Happiness, Inequality and Relative Concerns in European Countries

Absolute and relative levels of income as well as income inequality are regarded as determinants of individual happiness. The paper proposes a novel set of multidimensional indexes to control for the effect of the main dimensions of relative deprivation on happiness. We decompose the overall distribution of income into “between” and “within” reference groups with respect to inequality finding that inequality between reference groups does not affect happiness and that within group inequality negatively affects individual happiness. We interpret these results as an extension of social comparison theory and a validation of the hypothesis that people perceive the income of their reference group in terms of their own future prospects. The analysis is based on the European Quality of Life Survey.