Money, not equality, buys happiness

House-and-money-on-scales-Isolated-3D-image-Stock-Photo-balanceOne of those seemingly self-evident truths that seem to skip effortlessly off the tongues of the left-wing advocates of equality, is that equality of income is essential to societal stability and contentment. But is that really true?

The Better Life Index of the OECD aims to measure the relative life satisfaction (happiness) of citizens of mainly OECD countries. The point allocated to each country, calculated on the basis of a series of answers in a survey, reflects the subjective views of respondents. Dealing as the survey does with a purely subjective value, namely happiness, this is perfectly in order. The one thing that a person cannot second-guess, is another’s say-so about his or her own happiness.

Here is the raw data (from the most equal society to the least), including data on GDP per capita, a good proxy for average income levels:

Country Equality (Gini coefficient) after transfers & taxes Life satisfaction GDP per capita
Sweden 25 7.2 45143
Norway 25.8 7.4 64893
Czech Rep 26 6.5 30445
Austria 26 6.9 46164
Slovakia 26 6.1 27585
Finland 26.9 7.4 39755
Iceland* 28 7.5 43393
Denmark 28.1 7.5 44862
Australia 30.5 7.3 43901
Germany 30.6 7 45615
Luxembourg 30.8 6.9 91048
Netherlands 30.9 7.3 47130
Slovenia 31.2 5.7 29917
Hungary 31.2 4.9 23334
S Korea 31.3 5.8 34356
France 32.7 6.5 38851
Belgium 33 6.9 42725
Switzerland 33.7 7.5 56939
Canada 33.7 7.3 44088
Poland 34.1 5.7 23690
Greece 34.3 4.3 25667
Ireland 34.3 7 47804
Spain 34.7 6.5 33763
Italy 36 6 34758
Estonia 36 5.6 26355
NZ 36.2 7.3 35217
UK 38 6.8 39137
Japan 38.1 5.9 36426
Portugal 38.5 5.1 28326
Turkey 39 5.6 18783
Israel 39.2 7.4 33072
Russia 39.7 6 25248
US 41.1 7.2 54629
Mexico 48.1 6.7 16370
Chile 50.8 6.7 21942
Brazil 52.7 7 15835

 

First, a few observations:

  • The most unequal of the developed countries in the list, is the US. Yet it still has an LSI of 7.2, which compares well with that of the happiest society, Denmark, at 7.5.
  • The US fares even better compared to highly equal Sweden (7.2) and Norway (7.4)
  • It is a far happier society than a whole host of other more equal societies on the list, including Czech Republic (6.5), Slovakia (6.1), Austria (6.9) and Germany (7)
  • Switzerland, which tops the pile in terms of happiness together with Denmark at 7.5, is dead average in terms of equality, with a Gini coefficient of 33.7, placing it 18th out of the 36 on the list.

Assuming that equality matters for purposes of happiness, the rather obvious explanation for these seeming anomalies is that the per capita incomes of the happier societies – such as average-equality US and Switzerland – are far superior to that of any of the other more equal, but unhappier, societies.

If we plot the LSI (happiness) of each country on a graph against the income equality of each, it is immediately obvious that there is no correlation between the two. In other words, mere equality does not make people happier:

 

Gini
 
25 Sl Cz Sw Nor
27 Au Fi
29 Ice, Den
31 Hu Sl, Ko Ger, Lux Aus Ne
33 Fr Be, Ire Swi, Ca
35 Gr Po Sp
37 Est It, Ja UK NZ
39 Por Tur Ru Is
41 US
43
45
47 Mex
49
51 Chi
53 Br
 
Happiness 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5

 

On the other hand, if we were to plot the LSI of each country against its per capita GDP, it is immediately apparent that there is a compelling correlation between the two. It confirms the somewhat un-PC point that money, up to a point, does indeed seem to buy happiness:

 

GDP pc
90 Lux
85
80
75
70        X
65 Nor
60 Sw
55 US       X
50 Ire
45 Swe,Au. Ger, Be

 

X

Ice, XDen,

Aus, Ne,Ca

40 Fr UK, Ja Fi
35 Ko, It Sp X NZ, Is
30 Por Sl X Cz
25 Gr

 

Hu

X

Po,Es Sl, Ru
20 X Tur Ch
15 Mex Br
Happiness 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5

 

That of course does not mean that it may not be better to be both more equal and wealthier.

