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Countries Do Get Happier When They Get Richer—But Only If They Share The Wealth

Inequality gets in the way of improving national welfare, even in a robust economy.

Inequality hurts the welfare of a nation--even if GDP is growing.

[Top Photo: Mika Heittola via Shutterstock]

In 1974, the economist Richard Easterlin made a shocking claim. Between 1946 and 1970, he said, Americans had not become happier, despite strong economic growth. Easterlin proposed a paradox: Yes, economic growth makes nations happier—but only to a point. Once certain basic needs are met, he said, the relationship between wealth and happiness breaks down.

The Easterlin Paradox is an important concept in happiness economics, which generally looks for non-economic reasons for why nations are happy or not. Many countries appear to be happier than the United States despite having less GDP per capita. That suggests other factors like welfare and health care—which the U.S. doesn't provide as well as countries—are as important to satisfaction levels.

But there's a problem with the theory, say economists now. Many nations, including the Netherlands, Sweden and the United Kingdom, have continued becoming happier as they've become richer. How come some countries bottom out on happiness when economic growth improves and other don't?

lornet via Shutterstock

A new paper from Shigehiro Oishi and Selin Kesebir from the University of Virginia and London Business School suggests an explanation: a country's level of inequality. Crunching the data for 34 nations, they find inequality is a strong "moderating factor" in whether nations become happier when they grow economically.

"Our analyses demonstrate that once one considers income inequality, the Easterlin paradox is not so paradoxical anymore. When economic growth is more evenly distributed across the population, the Easterlin paradox rarely emerges," the paper says. "When economic growth is concentrated among a small segment of the population, it is more likely to emerge, and economic growth is not associated with an increase in life satisfaction."

The researchers looked at two sets of data: the first from the World Database of Happiness, a collection of self-reported surveys of happiness; and second, a sample from 18 Latin American countries, which had less developed economies. In the first sample of 16 countries, "economic growth was more strongly associated with increases in life satisfaction when there was less income inequality," even in advanced countries. In the second, each increase in equality, by a measurement called the Gini coefficient, led to a commensurate decrease in life satisfaction.

The researchers offer a couple of possible explanations. First, people on the lower rungs of the income scale don't benefit when economic growth surges, as has been happening in the United States of late. Second, inequality makes people more envious. "When inequality is high and people are exposed to the increasing wealth of others, they may focus more on their relative economic standing and less on their absolute standing," the paper says.

The paper doesn't discount the general idea that GDP is a crude measure of national welfare and that economic growth isn't worth having if it's economic growth at all costs. But it does show that distribution is important. There's no point a country getting wealthier, if parts of society aren't sharing in those gains.