State Level Income Inequality and Individual Self-Reported Health Status: Evidence from the United States

The relative income hypothesis theorizes an individual’s income, relative to the income of their peers, adversely affects their health. There is empirical evidence to support the relative income hypothesis, showing a negative statistical relationship between income inequality and health. The literature is unsettled on the relevant level of geography to measure income inequality, as well as other control variables in the estimation. This paper contributes to this literature by asking how state level income inequality affects the probability of an individual having excellent self-reported health. The relative income hypothesis is tested using individual level data from the Current Population Survey in the United States, and is supplemented with state level income inequality and healthcare spending data from 1996-2009. A logit model with clustered standard errors is employed, with marginal effects reported. Results suggest no statistically significant effects within the full sample. However, if the analysis is restricted to the five most or least equal states, there is a statistically significant relationship between income inequality and health. The most equal states exhibit a positive (but small) relationship between inequality and health, while the least equal exhibit a negative (but small) relationship. While a statistically significant association is found for these samples, the point estimates are not economically significant. The results are robust to the specific income inequality measure, lag structure of income inequality, and time period of analysis. The results do not support the relative income hypothesis. The implication is the effect of income inequality on health may be overstated