The point to make however, is that of the two factors (per capita income and equality), per capita income is by far the most influential. This we can tell by breaking the countries into peer groups according to income:

PCGDP over R50000:

Country Gini LSI
Norway 25.8 7.4
Luxembourg 30.8 6.9
Switzerland 33.7 7.5
US 41.1 7.2

 

40 000 – 50 000:

Country Gini LSI
Sweden 25 7.2
Austria 26 6.9
Iceland 28 7.5
Denmark 28.1 7.5
Australia 30.5 7.3
Germany 30.6 7
Netherlands 30.9 7.3
Belgium 33 6.9
Canada 33.7 7.3
Ireland 34.3 7

 

30 000 – 40 000:

Country Gini LSI
Czech Rep 26 6.5
Finland 26.9 7.4
S Korea 31.3 5.8
France 32.7 6.5
Spain 34.7 6.5
Italy 36 6
NZ 36.2 7.2
UK 38 6.8
Japan 38.1 5.9
Israel 39.2 7.4

 

20 000 – 30 000:

Country Gini LSI
Slovakia 26 6.1
Slovenia 31.2 5.7
Hungary 31.2 4.9
Poland 34.1 5.7
Greece 34.3 4.3
Estonia 36 5.6
Portugal 38.5 5.1
Russia 39.7 6
Chile 50.8 6.7

 

Less than 20000:

Country Gini LSI
Turkey 39 5.6
Mexico 48.1 6.7
Brazil 52.7 7

 

In none of the income categories is there any correlation between equality and happiness.

The real question is, however, whether there is a trade-off between the two factors of per capita income and equality of income. In other words, does a country have to give up income in order to achieve equality, and vice versa?

There are two types of policy measures that improve equality. The first is applied before government takes tax money and spends it on grants and welfare in order to equalise incomes. That category includes measures such as policies to bring about greater equality in the labour market.

First, let us examine labour law (the quantified value of which appears in the first column in brackets) as potential equaliser of income. A comparison of the Gini coefficient of different countries before taxes and transfers shows that labour laws have no significant impact on inequality of income. So for example the US, with significantly less labour regulation than most European countries, compares well with several highly regulated countries that are normally held up as paragons of equality (such as Austria and Germany, for example). The list comprises a wide variety of labour law systems with hugely differing degrees of labour regulation among both equal and unequal societies, with little discernible variation or trend.

 

Country Bargaining coverage

(labour market freedom)

Unemployment Immigrant  % of population Ed Gini before T&T Gini after T&T
South Korea 12 (4.51) 2.7 2.9 .865 .344 31.3
Iceland 100 (7.67) 4.5 10.7 .847 .382 28
Switzerland 37 (7.79) 3.5 28.9 .844 .409 33.7
Norway 74 (4.40) 3.7 13.8 .910 .410 25.8
Denmark 92 (7.34) 6.2 9.9 .873 .416 28.1
Sweden 90 (6.85) 7.8 15.9 .830 .426 25
New Zealand 15 (8.66) 5.6 25.1 .917 .455 36.2
Australia 39 (7.02) 6.4 27.7 .927 .468 30.8
Austria 95 (6.09) 4.8 15.7 .794 .472 26
Singapore 15 (7.60) 1.9 42.9 .768 .478 46.3
US 11 (9.03) 5.5 18.9 .890 .486 41.1
Germany 59 (6.49) 4.7 11.9 .884 .504 30.6
Portugal 45 (6.46) 13.3 8.9 .728 .521 38.5
Italy 80 (6.55) 12.6 9.4 .790 .534 36
Hong Kong 5 (9.30) 3.3 38.9 .767 .537 47.5

 

A related factor is the percentage of a country’s workforce that is covered by collective bargaining agreements. The bargaining coverage of countries is often cited as a factor that significantly brings about greater equality, but the table clearly disproves this notion. If labour law contributes to equality in these listed societies, clearly it must have to do with some other aspect of the law, or other factors.

