Decomposing Income Inequality: The Role of the Happiness Gap

Background/Objective: While positive emotions enhance productivity, little is known about whether income inequality will decrease if low-income individuals become happier. Methods: Relying on data from China Family Panel Studies (CFPS) from 2010 to 2018 and a regression-based decomposition method, this study investigates the contribution of happiness gap to income inequality. Results: The results show that a 1% increase in happiness leads to a 0.064-0.124% increase in income. This study employs average daily sunshine hours as an instrumental variable for happiness. The results from the two-stage least squares estimation also support the conclusion that an increase in happiness can lead to higher income. The decomposition results show that the happiness gap increases income inequality, although its contribution has decreased between 2010 and 2018. This positive effect is attributed to gaps in physical health and spare time devoted to learning. More precisely, happiness improves physical health among the upper-middle-income group and promotes spare time devoted to learning in the high-income group. Conversely, happiness narrows income inequality by reducing psychological stress in the low-income group. Conclusions: The results suggest that the enhancement of residents' sense of acquisition, satisfaction and happiness, especially among the low-income group, thereby reducing income inequality.