sense of fairness. I doubt we are even close to that position (except perhaps on workers’ rights).

    2. Australians do value very highly equality of opportunity – it is the essence of what they mean by a ‘fair go’ – everyone should have an equal chance to succeed if they put in the same effort and are of equal ability. Here too the wide perception of survey respondents is that Australia offers reasonably equal opportunities to everyone who will help themselves.

    These perceptions are, in my view, out of line with reality. As people realise that access to employment, education, health, housing and public transport is unequal – and increasingly so – and as they start to accept the view of economists like myself that this is productive investment, it could show up at the ballot box and take the form of an ever-increasing preference for collective (universal and targeted) services over tax cuts . The polls are moving in that direction already to a small extent but the momentum is not yet strong enough to influence politicians.

    3. Tom, I suspect from my limited personal observations that the poor compare themselves with the median and the rich compare themselves with the very rich. But I can’t prove that.

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  5. “in Anglo cultures, that money earned in the market -even if subsequently confiscated through tax – would accrue more status than a welfare handout, an inheritance, or proceeds from crime”
    Really? I would have thought the opposite – that inherited money (and the more generations away from the ‘trade’ that made it the better) was the classiest. Perhaps that’s the changing times: Therese Rein having higher status than Tammy Fraser?

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  6. On a pedantic note, the most recent figures the OECD has on income inequality in Germany finds that it is about the same as in Australia – 0.298 in Germany and 0.301 in Australia both around 2004, which I would be inclined to describe as not statistically significant.

    Inequality has been stable in Australia according to our figures but rising quite rapidly in Germany, which might explain their national angst.

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  7. Peter – Thanks for the correction on German inequality – does that combine east and west? The overall life satisfaction figures in Germany are dragged down a little by the east, but they have been consistently low since regular surveys began in the mid-1970s. As can be seen in the British Medical Journal link this is partly because of the relatively low proportion of people saying that they are ‘very satisfied’.

    I’m not sure whether this is influenced by culture; as I understand it one reason Asian countries tend not to get high averages is that very few people will put themselves at the top of the scale, which for some reason is not seen as proper (I am paraphrasing a conference paper I heard here, I have not examined the research on this point).

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  8. Yes, that combines East and west – separately they are likely to be more equal, I would imagine. the trend to increased inequality is for the two combined since 1990, so is not directly affected by reunification.

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