1

Alternative measures of well-being

Joint work by ECO/ELSA/STD

2

Motivation

Economic perspective:– Is GDP per capita an adequate measure of well-being?

Social perspective:– What light social indicators bring to an assessment of living

conditions?

3

In the 1970s: discussions on environmental and social limits to growth

In recent years: concerns on broader measures of well-being within discussions on sustainable development

Background

4

Economic theory and well-being

Focus on the household sector Broad range of items enters individuals’ utility

function Individuals’ versus societal well-being: social welfare

functions build on alternative philosophies of social justice

Problems in real income comparisons: not a good measure of consumption possibilities; externalities and other distortions; situational comparisons

5

Paper’s organisation

1. Different national accounts measures of economic resources

2. Other factors: objective measures of various factors that influence well-being and subjective measures of happiness and life-satisfaction

6

Different NA measures of economic resources

Two parts– Measures for the economy as a whole– Measures for the household sector

7

Economy-wide measures

Adjustments to GDP: – Relations with the rest of the world

• Net income transfers from abroad• Terms of trade effects (for fixed price measurements)

GNI

– Effect of consumption of fixed capital

NNI

8

Levels of NNI are lower than GDP per capita Rankings based on NNI are similar to GDP

0

10000

20000

30000

40000

50000

60000

GDP per capita NNI per capita

GDP and NNI per capita in current prices and PPPs, 2003

9

Growth rates of GDP and NNI are similar in most countries

GDP and NNI per capita growth, average annual growth, 1994-2003

SVK

FIN

GRC

GBRAUS

SWEISL

CANESP

USAAUT

DNK

NLDBELFRA

ITA

DEU

MEX

CHE

0.0

1.0

2.0

3.0

4.0

5.0

0.0 1.0 2.0 3.0 4.0 5.0

GDP per capita, per cent

NN

I per

cap

ita, p

er c

ent

GDP and NNI per capita growth, average annual growth, 1994-2003

10

Measures for the household sector

Three NA measures of consumption possibilities of individuals:– Household disposable income– Household final consumption expenditure– Household “actual” consumption expenditure

11

Levels of the three measures lower than GDP per capita Strong correlation between levels of household income/consumption and GDP per capita

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

55000

-10

1 2 3 4 5 6 7Final consumption Government and NPI services Disposable income GDP

Consumption, actual consumption and GDP per capita, 2003

12

• Starker differences when looking at growth rates

GDP and final consumption expenditure per capita

AUS

AUT

BEL

CAN

CZE

DNK

FIN

FRA

DEU

GRC

HUN

ISL

IRL

ITA

JPN

KOR

LUX

MEX

NLD

NZL

NOR

POL

PRT

SVK

ESPSWE

CHE

TUR

GBR

USA

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7GDP per capita

Priv

ate

cons

umpt

ion

per

capi

ta

GDP and household disposable income per capita

USAGBR

TUR

CHE

SWE

SVKPRT

POL

NOR

NZLNLD

MEX

KOR

JPNITA

HUN

GRC

DEU

FRAFIN

DNK

CZE

CAN

BEL

AUT

AUS

0

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7GDP per capita

Hou

seho

ld d

ispo

sabl

e in

com

e pe

r ca

pita

Real annual growth in household’s disposable income, actual consumption expenditure and real GDP per capita, 1994-2003

13

Summing up Economy-wide measures in NA are closely related to each

other There are larger differences between household and economy

wide-measures (GDP per capita)

14

2. Other non-economic factors

1. Integration of additional items into “enlarged” (money based) measures of well-being

2. Social indicators (Non-monetary)

3. Measures of happiness and life-satisfaction

15

2.1. Integration of additional items into monetary measures of well-being

Which additional factors? – Leisure-time of workers (direct influence on GDP)– Living arrangements (household economies of scale)– Income distribution

Limits – Illustrative calculations only (subject to arbitrary assumptions)– No attempt to see whether the effects of these different factors

cumulate or cancel out when combined

General conclusion– Some significant differences in “levels” of countries’ performance

relative to GDP per capita– Differences in “changes” limited to “extreme” assumptions on

valuation

16

Leisure time of workers: smaller gaps relative to the US after valuing leisure-time in some

Continental European countries

Levels, relative to the US, in leisure-adjusted GDP per capita, 2001

0.0

0.4

0.8

1.2

1.6

Mex

ico

Slova

k Rep

.

