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Inequality and happiness: are Europeans and Americans different?

About the authors
Alberto Alesina is a Professor in the Economics Department at Harvard University. His primary fields of interest are political economy, monetary and fiscal policy, and macroeconomics.
Rafael Di Tella is an Associate Professor at Harvard Business School.
Robert MacCulloch is a Research Fellow at London School of Economics.
Most governments redistribute income through taxation and the welfare state. But European governments do so more than the government of the United States. Does this reflect more of a “taste” for equality in Europe, or is it the consequence of differences in social mobility?

Redistributing government, big and small

Governments redistribute income using direct and indirect means. This public sector role has increased vastly in the last few decades in all industrial countries. But European governments are more heavily involved in redistribution than that of the United States. European fiscal systems are more progressive than in the United States (meaning that proportionately, they tax richer people more heavily than poorer people). And the welfare state is more widespread in Europe, where the government’s share of the economy is substantially larger than in the United States.

In 1996 the share of total government spending over GDP (excluding interest payments) was about thirty per cent in the US. It was forty-four per cent in Europe. Income transfers (redistribution) as a proportion of GDP were about fourteen per cent in the US, and about twenty-two per cent in Europe.

At the end of the nineteenth century, the share of transfers as a proportion of GDP was less than one per cent in both Europe and the US. In 1960, it was about six per cent of GDP in the US, and about ten per cent of GDP in Europe. The growth of transfers explains almost all of the difference in the size of government between Europe and the US.

Who supports redistribution, and why?

If European governments redistribute so much with democratic legitimacy, it must mean a large fraction of the population favours these programmes. For a start, the “poor” should be in favour of redistribution, since on balance they gain from it.

But this preference is mitigated by the fact that the poor of today may become the rich of tomorrow. Though poor now, they may not want to be in the future the ones who will support redistributive schemes. So social mobility should influence the public perception of redistributive policies.

Beyond self-interest, however, people may perceive inequality (often associated with high poverty rates) as a social evil. That is – at least up to a point – even the rich, net losers from redistributive schemes, may favour them, because they perceive poverty and inequality as social ills. This perspective may be motivated in part by self-interest: inequality breeds crime and threats to property rights. But beyond that, the observation or perception of poverty may negatively affect the welfare of the rich, and their sense of fairness about the world in which they have succeeded.

Inequality and happiness

We have studied these perceptions, investigating whether and why inequality may negatively affect individual utility. We measure “utility” in terms of survey answers about “happiness” and “life satisfaction”, using the United States General Social Survey (1972-1994) and the Euro-Barometer Survey Series (1975-1992).

The US question 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?” The European question differs, because the word “happy” translates imprecisely across languages: “On the whole, are you very satisfied, fairly satisfied, not very satisfied or not at all satisfied with the life you lead?” “Happiness” and “life satisfaction” are strongly correlated.

Some readers may feel uncomfortable with our use of a vague question like “are you happy?” for statistical investigation. However, a growing literature both in psychology and in economics successfully uses just this question, and the patterns observed in the answers to this question are reasonable and quite similar across countries. We are confident that such data is significant to the study of inequality.

Europeans dislike inequality, Americans don’t

We have found some intriguing results. First, Europeans seem to strongly dislike inequality; but there is no evidence that Americans are affected by it. Second, the European aversion to inequality is more concentrated in certain groups. Those who define themselves as leftist, for example, show a strong distaste for inequality, while those who define themselves as right-wing are unaffected by it.

Third, the breakdown of rich versus poor shows a clear difference between Europe and the US. In Europe, the happiness of the poor is strongly negatively affected by inequality, while the rich are unaffected. In the US, one finds that the only group that seems to be negatively affected by inequality is the rich leftists.

There are two potential interpretations for our finding that Europeans dislike inequality, while there are no strong effects in the US. The first involves taste. Could the results simply reflect a higher “taste” for equality and social harmony in Europe relative to the US? That is, does equality enter the utility functions of Europeans, while playing a weaker role in that of Americans? If this is the case, “equality” could be seen as a kind of luxury good.

The share of government transfers is increasing in GDP in cross-country samples, but Europeans care more than Americans about this particular luxury and are willing to pay for it.

However, this interpretation does not seem consistent with our results. Inequality has different effects within Europe, across income and ideological groups. If equality is likely to be a “luxury” good, the “taste for equality” should be found in high-income groups. Yet it is the happiness of the poor, not the rich, that is negatively affected by inequality in Europe.

A more plausible interpretation relies on differences in social mobility. If the US is a more mobile society than Europe, where people have more opportunities to move up (or down), then present-day inequality levels may have little influence on individual utility. Inequality in such cases is a poor indicator of what awaits in future.

We have discovered that, on balance, inequality does not make Americans unhappy. In Europe, it makes the poor unhappy, as well as the left. This favours the hypothesis that inequality affects European happiness because of their lower social mobility (since no preference for equality exists among the rich or the right).

[Also see: Robert Wade's champagne glass of inequality]


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