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Income Inequality and its Consequences for Life Satisfaction: What Role do Social Cognitions Play?

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Abstract

While it is generally agreed that income inequality affects an individual’s well-being, researchers disagree on whether people living in areas of high income disparity report more or less happiness than those in more equal environments, thereby indicating the need to study how and why income inequality matters to the individual’s well-being. Findings on group-specific reaction patterns to income inequality further fuel this need. Alesina et al. (2004) argue that a preference for inequality and the perception of the possibility of social mobility account for the indistinct relationship between income inequality and subjective well-being. Combining this hypothesis with previous research on social cognition and drawing on social justice theory, this paper aims to demonstrate the mediating nature of perceptions of income inequality. It argues that the perceived legitimacy of distributive outcomes and procedures contributes to how income inequalities affect individuals and their sense of well-being. The empirical analysis is based on data from the International Social Justice Project, developed from face-to-face interviews with a representative sample of the German population. Using structural equation modeling, the paper finds structural biases in the perception of income inequality. The paper concludes that subjective well-being is a product of the individual’s perception and legitimating processes. The results indicate that social cognition is a useful tool for studies of income inequality and subjective well-being.

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Notes

  1. Existing studies on perceptions of societal conditions (Bjørnskov et al. 2009; Wong et al. 2006) and their impact on subjective well-being have methodological shortcomings (e.g., neglect of social biases in social perception and evaluation processes) which I attempt to overcome in this study.

  2. “Now please indicate how satisfied or dissatisfied you are with some different things in your life today using the scale on this card. If you are completely dissatisfied with the item I mention, you would say ‘1’. If you are completely satisfied, you would say ‘7’. If you are neither satisfied nor dissatisfied, you would say ‘4’. (You may use any number from 1 through 7). (…) All things considered, how satisfied are you with your life as a whole?”.

  3. Model fit of equivalence test using grouping analysis with metric invariance restrictions for differences between East and West Germany: χ²: 5.907, df(4), p < 0.2062; CFI:0.999; TLI: 0.998; RMSEA: 0.018; SRMR: 0.010.

  4. The differences prove to be significant but must be interpreted with caution due to the violation of the precondition of equal variance within sub-groups (as indicated by the significant value of the Bartlett test of equal variance).

  5. Due to a cut-off point of maximal earnings estimations (around 100 million Euros for managers), which was exceeded by 18 (perceived income) and 11 (just income) respondents, the average values are underestimated.

  6. Consistent with previous studies, these differences cannot be fully explained by the long-lasting structural deficits in East Germany; cultural differences in the evaluation patterns and processes of social comparison may be reasonable explanations (see Schneider 2008).

  7. According to theoretical reasoning, cognitions are expected to be interrelated with each other. Therefore, within the structural equation framework, I modeled correlations between mediating factors. The results show a negative (−0.05) but insignificant correlation between perceptions of social mobility and perceptions of income inequality in society. Significant and positive correlations are observed for preferences for social inequality and social mobility (0.18) and between perceptions and preferences of income inequality (0.73). This strong correlation is not surprising, as according to Homans (1976), perceptions of reality form expectations and therefore frame preferences.

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Acknowledgments

I would like to thank Ruut Veenhoven, Jouni Häkli, Martin Groß and the anonymous reviewer for their valuable comments on earlier drafts of this article. I also want to express my gratitude to Bernd Wegener, who made research on this issue possible. For all statements of fact, data analyses and interpretation of results the author alone bears responsibility.

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  1. Socio-Economic and Statistical Studies, Berlin Graduate School of Social Sciences, Humboldt-Universität zu Berlin, Unter den Linden 6, 10099, Berlin, Germany

    Simone M. Schneider

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Schneider, S.M. Income Inequality and its Consequences for Life Satisfaction: What Role do Social Cognitions Play?. Soc Indic Res 106, 419–438 (2012). https://doi.org/10.1007/s11205-011-9816-7

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