The Income Inequality Hypothesis Revisited: Assessing the Hypothesis Using Four Methodological Approaches

The income inequality hypothesis states that income inequality has a negative effect on individual’s health, partially because it reduces social trust. This article aims to critically assess the income inequality hypothesis by comparing several analytical strategies, namely OLS regression, multilevel regression, fixed effects models and fixed effects models using pseudo panel data. To test the hypothesis, data from two studies conducted between 1981 and 2014 were combined: the World Values Survey and the European Values Study. Three frequently used measures of health were taken into account. In the OLS and multilevel models, income inequality was often associated with better health, whereas in the fixed effects and pseudo panel data, income inequality was associated with poorer health, suggesting that the unexpected results of the OLS and multilevel methods might be explained by unobserved confounders. Furthermore, in almost all of the models, social trust mediates the relationship between income inequality and health, showing the importance of this mechanism. Interestingly, the pseudo panel data offer the strongest support for the income inequality hypothesis, suggesting that better controlling for confounding factors and/or more carefully monitoring cohort effects, may result in a better understanding whether and how income inequality can be harmful for people’s health.