The impact of income inequality on life satisfaction : the role of perceived income inequality

Redistribution is often the subject of a debate in which those who advocate increased redistribution aim to reduce income inequality and those who oppose it point to the negative effects of increased taxes. While some inequality may be tolerable and even desirable, the question remains what degree of inequality people perceive as optimal. In order to contribute to this debate, this study explains how income inequality affects life satisfaction. Although research about the impact of income inequality on life satisfaction is inconclusive, authors have suggested several reasons for its potential impact. We look at these explanations given in the literature and examine how they interact with both actual as well as perceived income inequality. Several studies show that there are significant differences between actual, objective income inequality and the perception of income inequality and that the latter is more important to predict preferences for redistribution. We perform multilevel analyses on three European databases that each contain information about one or more of the important explanations for the impact of income inequality on life satisfaction. We find that there is no direct negative effect of inequality on life satisfaction, but that individual characteristics often interact with perceived income inequality and, to a lesser extent, with actual income inequality. Our results show that the impact of perceived income inequality on life satisfaction depends on perceived mobility, risk aversion, perceived fairness, job security, the subjective evaluation of one’s financial situation and the expected financial situation. The impact of actual income inequality depends on perceived mobility, income and a subjective evaluation of income. Surprisingly, the attitude towards redistribution does not interact significantly with the two measures of inequality. We conclude that traditional explanations often erroneously assume that people correctly assess income inequality and that these concepts are more capable of explaining the effect of perceived income inequality on life satisfaction. Given that research on the determinants of the perception of income inequality is scarce, future research could focus on how this perception is formed.Redistribution is often the subject of a debate in which those who advocate increased redistribution aim to reduce income inequality and those who oppose it point to the negative effects of increased taxes. While some inequality may be tolerable and even desirable, the question remains what degree of inequality people perceive as optimal. In order to contribute to this debate, this study explains how income inequality affects life satisfaction. Although research about the impact of income inequality on life satisfaction is inconclusive, authors have suggested several reasons for its potential impact. We look at these explanations given in the literature and examine how they interact with both actual as well as perceived income inequality. Several studies show that there are significant differences between actual, objective income inequality and the perception of income inequality and that the latter is more important to predict preferences for redistribution. We perform multilevel analyses on three European databases that each contain information about one or more of the important explanations for the impact of income inequality on life satisfaction. We find that there is no direct negative effect of inequality on life satisfaction, but that individual characteristics often interact with perceived income inequality and, to a lesser extent, with actual income inequality. Our results show that the impact of perceived income inequality on life satisfaction depends on perceived mobility, risk aversion, perceived fairness, job security, the subjective evaluation of one’s financial situation and the expected financial situation. The impact of actual income inequality depends on perceived mobility, income and a subjective evaluation of income. Surprisingly, the attitude towards redistribution does not interact significantly with the two measures of inequality. We conclude that traditional explanations often erroneously assume that people correctly assess income inequality and that these concepts are more capable of explaining the effect of perceived income inequality on life satisfaction. Given that research on the determinants of the perception of income inequality is scarce, future research could focus on how this perception is formed.C