The gap between image and reality yawns ever wider. Our rich society is full of people presenting happy smiling faces both in person and online, but when the Mental Health Foundation commissioned a large survey last year, it found that 74% of adults were so stressed they felt overwhelmed or unable to cope. Almost a third had had suicidal thoughts and 16% had self-harmed at some time in their lives. The figures were higher for women than men, and substantially higher for young adults than for older age groups. And rather than getting better, the long-term trends in anxiety and mental illness are upwards.

For a society that believes happiness is a product of high incomes and consumption, these figures are baffling. However, studies of people who are most into our consumerist culture have found that they are the least happy, the most insecure and often suffer poor mental health.

An important part of the explanation involves the psychological effects of inequality. The greater the material differences between us, the more important status and money become. They are increasingly seen as if they were a measure of a person’s inner worth. And, as research shows, the result is that the more unequal the society, the more people feel anxiety about status and how they are seen and judged. These effects are seen across all income groups – from the poorest to the richest tenth of the population.

Inequality increases our insecurities about self-worth because it emphasises status and strengthens the idea that some people are worth much more than others. People at the top appear supremely important, almost as superior beings, while others are made to feel as if they are of little or no value. A study of how people experience low social status in different countries found, predictably, that people felt they were failures. They felt a strong sense of shame and despised themselves for failing. Whether they lived in countries as rich as the UK and Norway, or as poor as Uganda and Pakistan, made very little difference to what it felt like to be near the bottom of the social ladder.

Studies have shown that conspicuous consumption is intensified by inequality. If you live in a more unequal area, you are more likely to spend money on a flashy car and shop for status goods. The strength of this effect on consumption can be seen in the tendency for inequality to drive up levels of personal debt as people try to enhance their status.

But it is not just that inequality increases status anxiety. For many, it would be nearer to the truth to say that it is an assault on their feeling of self-worth. It increases what psychologists have called the “social evaluative threat”, where social contact becomes increasingly stressful. The result for some is low self-esteem and a collapse of self-confidence. For them, social gatherings become an ordeal to be avoided. As they withdraw from social life they suffer higher levels of anxiety and depression.

Others react quite differently to the greater ego threat of invidious social comparisons. They react by trying to boost the impression they give to others. Instead of being modest about achievements and abilities, they flaunt them. Rising narcissism is part of the increased concern with impression management. A study of what has been called “self-enhancement” asked people in different countries how they rated themselves relative to others. Rather like the tell-tale finding that 90% of the population think they are better drivers than average, more people in more unequal countries rated themselves above average on a number of different dimensions. They claimed, for example, that they were cleverer and more attractive than most people.

Nor does the damage stop there. Psychological research has shown that a number of mental illnesses and personality disorders are linked to issues of dominance and subordination exacerbated by inequality. Some, like depression, are related to an acceptance of inferiority, others relate to an endless attempt to defend yourself from being looked down on and disrespected. Still others are borne of the assumption of superiority or to an endless struggle for it. Confirming the picture, the international data shows not only that mental illness as a whole is more common in more unequal societies, but specifically that depression, schizophrenia and psychoses are all more common in those societies.

What is perhaps saddest about this picture is that good social relationships and involvement in community life have been shown repeatedly to be powerful determinants of health and happiness. But it is exactly here that great inequality throws another spanner in the works. By making class and status divisions more powerful, it leads to a decline in community life, a reduction in social mobility, an increase in residential segregation and fewer inter-class marriages.

More equal societies are marked by strong community life, high levels of trust, a greater willingness to help others, and low levels of violence. As inequality rises, all this goes into reverse. Community life atrophies, people cease to trust each other, and homicide rates are higher. In the most unequal societies, like Mexico and South Africa, the damage has gone further: citizens have become afraid of each other. Houses are barricaded with bars on windows and doors, razor wire atop walls and fences.

And as inequality increases, a higher proportion of a country’s labour force is employed in what has been called “guard labour” – the security staff, prison officers and police we use to protect ourselves from each other.

Understanding inequality means recognising that it increases school shootings, bullying, anxiety levels, mental illness and consumerism because it threatens feelings of self-worth.

• Richard Wilkinson and Kate Pickett are the authors of The Inner Level: How More Equal Societies Reduce Stress, Restore Sanity and Improve Everyone’s Wellbeing