Inequality, Well-being, and Social Rank: Income Increases Buy More Life Satisfaction in More Equal Countries

How do income and income inequality combine to influence subjective well-being? We examined the relation between income and well-being in different societies, and found large effects of income inequality within a society on the relationship between individuals’ incomes and their subjective well-being. We found that the income—well-being gradient is steeper in countries with more equal income distributions, such that the positive effect of a 25% increase in income on subjective well-being is about three times as large in a country with low income inequality as it is in a country with high income inequality. The effect is stronger for richer countries, survives controls for country GDP per capita, and the link between income inequality and the income/well-being gradient is strongest after a time-lag of four to eight years. The same effect holds across US states. An income rank hypothesis, according to which well-being is derived from social rank, predicts the data: A fixed increment in income confers a greater increment in social position in a more equal society, in which incomes span a narrower range, because the income increment moves the individual further up the social ladder of income distribution. It was suggested that income is a more reliable indicator of social status in more unequal societies, leading to more materialistic and less pro-social behavior as income inequality increases.