Economic Freedom, Income Inequality and Life Satisfaction in OECD Countries

Abstract

Since Piketty’s Capital in the 21st Century in 2014, scientific interest into the impact of income inequality on society has been on the rise. However, little is known about the mediating role of income inequality in the relationship between market institutions and subjective well-being. Using panel analysis on a sample of 21 OECD countries to test the effects of five different types of economic freedom on income inequality, we find that fiscal freedom, free trade and freedom from government regulation increase income inequality, whereas sound money decreases income inequality. Income inequality is found to have a negative effect on life satisfaction. Mediation tests show that income inequality mediates the influence of fiscal freedom, free trade and freedom from government regulation on life satisfaction.

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