When income differences hurt or excite: The nonlinear effect of regional inequality on subjective wellbeing

• Published date: 01 December 2023
• Author: Leonardo Becchetti,Francesco Colcerasa,Fabio Pisani
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/roiw.12608

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Review of Income and Wealth

Series 69, Number 4, December 2023

DOI: 10.1111/roiw.12608

WHEN INCOME DIFFERENCES HURT OR EXCITE: THE NONLINEAR

EFFECT OF REGIONAL INEQUALITY ON SUBJECTIVE WELLBEING

BY LEONARDO BECCHETTI∗,FRANCESCO COLCERASA and FABIO PISANI

University of Rome TorVergata

Combining information from the European Union Statistics on Income and Living Conditions and

the European Social Survey, we investigate the relationship between subjective well-beingand income

inequality using regional inequality indicators and individual data. We assume that inequality aver-

sion and perception of social mobility affect the impact of regional inequality on subjective well-being

in opposite directions. We nd evidence of an inverse U-shaped effect of inequality, where inequal-

ity starts to have a positive effect on subjective well-being that becomes negative with a switch point

before the average of the Gini index for the entire sample.The rationale for our nonlinear nding is that

Hirschman’s tunnel effect (and the positive effect of perceived social mobility) prevails for low levels

of inequality, whileinequality aversion and negative relative income effects arerelatively stronger when

inequality is higher.Robustness checks on differentsample splits are consistent with the hypothesis of the

two drivers.

JEL Codes: I30, I31, I38

Keywords:income inequality, inequality aversion, non-linear effect, subjective wellbeing

1. INTRODUCTION

The dynamics of inequality patterns acrosscountries and regions has been dra-

matically shapedby contrasting effects of forces such as globalization, technological

change, and conditional convergence (Jaumotte et al., 2013; Milanovic, 2016; Bour-

guignon, 2016; Ravallion 2018). On the one hand, the higher growth rate of poorer

vis-à-vis high-income countries (due to the conditional convergenceeffect) in recent

decades has reduced intercountry and inter-regional inequality in terms of compar-

isons of mean and median per capita income. On the other hand, globalization of

product and labor markets, migration of low-skilled workers, skill-biased techno-

logical change,and capital deepening have increased competition among low-skilled

workers coming from rich and poor countries, widening the wage gap between

high- and low-skilled workers within each country and raising skill wage differen-

tials and within-country income inequality (Desjonqueres et al., 1999;Haskeland

Slaughter, 1999; Burstein and Vogel, 2017; Acemoglu and Autor, 2010). Parallel

to this, there are several examples of social unrest around the world that can

be related to increasing within-country inequality with a causality nexus (Jetten

et al., 2020), even though the literature has historically found mixed evidence

*Correspondence to: Leonardo Becchetti, University of RomeTor Vergata, Via Columbia 2, 00133

Rome,Italy (becchetti@economia.uniroma2.it).

© 2022 International Association forResearch in Income and Wealth.

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Review of Income and Wealth, Series 69, Number 4, December 2023

on this point (Weede and Tiefenbach, 1981; Midlarsky, 1988; Brockett, 1992;

Binswanger et al., 1993; Collier et al., 2004).1

Our study explains these eventsby seeking to understand when and under what

circumstances inequality hurts or excites. We further investigate this nexus by test-

ing the relationship between individual life satisfactionand regional inequality. The

results from these differentliterature strands predict that indexes of inequality at the

local level are expected to affectsubjective well-being (see the next section for a syn-

thetic review). However, previous empirical literature does not present conclusive

evidence about this relationship, revealing a negative, positive, or non-signicant

nexus.

Our study sheds light on this paradox. We hypothesize that two main drivers

(perception of social mobility and inequality aversion)affect the impact of regional

inequality on subjective well-being in opposite directions; inequality aversion

makes the effect of income inequality on subjective well-being negative, while

the perception of social mobility makes it positive. The two offsetting forces

produce a nonlinear, inverse U-shaped effect if, for low levels of inequality, the

second effect tends to prevail, whereas the opposite occurs when inequality is

higher.

An innovationof our research is that our empirical analysis is based on regional

data. This deeper levelof specicity is an important difference as it implies that com-

parisons with people at closer distances matter more. It also avoidsunderestimating

inter-regional heterogeneity in inequality that levels up at the domestic level. Our

estimates indicate that regional inequality has a higher impact on life satisfaction

than national inequality.

The remainder of this paper is organized as follows. Section 2reviews the lit-

erature and provides a synthetic overview of the possible explanations for the link

between income inequality and life satisfaction, outlining our research hypothesis.

Section 3presents the data, and Section 4describes the econometric methodology

and results. Section 5discusses and interprets our ndings, and Section 6presents

concluding remarks.

2. LITERATURE REVIEW

Although it is often argued that less unequal societies lead to higher levels of

individual happiness,empirical studies provide mixed ndings on the sign and mag-

nitude of the effect. The pioneering study by Morawetz et al. (1977) compares two

villages that are similar in terms of cultural, political, and individual characteristics

but not the level of income equality, nding that less equal villages are populated

by less happy individuals. Alesina et al. (2004), Schwarze and Härpfer (2007),

1The hypothesis that rising inequality producessocial unrest traces back to Durkheim (1893) and

is, more recently, reviewed byWilkinson and Pickett (2009). With reference to more recent events,Jetten

et al. (2020) discuss whether increasing economic inequality has fueled the rise and persistence of the

Yellow vest crisis. In an experimental setting, Fehr (2018) tests this hypothesis by demonstrating that

individuals are increasinglylikely to adopt socially harmful behavior when perceivinggrowing inequality

deriving from morally questionableactivities different from individual effort.

© 2022 International Association forResearch in Income and Wealth.

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