Income Distribution and Happiness in Europe - Are Scandinavians more Sensitive to Inequality?

Abstract

The main objective of this thesis is to investigate the effect of income inequality on happiness in Europe. A comparison between Scandinavia and the rest of Europe is made using cross-sectional data from the European Social Survey for 2008-2016 to establish possible differences in inequality aversion. Ordinary Least Squares regressions are used to estimate an econometric model where macroeconomic factors and individual characteristics are controlled for. Using this approach, we find income inequality to have a negative effect on happiness in Europe. The negative effect is, however, stronger in Scandinavia indicating stronger inequality aversion. Besides income inequality, we find GDP per capita to have a positive effect on happiness in Europe. Government expenses as a percentage of GDP is further shown to positively affect happiness in Scandinavia whilst negatively in the rest of Europe. Our findings highlight the importance of the composition and efficiency of a prevailing welfare system in enabling a happy population.