Multivariate analysis of the effect of income inequality on health, social capital, and happiness

The last two decades have seen a growing concern about rising inequality. In a recent book (2012), Economics Nobel laureate Joseph Stiglitz argues that rising income inequality is one of the main factors underlying the economic and financial crisis in the United States. Wilkinson and Pickett (2009) similarly assert that higher inequality has harmful social consequences. This trend of growing inequality has furthermore been condemned in public arenas, where protests in the United States (the “Occupy Wall Street” movement) and in Spain (the “indignados”) show the extent of widespread public dissatisfaction with the present system which is denounced as being fundamentally flawed and unfair. The “We are the 99%” slogan and the associated web blog “We are the 99 percent” are direct references to this growing unequal distribution of wealth. A common rallying point of these movements is the argument that bankers who have benefited from large bonuses have been protected by bailout measures, while the victims of the crisis brought on by these very same bankers are faced with the reality of rising unemployment. This has also recently led the EU to agree on capping bonuses to bankers. Within this context, the European Commission decided last year to undertake a comprehensive study on the social and economic challenges associated with rising income inequality in Europe. This report constitutes the third deliverable of this global study. The first report includes a literature review on the relationship between income inequality and social outcome variables in the areas of happiness, criminality, health, social capital, education, voting behavior and female labor participation (d'Hombres, Weber, & Elia, 2012). The second report complements the literature review by examining the bivariate correlations on NUTS1 level between income inequality and the social outcomes mentioned above (Elia, d'Hombres, Weber, & Saltelli, 2013). In this third report, we carry out a multivariate analysis on a selected number of social outcomes while controlling for a multitude of individual and country level specificities. The social outcomes are social capital, i.e. trust and participation in organizations, happiness and health. This study suggests that the adverse effect of income inequality on a plurality of societal development challenges as proposed by Wilkinson and Pickett (2009) cannot be confirmed by the data, except for the case of trust. In particular, our analysis cannot confirm the hypothesis of a strong and significant effect of income inequality on health, happiness and participation in associational activities. However, we show that income inequality has a potential damaging effect on trust in Europe. A negative association between income disparities and generalized trust is reported in all estimations presented in this report. Though these findings need to be considered with care given that they might be specific to the countries sampled or the time period covered, the implication of a significant effect of inequality on trust should not be discounted. According to a variety of scholars, trust is critical for the functioning of societies (Putnam, 2000). Social capital and trust are factors which are linked to cooperative behaviors and investment decisions as well as to the quality of institutions, which in turn are all key factors of economic performance (Knack and Keefer, 1996, and Guiso et al 2004).