Testing the relationship between income inequality and life expectancy: a simple correction for the aggregation effect when using aggregated data

Abstract

In this paper, we show a simple correction for the aggregation effect when testing the relationship between income inequality and life expectancy using aggregated data. While there is evidence for a negative correlation between income inequality and a population’s average life expectancy, it is not clear whether this is due to an aggregation effect based on a non-linear relationship between income and life expectancy or to income inequality being a health hazard in itself. The proposed correction method is general and independent of measures of income inequality, functional form assumptions of the health production function, and assumptions on the income distribution. We apply it to data from the Human Development Report and find that the relationship between income inequality and life expectancy can be explained entirely by the aggregation effect. Hence, there is no evidence that income inequality itself is a health hazard.