Inequality and happiness: are Europeans and Americans different?

Abstract

We study the effect of the level of inequality in society on individual well-being using a total of 123,668 answers to a survey question about “happiness”. We find that individuals have a lower tendency to report themselves happy when inequality is high, even after controlling for individual income, a large set of personal characteristics, and year and country (or, in the case of the US, state) dummies. The effect, however, is more precisely defined statistically in Europe than in the US. In addition, we find striking differences across groups. In Europe, the poor and those on the left of the political spectrum are unhappy about inequality; whereas in the US the happiness of the poor and of those on the left is uncorrelated with inequality. Interestingly, in the US, the rich are bothered by inequality. Comparing across continents, we find that left-wingers in Europe are more hurt by inequality than left-wingers in the US. And the poor in Europe are more concerned with inequality than the poor in America, an effect that is large in terms of size but is only significant at the 10% level. We argue that these findings are consistent with the perception (not necessarily the reality) that Americans have been living in a mobile society, where individual effort can move people up and down the income ladder, while Europeans believe that they live in less mobile societies.

Introduction

Most governments redistribute income, using both direct and indirect means. Even though this role of the public sector has increased vastly in the last few decades in all industrial countries, European governments are more heavily involved with redistribution than that of the United States. European fiscal systems are more progressive than in the United States and the welfare state is more generous in Europe, where the share of government in the economy is substantially larger than in the United States. For instance, in 2000 the share of total government spending (excluding interest payments) over GDP was about 30% in the US, versus 45% in Continental Europe. The share of transfers over GDP was about 11% in the US and about 18% in Europe, and more than 20 in Germany, Sweden and other northern European countries.¹ At the end of the 19th century, the share of transfers over GDP was less than 1% both in Europe and the US. It was about 6% of GDP in the US, and about 10% of GDP in Europe in 1960. The growth of transfers explains almost all of the increase in the size of government and the difference in the size of government between Europe and the US.²

If democratic governments redistribute so much, it must mean that a large fraction of the population favors these programs that are meant to reduce inequality. For a start, the “poor” should be in favor of redistribution, since they gain from it on net. However, this preference is mitigated by the fact that the poor of today may become the rich of tomorrow and they do not want to be the ones who will have to support redistributive schemes. Conversely the rich should oppose redistributions, but if they fear to become poor they may see redistributive policies as an insurance against future potential misfortunes. Therefore, social mobility should influence how forward looking individuals value redistributive polices.³

Beyond self-interest, however, inequality (which is often associated with high poverty rates) may be perceived as a social evil. That is, at least up to a point, even the net losers from redistributive schemes may favor them because they perceive poverty and inequality as social harms. In part, this may also be motivated indirectly by self-interest, to the extent that inequality breeds crime and threats to property rights. But, even beyond that, the observation (or perception) of poverty may negatively affect the welfare of the rich and their sense of fairness. The bottom line is that inequality must be perceived as a social evil especially in those countries with large redistributive programs.

In this paper, we explore whether and why inequality negatively affects individual utility even after controlling for individual income. We measure “utility” in terms of survey answers about “happiness”. Some readers may feel uncomfortable using such a vague question like “are you happy?” for any useful statistical investigation. As we discuss below, however, a growing literature both in psychology and in economics successfully uses it, and the patterns observed in the answers to this question are reasonable and quite similar across countries. This gives us confidence in the significance of using such data to study inequality.

We find some intriguing results. First, Europeans and Americans report themselves less happy when inequality is high; however, the effect of inequality on happiness is more precisely estimated for Europe.⁴ Second, aversion to inequality is concentrated amongst different ideological and income groups across the two regions. There is no clear ideological divide in the US concerning the effect of inequality on happiness. In contrast, those who define themselves leftist show a strong distaste for inequality in Europe, while those who define themselves rightists are unaffected by it. The breakdown of rich versus poor also shows some differences between Europe and the US. In Europe, the happiness of the poor is strongly negatively affected by inequality, while the effect on the rich is smaller in size and statistically insignificant. In the US, one finds the opposite pattern, namely that the group whose happiness seems to be most adversely affected by inequality is the rich. A striking result is that the US poor seem totally unaffected by inequality. Any significance of the inequality coefficient in the US population is mainly driven by the rich.

We argue that these results are due to different perceptions of the degree of social mobility in the US and Europe. Americans believe that their society is mobile so the poor feel that they can move up and the rich fear falling behind. In Europe, a perception of a more immobile society makes the poor dislike inequality since they feel “stuck”.⁵ Alesina et al. (2001) provide different evidence that this is indeed the case. For instance, according to the World Values survey less than 30% of Americans believe that poor are trapped in poverty while 60% of Europeans have this belief. Americans definitively believe that society is mobile and one can escape poverty with hard work. When asked about poverty, in fact about 60% of Americans believe that the poor are lazy while less than 30% of Europeans have the same beliefs. The same authors point out the large mismatch between these strong beliefs and available measures of actual mobility in Europe and US, but for our purposes what matters are individuals' beliefs.

Given that European citizens seem so averse to inequality, and believe that the poor are stuck in poverty and worthy of help, they should favor redistributive policies, i.e. the welfare state. Broadly speaking this is the message of Boeri et al. (2000). In a survey conducted in three European countries they find that Germans, Italians and Spaniards are reluctant to favor cuts in welfare programs, even though they show a lack of clear understanding of the costs associated with them namely, they tend to understate the costs. Di Tella and MacCulloch (1996) find a desire for higher unemployment benefits in five out of six European countries (the exception being Norway) and a desire for lower or equal unemployment benefits in the United States and Australia.

The present paper is at the crossroads of two lines of research. One is the study of the determinants of “happiness”. The economic literature started with Easterlin (1974), who documented stagnant average happiness levels in the US in the face of large increases in income, a question recently taken up by Blanchflower and Oswald (2000) and Inglehart (1996).⁶ A number of subsequent papers have focused on micro-economic aspects; including the role of being unemployed on self reported well-being Clark and Oswald, 1994, Winkelmann and Winkelmann, 1998. Di Tella et al. (1997) show that the country-level “micro-happiness” regressions display a very similar structure across 12 OECD countries. That paper also takes a macro-perspective by including aggregate unemployment and a measure of the generosity of the welfare state in these happiness regressions. Other work has used happiness data to study the role of democratic institutions Granato et al., 1996, Frey and Stutzer, 1999, the inflation–unemployment trade-off Di Tella et al., 2001, Wolfers, 2002, the role of partisanship in politics (Di Tella and MacCulloch, 1998) and the role of social norms (Stutzer and Lalive, 2000). An early paper by Morawetz et al. (1977) discusses how average happiness varies across two communities in Israel that have different levels of inequality.⁷

The second line of research is the literature on the determinants of preferences for redistribution. On the theoretical side, some of the key papers are Romer (1975) and Meltzer and Richards (1981) on inequality and redistributions, and Piketty (1995) and Benabou and Ok (2001) on social mobility. Recent empirical work on the demand for redistribution includes Alesina and La Ferrara (2000), Ravallion and Lokshin (2000), Corneo (2000) and Corneo and Gruner (2000). These papers find, looking at the data from the US, Europe and in one case, Russia, that social mobility does affect the preference for redistribution.

This paper is organized as follows. Section 2 describes our data set. Section 3 presents results for the US. Section 4 present results for European countries. In Section 5, we compare results for the US and Europe. The last section concludes.