Hunga

ry

Korea

Gre

ece

Portu

gal

New Z

eala

ndSpa

inIta

ly

Ger

man

y

Finlan

d

Japa

n

Unite

d Kin

gdom

Franc

e

Sweden

Austra

lia

Belgiu

m

Canad

a

Nethe

rland

s

Austri

a

Denm

ark

Irelan

d

Norway

Luxe

mbo

urg

Leisure valued at hourly compensation Leisure valued at half of hourly compensationLeisure valued at GDP per hour w orked GDP per capita

17

Impact of inequality: significant on levels of household disposable income, smaller in terms of rankings

Levels of “equally-distributed” household disposable income for different values of the coefficient of aversion to inequality, 2002

0

10 000

20 000

30 000

40 000Coeff. of aversion to inequality of 0Ceoff. of aversion to inequality of 1Coeff. of aversion to inequality of 10GDP per capita

18

• Changes in living arrangements: some significant reductions in growth of household disposable income in

some countriesReal annual change of per capita household disposable income and adjustments for changes in

household size, selected OECD countries

1985-2002

USA

GBR

SWENLD

JPN

ITA

DEU

FRA

FINDNK

CAN

AUT

AUS

-1

0

1

2

3

4

-1 0 1 2 3 4

Mean non-equivalised income

Mea

n eq

uiva

lised

inco

me

1995-2002

USA

GBR

TURSWE

ESP

PRT

POL

NOR

NZL NLD

MEX

JPN

ITA

GRC

DEU

FRA

FIN

DNK

CZE

CAN

AUT

AUS

-1

0

1

2

3

4

-1 0 1 2 3 4

Mean non-equivalised income

Mea

n eq

uiva

lised

inco

me

19

2.2. Non-monetary social indicators

Measures of selected “outcomes” (rather than “inputs”) in four different fields:– Self-sufficiency– Equity– Health – Social cohesion

20

Correlations between social indicators and GDP per capita: significant in levels but not in changes

Social cohesion

Changes

LevelsSelf-sufficiency Equity Health

-20%

0%

20%

40%

60%

80%

-40%

-20%

0%

20%

40%

60%

80%

Total

emplo

ymen

t rat

es (2

003)

People

in jo

bless

hou

seho

lds* (

2000

)

Avera

ge ye

ars o

f sch

oolin

g (2

002)

Mea

n stu

dent

pre

form

ance

(200

0)

Inco

me

Ineq

uality

* (20

00)

Relativ

e po

verty

rate

* (20

00)

Child

pove

rty* (

2000

)

Gende

r wag

e ga

p* (1

999)

Health

y life

exp

ecta

ncy a

t birt

h (2

002)

Life

expe

ctanc

y at b

irth,

tota

l (20

02)

Infa

nt m

orta

lity* (

2002

)

Poten

tial n

umbe

r of y

ears

lost*

(200

2)

Volunt

eerin

g (2

000)

Victim

isatio

n ra

te* (

2000

)

Convic

ted

adult

s* (2

000)

Suicide

rate

* (20

02)

21

Aggregation: some significant differences in economic and social performances for some countries

Median value and confidence interval of a composite index based on selected social indicators in OECD countries and GDP per capita

22

2.3. Subjective measures of life-satisfaction: 90% of respondents satisfied with their life in ⅔ of countries

5

6

7

8

9

10

Scor

es

60

70

80

90

100

Perc

enta

ges

Mean life-satisfaction score (left-axis)Mean Happiness score (left-axis)Share of very/fairly happy people (right-axis)

23

2.3. Review of selected results from existing literature

– Country-based evidence • inconclusive

– Individual-based evidence • Own-income matters, but social comparisons and adaptation reduce its

impact on well-being

• A range of factors influence well-being beyond their financial effect

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Main conclusion

No single best contender: measures of economic resources remain critical but there is scope for improvement

An assessment of well-being needs to rely on complementary perspectives (monetary and non-monetary indicators)