17 Mar 2014

Interpersonal trust hindered by growing income inequality in Europe

 	Adverse effects of income inequality on health and happiness cannot be confirmed by the data.
Adverse effects of income inequality on health and happiness cannot be confirmed by the data.
© 2009, sanja gjenero (stock.xchng)

A recent study published by the JRC reveals that income inequality might have a negative effect on interpersonal trust. Trust is a critical factor for societies to function well: it goes hand in hand with cooperative behaviors and investment decisions, as well as with the quality of institutions, which are all key determinants of economic performance. The implications of such a detrimental effect of inequality on trust should, therefore, not be disregarded.

The last two decades have seen a growing concern about rising inequality. The Economics Nobel laureate Joseph Stiglitz recently argued that rising income inequality is one of the main factors underlying the economic and financial crisis in the United States. The debate has also gone into the public arena, with the present system being denounced as fundamentally flawed and unfair.

Within this context, the JRC, in collaboration with the Directorate-General for Employment, Social Affairs and Inclusion, has investigated the impact of income inequality on social capital, happiness and health in Europe over the last 30 years. The multivariate econometric analysis combines country level information on income inequality with individual data on the social outcomes mentioned above. Conclusions suggest that the adverse effect of income inequality on these areas cannot be confirmed by the data, except for social capital.

The JRC analysis shows that income inequality has a potential damaging effect on the self-reported level of interpersonal trust, with trust being an indicator of social capital. This detrimental effect of income inequality might be driven by various factors. In particular, when income inequality is high, individuals from different socio-economic groups might have the sensation that they are not sharing the same fate, and this should hamper trust. Also, individuals from different socio-economic groups are less likely to share common values and norms, creating an environment not favorable to the development of social capital. Finally, a higher level of inequality is likely to reduce the level of optimism for the future, and thereby trust.

This research is published in a JRC report entitled “Multivariate analysis of the effect of income inequality on health, social capital, and happiness”. The conclusions of this study also feature in the 2013 report “Employment and Social Developments in Europe” (chapter 7) recently published by the European Commission's Directorate-General for Employment, Social Affairs and Inclusion.

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