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The Impact of Income Inequality on Individual Happiness: Evidence from China

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Abstract

Using survey data from China, this paper tests the association between individual self-reported happiness and income inequality. The hypothesized relationship between income inequality and individual happiness is an inverted-U shaped association based on the tunnel effect theory proposed by Hirschman and Rothschild (Q J Econ 87(4):544–566, 1973). Using the Chinese General Social Survey data, we empirically investigate the relationship between income inequality and individual happiness and we find evidence confirming the tunnel effect hypothesis. Specifically, individual happiness increases with inequality when county-level inequality measured by the Gini coefficient is less than 0.405, and decreases with inequality for larger values of the Gini coefficient, where approximately 60 % of the counties in the study have a Gini coefficient larger than 0.405. The inverted U-shaped association exists in both urban and rural China; however, the turning points for urban and rural areas are 0.323 and 0.459, respectively. Between the rich and poor groups, the inverted-U shape relationship exists only in the poor subsample.

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Notes

  1. They measure “between-group inequality” by the income gap between migrants without local hukou and urban residents.

  2. In total, China has 31 provinces, municipalities, and autonomous regions in mainland China. Qinghai, Ningxia, and Tibet were not covered in this survey, because the population of the three regions only accounts for a very small proportion of the whole nation, missing them should not affect the national representativeness of the survey.

  3. In order to check whether the functional form of income inequality is reasonable, i.e. why we choose quadratic of income inequality, not the cubic or the biquadrate, we carry out the following tests. LR-test result for linear and quadratic model: LR Chi2(1) = 22.62, Prob > Chi2 = 0.0000; LR-test result for cubic and quadratic model: LR Chi2(1) = 1.87, Prob > Chi2 = 0.1712; LR-test result for biquadrate and quadratic model: LR chi2(1) = 3.92, Prob > Chi2 = 0.1408; Ramsey RESET test using powers of the fitted values of happiness for the quadratic model, Ho: model has no omitted variables, F(3, 8,173) = 1.09, Prob > F=0.3534.

  4. Addressing the potential heteroskedasticity of the error term, we report the robust standard errors for all the regression. In fact, we have also estimated the standard errors and find the results are similar.

  5. The formula: turning point for Gini = −[effect of Gini/(2·effect of Gini2)], that is, the Gini at the peak of the inverted U-shaped curve of Gini and happiness.

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Acknowledgments

This study was funded by the Applied Economics Research Funds of Southwest University for Nationalities (2011XWD-S0202), the National Natural Science Foundation of China (71303165), Sichuan University (skqx201401), the China Postdoctoral Science Foundation (2013M540706) and China Medical Board (13-167). We are grateful to the seminar and conference participants at Southwestern University of Finance and Economics for their insightful comments, and to colleagues at the PKU Center of Health Economics Research, Gordon G. Liu, Gergely Horváth and the anonymous referees. Data analyzed in this paper were collected by the research project “China General Social Survey (CGSS)” sponsored by the China Social Science Foundation. This research project was carried out by Department of Sociology, Renmin University of China and Social Science Division, Hong Kong Science and Technology University, and directed by Dr. Li Lulu and Dr. Bian Yanjie. The authors appreciate the assistance in providing data by the institutes and individuals aforementioned. The authors are responsible for all remaining errors.

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Authors and Affiliations

  1. School of Economics, Southwest University for Nationalities, Chengdu, China

    Peng Wang

  2. West China School of Public Health, Sichuan University, Chengdu, China

    Jay Pan

  3. West China Research Center for Rural Health Development, Sichuan University, Chengdu, China

    Jay Pan

  4. Department of Epidemiology and Biostatistics, Michigan State University, East Lansing, MI, USA

    Zhehui Luo

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  1. Peng Wang
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Correspondence to Jay Pan.

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Wang, P., Pan, J. & Luo, Z. The Impact of Income Inequality on Individual Happiness: Evidence from China. Soc Indic Res 121, 413–435 (2015). https://doi.org/10.1007/s11205-014-0651-5

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