By Selin Kesebir
Rich people are happier than poorer people on average and richer countries are happier than poorer countries. And yet, growing national wealth isn’t always accompanied by growing national happiness. This is the famous Easterlin Paradox, named after economist Richard Easterlin, who first observed a puzzling phenomenon: Between 1946 and 1970, the United States witnessed remarkable economic expansion. And yet, surveys failed to show any upsurge in happiness throughout this postwar boom.
Shigehiro Oishi and I sought to test whether income inequality can partly account for these findings. As an economy grows, that growth is typically not shared equally. Unless redistributive mechanisms stand in the way, the wealthy see a disproportionate increase in per capita income—the rich get richer and inequality widens.
Inequality has been linked to lower levels of trust in others and a reduced sense of fairness; trust and fairness are both predictive of happiness. And inequality is linked with fewer economic opportunities, less social mobility, poorer overall health and higher levels of crime. All of these conditions cause anxiety, detracting from a society’s overall sense of safety, security and well-being. Thus the Easterlin Paradox may be more likely to exist when economic growth is accompanied by growing income inequality.
To test this idea, Oishi and I looked into patterns of per capita income, inequality and happiness in two data sets containing information from 34 countries. The first set was composed of 16 developed economies, including Finland, France, Japan and Spain. The second data set was taken from Latinobarometer, a comprehensive survey of 18 Latin American countries, such as Argentina, Brazil and Colombia.
Our research made two things clear: First, in both sets of countries, inequality was associated with lower levels of happiness after statistically controlling for GDP per capita.
In other words, inequality is bad for happiness—a finding that has been shown multiple times. Second, inequality mitigates the positive effects of economic development on happiness.
For the developed countries, the positive relationship between income growth and happiness disappeared with rising inequality. For the Latin American countries, the negative relationship between income growth and happiness got stronger with rising inequality.
Why is the relationship between income growth and happiness different in the two data sets? It could be that the Latin American countries are on average poorer than the more advanced economies, or that they are much more unequal. Our data didn’t present unequivocal answers. What we can say for sure, however, is that it’s a fallacy to equate GDP with well-being.
Selin Kesebir is an assistant professor of organizational behavior at London Business School.