The Effects of Income Levels and Income Inequalities on Happiness

The standard of living reflected by one’s income and consumption is the primary explanation for the utility or satisfaction of the private consumer. However, empirical evidence very often demonstrates that the level of happiness is not necessarily higher for wealthy people in comparison to the poor. This holds within specific populations of a country, and in macro terms by comparison between the happiness of populations with low and high GDP_ppp per capita. Different research studies have used other economic and social explanatory variables for determining consumer happiness within countries. The present paper adds the new factor of income inequality that affects happiness. It is empirically proved that at extreme values of inequality measured by the Gini index, the effect of happiness is negative regardless of GDP_ppp per capita. However, at the intermediate ranges of the Gini index the effect of changes in the index on happiness is ambiguous. These results are found regardless of the actual values of GDP_ppp per capita.