Income Distribution and Subjective Happiness

This survey summarises the insights that the new literature based on subjective data has shed on the issue of income inequality and income comparisons. It reviews the various channels that relate income distribution and subjective well-being. It considers the welfare effect of income gaps in general, both in terms of the difference between individual income and the income of some relevant other, and with regard to generic income distribution. Concerning income comparisons, the general lesson is that it is useful to distinguish status effects from signal effects: income comparisons hurt, but they may also increase life satisfaction when they mean good news; this is all the more likely as the reference group is made of people who most likely share a common destiny. Concerning income distribution in general, the relationship with subjective well-being is generally found to be negative, with higher societal inequality being associated with lower subjective well-being. There are many possible pathways which may lie behind such an empirical finding. The first type of aversion to income inequality derives from self-centred motives, such as risk-aversion and prospects for upward mobility (POUM). Both stem from a perception of the income distribution as a ladder that one risks falling from or has a chance to climb. Attitudes to inequality are also sometimes found to be based on other-regarding preferences such as fairness and reciprocity, which are generally independent of the income position of the individual himself. An important point is that subjective attitudes are the joint output of preferences and beliefs concerning income distribution in society. The demand for redistribution is higher whenever people have strong preferences for equal outcomes or opportunities but believe that in the society in which they live, outcomes or opportunities are actually not equal. As illustrated by several studies, preferences and beliefs concerning income distribution are context dependent and are thus heterogeneous across countries and groups of the population.