The relative income hypothesis: does it exist over time? Evidence from the BHPS.

Abstract

The relative income hypothesis suggests that income inequality has a detrimental affect on people’s health. This previously well accepted relationship has recently come under scrutiny. Some claim it is a statistical artefact, while others argue that aggregate level data are not sophisticated enough to adequately test for its existence. This paper adds to the debate by estimating the relationship between income inequality and health using panel data. A random effects ordered probit is used to estimate the relationship between net household income, regional income inequality and self-reported health, for 3736 individuals over 9 years, while controlling for individual socioeconomic characteristics like gender, social class and age. Significant differences in income inequality across regions and considerable changes in health are found across years, however, the panel data estimating regressions find no significant association between any of the measures of income inequality and self-reported health. Therefore, it would appear that the relative income hypothesis does not exist over time and does not exist within Britain.