Income Inequality, Life Satisfaction Inequality and Trust: A Cross Country Panel Analysis

Literature has argued that income inequality crowds out trust. However, whether income inequality makes people less trusting depends on how they perceive income inequality within their personal social context and social cognition. In this paper we therefore conjecture that the relationship of income inequality to trust depends on how income inequality affects inequality of life satisfaction. If life satisfaction inequality is high, distrust is generated among the least happy. This will increase polarization and the risk of rebellion, thereby also affecting trust among the happier people. Thus, life satisfaction inequality may be an essential factor in the relationship between income inequality and trust. In previous literature, the potential mediating role of life satisfaction inequality in the relationship between income inequality and social trust has not yet received attention. We test our model by panel analysis on 25 OECD countries in the period 1990-2014. The panel analysis shows that income inequality increases life satisfaction inequality and that both income inequality and life satisfaction inequality have a significant negative impact on social trust. Mediation tests show complementary mediation: besides the direct negative effect of income inequality on trust, we find an indirect effect mediated by life satisfaction inequality. This indirect effect counts for 20% of the total effect of income inequality on trust. Our results imply that policy options for increasing trust are not limited to countering income inequality, but can also include policy measures that directly reduce inequality of life satisfaction.