Literature review on income inequality and the effects on social outcomes

In 2009, two epidemiologists, Wilkinson and Pickett, published a book entitled “The Spirit Level, Why More Equal Societies Almost Always Do Better” in which they claim that inequality and its acute perception by the average EU citizen is a toxic element of today’s European societies and one that seems to be associated with decreased levels of trust, civic engagement and participation, as well as to a host of other social challenges from poor health to crime, to underage pregnancies. Despite Wilkinson and Pickett’s intuitively convincing story of the link between higher income inequality and worse social outcomes, the empirical tests are based on simple bivariate correlations, implying that the authors fail to control for all the other numerous factors, which might have had an impact on both the social outcomes and income inequality. In doing so, the empirical associations reported in their book are likely to lead to misleading causal inferences. Nonetheless, Wilkinson and Pickett’s book attracted a lot of attention and called for a more careful analysis of the consequences of rising income inequality. The aim of this report is, hence, to look into sound empirical studies - based on multivariate analysis - which examine the effect of income inequality on important social outcomes related to (i) well-being, (ii) criminality, (iii) health, (iv) social capital, (v) education, (vi) political participation and (vii) female labor market participation. The upshot of this literature review is that higher criminality, reduced political agency and, to some extent, lower social capital formation and well-being appear to be tangible illustrations of the wastage produced by rising income inequality. In addition, there are a number of self-reinforcing loops linked to inequality. A clear illustration of this is the role of inequality in reducing the voting participation of the low income groups and the concomitant consequences in terms of redistributive policies and therefore on income disparities.JRC.G.3-Econometrics and applied statistic