Inequality and happiness: are Europeans and Americans different?
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.
Section snippets
Description
The analysis examines US happiness data from the United States General Social Survey (1972–1997) (see Davis and Smith, 1994). We use the happiness question that reads “Taken all together, how would you say things are these days—would you say that you are very happy, pretty happy, or not too happy?” (small “Don't know” and “No answer” categories are not studied here). This was asked in each of 25 years. In the main analysis, data limitations on state-level inequality data force us to restrict
Happiness and inequality in the United States
The period from the early 1980s to the mid-1990s is characterized by a large and noticeable increase in inequality, particularly in the US. Therefore, this is a rather interesting time period to analyze from our perspective, since there is much variability in the data. All the regressions include state and year dummies.
We begin in column 1 of Table 1-US with a regression that includes only the individual characteristics of the respondent. The results are sensible and provide some confidence in
Happiness and inequality in Europe
Table 1-Eur presents pooled ordered logit regressions for the 12 European countries listed above for all countries and years for which we have happiness data. We have inequality data for only a part of this sample, giving us a total of 103,772 observations. All the regressions include country and year dummies.
As for the US results, we first present, in column 1, the results obtained using only individual controls. Comparing column 1 of Table 1-Eur with column 1 of Table 1-US one is struck by
Comparing Europe and the United States
The differences between the two sides of the Atlantic are striking. In Europe, the poor and the left leaning respondents show a strong aversion to inequality. In the US, in contrast, the rich is the only group displaying aversion to inequality. Note that when we use other data sets on income distribution at the state level in the US, such as the census measures or the measures of inequality produced by the Economic Policy Institute from gross income data of the CPS, or the data presented in
Conclusion
Countries differ greatly in the degree of income inequality that they tolerate, even at similar stages of development. European observers object to the higher (and, for much of the past few decades, growing) inequality in the US. American commentators argue that European society's “obsession” with inequality stifles creativity and creates a vicious circle of welfare addiction of the poor. Do these differences of opinion simply reflect different preferences about the merits of equality in the
Acknowledgements
We thank Eliana La Ferrara, Norman Loayza, Andrew Oswald, Thomas Piketty, three anonymous referees and participants in many seminars for their discussions and comments. We are very grateful to Rebecca Blank, Eliana La Ferrara, Jeff Perloff and Ximing Wu for their generous help with data. Min Shi provided excellent research assistance. Alesina gratefully acknowledges financial support form the NSF through the NBER.
References (65)
- et al.
More equal but less mobile? Education financing and intergenerational mobility in Italy and the US
Journal of Public Economics
(1999) Random groups effects and the precision of regression estimates
Journal of Econometrics
(1986)- et al.
Who wants to redistribute? The tunnel effect in 1990 Russia
Journal of Public Economics
(2000) Individual Welfare, Majority Voting and the Properties of a Linear Income Tax
Journal of Public Economics
(1975)On the measurement of welfare
Journal of Econometrics
(1991)Ordinal and cardinal utility
Journal of Econometrics
(1991)- Agurzky, B., Schmidt, C., 2001. The evaluation of community-based interventions: a Monte Carlo study, IZA DP No....
- Alesina, A., La Ferrara, E., 2000. Preferences for redistribution in the land of opportunity,...
- et al.
Political Cycles and the Macroeconomy
(1997) - et al.
Why doesn't the United States have a European-style welfare state?
Brookings papers on Economic Activity
(2001)
Empirical Studies of Income Mobility
Social mobility and the demand for redistribution
The Quarterly Journal of Economics
Intergenerational income mobility in Sweden compared to the United States
American Economic Review
What makes an entrepreneur?
Journal of Labor Economics
What causes public assistance caseloads to grow?
Journal of Human Resources
Would you like to shrink the welfare state? A survey of European citizens
Economic Policy
The Structure of Psychological Well-Being
Optimal permutation tests for the analysis of group randomized trials
JASA
Unhappiness and unemployment
Economic Journal
A new data set measuring income inequality
World Bank Economic Review
Subjective well-being
Psychological Bulletin
Subjective well-being: three decades of progress
Psychological Bulletin
Cited by (1070)
Does unfairness reduce efficiency? Within-industry CEO pay inequity and firm efficiency in China
2024, Finance Research LettersExecutive equity incentive plans: Effective golden handcuffs?
2024, International Review of Economics and FinanceCommuting characteristics, perceived traffic experience and subjective well-being: Evidence from Hangzhou, China
2024, Transportation Research Part D: Transport and EnvironmentThe effect of housing price inequality on mental health
2023, Labour Economics