Happiness and inequality in European countries: is it a matter of peer group comparisons?

This paper uses peer comparisons to analyze the impact of different types of inequalities (i.e., within-group, between-group and overall inequality) and reference income on subjective happiness. This study contributes to an emergent strand of research in which both relative levels of economic resources and the income distribution are regarded as determinants of individual happiness. The empirical findings show that overall and within-group inequality negatively affect individual happiness, inequality between reference groups does not affect happiness, and a higher average income of the reference group increases individual happiness. We examine whether people's aversion to inequality is conditional on their income position within reference group and institutional differences across European countries. These tests indicate that an increase in inequality or a decrease in average income decreases the happiness of both the rich and the poor. Regarding the differences across countries, people who live in more mobile societies with better welfare systems (e.g. Social-Democratic countries) are less adversely affected by inequality than people living in countries with low social mobility and ineffective systems of social protection (e.g. the Mediterranean countries). The analysis is based on data from the European Quality of Life Survey.