The only other labour law factor that realistically be significant, would be state-imposed minimum wages. However, none of the 6 most equal societies above has such minimum wages – except for South Korea, which is the exception proving the rule.

As for non-law factors, the countries above that have low inequality have low unemployment too, provided they also have low levels of immigration (Korea, Iceland, Switzerland). Singapore, Hong Kong and the US (with much higher inequality), by contrast, have low unemployment but high immigration.

Low unemployment is self-evidently conducive to equality (poor people earning wages always have higher incomes than poor people who are unemployed).

Immigration has an impact as it often – at least temporarily – lowers the educational and skills level and language- and cultural cohesion of the population. (Germany in a way of course has the greatest “immigration” burden of all in that West Germany had to absorb an entire country barely two decades ago. It is fair to infer that that partly explains its relative inequality of income.)

The most equal society in the world (as measured by its pre-T&T Gini coefficient), namely Korea, confirms this thesis as it has both very low unemployment and very low immigration levels.

High levels of education improves productivity and thus salaries. This is well illustrated by New Zealand, the US and Australia, where indifferent unemployment rates and quite high immigration levels are somewhat corrected by very high education levels.

These and similar non-law factors, one intuitively feels, account almost entirely for the difference in pre-T&T Gini levels, leaving very little room for labour law as a differentiating factor.

Minimum wages and similar measures designed to improve conditions of employment, thus have virtually no impact on equality of income, whilst education and job growth most certainly do.

It is of course so that taxes and transfers may be used to improve equality of income.

To deal with this, I compare the proportion of the economy of a group of wealthy countries (excluding purely oil-based economies) that consists of state expenditure, that being a good proxy of taxes and transfers.

 

Government expenditure as a proportion of GDP: Wealthy countries, excluding oil-based economies

Country State expenditure% (economic freedom rank) Per capita GDP Gini after T&T
Sweden 58.1 (42) 45 143 25
Denmark 58.1 (22) 44 862 28.1
Iceland 58.1 (85) 43 393 28
Belgium 56 (52) 42 725 33
Netherlands 54.7 (30) 47 130 30.9
Austria 54.3 (31) 46 164 26
Germany 48.8 (29) 45 615 30.6
Canada 48.2 (9) 44 088 33.7
Australia 43.6 (12) 43 901 30.5
Switzerland 37.8 (4) 56 939 33.7
Luxembourg 37.5 (27) 91 048 30.7
US 19.9 (16) 54 629 41.1
Hong Kong 17 (1) 55 084 53.7
Singapore 16.3 (2) 82 763 46.4

 

The trade-off between taxes and transfers on one hand and equality on the other is clear. The higher taxes and transfers are, the lower the inequality of income tends to be.

Another trade-off is equally clear however. And that is between government taxes and transfers, and per capita income.

Countries with a government expenditure percentage over 40 percent of GDP (down to Australia in the list), all cluster around a per capita GDP of just over $40 000. The rest, whose government spending is under 40% of GDP, are significantly better performers with an average per capita GDP of $68 092. The incomes of these countries increase exponentially in line with declining state spending.

The fair inference from all this is that taxes and transfers tend to undermine per capita income, which as we have seen, tends to correlate with happiness. Amongst already developed countries this may be less important. Amongst developing countries like South Africa it matters hugely.

South Africa is thus far better off aggressively pursuing employment and growth than equality, in the pursuit of the happiness of our people.

This has important implications. Policies that amount to tax and spend such as welfare grants, do not support income growth and happiness in the long run. The same applies to policies that indirectly have the same effect, such as employment equity laws, BEE and minimum wages.

 

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