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In this study, we aim to test whether changes in community income inequality influence adolescent emotional distress. We take advantage of the unique combination of data and history available in Iceland. This affluent welfare society has experienced extreme shifts in income inequality, allowing us to test whether changes in community income inequality are related to changes in adolescent emotional distress. Combining adolescent survey data (n = 24,107) with tax registry data on 76 neighborhood communities, we used a multilevel approach to model the data as longitudinal in order to test whether changes in community income inequality are related to changes in symptoms of anxiety and depression among adolescents. The results showed that, after adjusting for relevant individual and community covariates, decreases in community income inequality were associated with decreases in symptoms of anxiety among adolescents (b = − 0.367, p ≤ 0.001), but not with decreases in symptoms of depression. While the results provide a partial support for the income inequality thesis, we call for replications from other cultures and studies exploring the mediating role of social psychological processes.

Theory holds that income inequality may harm adolescent mental health by reducing social capital within neighborhood communities. However, research on this topic has been very limited. We use multilevel data on 102 public schools and 5958 adolescents in Iceland (15 and 16 years old) to examine whether income inequality within neighborhoods is associated with emotional distress in adolescents. Moreover, we test whether indicators of social capital, including social trust and embeddedness in neighborhood social networks, mediate this contextual effect. The findings show that neighborhood income inequality positively influences emotional distress of individual adolescents, net of their personal household situations and social relations. However, although the indicators of social capital negatively influence emotional distress, they do not mediate the contextual effect of neighborhood income inequality. The study illustrates the role of economic disparities in adolescent mental health, but calls for more research on the underlying social and social-psychological mechanisms.

Theory holds that as income distribution becomes more equal, the well-being of those of low socioeconomic standing increases, since their relative status is improved. In this study we measure changes in individual subjective well-being (SWB) over a three year period of declining income inequality in Iceland. Using growth mixture modelling, we identified two groups whose well-being trajectories differ. One group (n = 540) whose SWB was initially high but then declined slightly, and a second group (n = 110) whose SWB was initially low, but improved over time. This second group had lower socio-economic status and stronger materialistic values. These differing shifts in SWB coincide with diminishing income inequality and class division and the results are consistent with the status anxiety explanation of the income inequality hypothesis. Our findings suggest the need to examine separate trajectories of distinct socioeconomic groups in societies generally regarded as egalitarian, and examine the role of a materialistic value orientation further.