Does Income (Re)distribution Matter for Subjective Well-being? Evidence from Cross-country Panel Data

Objectives: This study empirically investigates the effects of income inequality and income redistribution policy on country-level subjective well-being. Methods: The paper uses panel data of 134 countries from 2005 to 2017. The fixed effect model with time and country dummies is employed. Results: We find that a higher inequality level significantly deteriorates happiness in a country with high income inequality, while it does not affect happiness in a country with a low level of inequality. In addition, stronger redistributive policies improve subjective well-being of countries that have high income inequality, while the policies do not have significant effect on subjective well-being in countries with relatively low-income inequality. Furthermore, this paper finds that people are affected by relative levels of income inequality as income grows: people in developed countries may have higher standard for income equality compared with those in developing countries. Conclusions: The policy implication of this paper is that an active income redistribution policy can improve the country level subjective well-being if a country's income inequality level is higher than its peer group, regardless of whether it is a developed or developing country.