Source: Association for Psychological Science

The United States seems to exist in a state of perpetual political campaign these days. Politicians dominate the airwaves talking about ways to improve the economy. They play on people’s dissatisfaction and unhappiness as they talk about why they will be able to make things better. The hidden assumption of this work is that if the economy improves, people will be happier.

This seems intuitively obvious, of course. Many problems people face can be fixed by money. In addition to the basic needs of food, clothing, and shelter, many other benefits like access to also come from having more money.

Yet, when social scientists measure of nations and compare it to changes in their economic status (as measured by Gross Domestic Product or GDP), the relationship is not always positive. This observation has been called the Easterlin Paradox, named after the first person to report this finding.

A paper by Shigehiro Oishi and Selin Kesebir in the October, 2015 issue of Psychological Science explored why happiness and well-being might not correlate in every country.

Since this finding was observed in the 1970s, a number of suggestions have been given. One suggestion is that after people’s basic needs are met, increases in wealth don’t matter that much. That finding suggests that in more highly economically developed nations, the relationship between happiness and GDP should be weaker than in poorer nations. But, that has not been the case. Some wealthy nations get happier as their GDP rises. Some poor nations actually get sadder overall as their GDP rises.

These researchers suggest that income inequality may contribute to the relationship between GDP and happiness. In particular, in nations where income inequality is larger, they argue that increases in GDP may not make people happier. The idea is that the more that income is distributed unequally, the more that wealthier people benefit from increases in GDP more than poorer people.

They tested this idea in analyses of two large-scale data sets. Both examined the relationship between GDP, income inequality (measured with something called the Gini index), and measures of well-being of the people in a country. The first study looked at these variables in sixteen highly economically developed countries over the period from 1959-2006. The second looked at eighteen poorer nations from Central and South America between 2001-2009.

The first study found that for wealthier nations, the relationship between GDP and well-being was positive after controlling for effects of income inequality. Basically, when a country has low income inequality, increases in GDP over time led to increases in happiness. When a country has high income inequality, increases in GDP have no effect on happiness.

The second study found a consistent result, but increases in GDP tended to decrease the sense of well-being rather than increasing it. That is, for Latin American countries that have lower income inequality, then changes in GDP did not affect happiness much. For countries with higher income inequality, increases in GDP actually decreased happiness.

The results of these two studies are different because Latin American countries have much higher income inequality than European countries and Japan. So, there is an overall effect of income inequality that makes people unhappy. On top of that, when income inequality is high enough, most people (except the very rich) actually feel worse when the GDP improves.

This is a reason why politicians here in the United States have begun to talk more about income inequality. The economy in the US has rebounded significantly since the financial collapse in 2007, yet many people are still dissatisfied with their lives and their position in society. The results presented in this paper suggest that this dissatisfaction is not a result of a poor economy, but rather a result of widening income inequality.

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