Misperceptions and Mismeasurements: An Analysis of Subjective Economic Inequality

Abstract

This paper focuses on an important aspect of economic inequality -- the question of how people perceive inequality and whether these perceptions deviate in any meaningful way from statistical measures of inequality. Perceptions of inequality have been shown to affect happiness, job satisfaction, and political support for redistribution, and studies have also shown that individuals tend to 'misperceive' inequality. Using a novel approach I find that individuals across different countries are able to correctly estimate the shape of the income distribution of the country where they reside. I also find that perceptions of inequality are frequently shaped by reference groups such as those formed according to educational attainment, age, and gender. Across countries, I find that education is a more important reference group where access to education (more specifically to higher education) is better. In addition, I find that age-related reference groups are more important in societies with higher intergenerational mobility. Lastly, gender reference groups are more relevant in countries where gender disparities are more accepted and more pronounced.