This paper studies the impact of income inequality on the subjective well-being of different
social groups in urban China. We classify urban social groups according to their hukou status:
rural migrants, “born” urban residents, and “acquired” urban residents who once changed
their hukou identity from rural to urban. We focus on how the horizontal inequality—income
disparity between migrants and urban residents—affects individual happiness. The main
results are as follows. First, migrants suffer from unhappiness when the horizontal inequality
increases, but urban residents show a much smaller aversion to the horizontal inequality.
Second, migrants will not be happier if their relative incomes within their migrant group
increase, while urban residents do become happier when their incomes increase within their
group’s income distribution. Third, “acquired” urban residents have traits of both migrants
and “born” urban residents. They have an aversion to the horizontal inequality like migrants,
and they also favor higher relative income among urban residents. Fourth, “born” urban
residents have lower happiness scores when they are old. People who are Communist Party
members strongly dislike the horizontal inequality. Our findings suggest that migrants,
“acquired” urban residents, elderly people and Party members from “born” urban residents are
the potential proponents of social integration policies in urban China.