Sustainability, Jobs and Welfare

Richard J. Jones

Senior Research Officer, WELMERC*

and

Lynn Mainwaring

Research Associate, WELMERC*

Abstract

The paper considers different conceptions of sustainability, distinguishing between

those with a narrow economic and environmental focus and those that accommodate a

wider range of social indicators. It then identifies links between these notions of

sustainability and the labour market. Narrower sustainability concepts imply a

potential trade-off between sustainability and current-generation interests. From that

perspective, the first link is the possibility of easing or sidestepping the trade-off by

allowing environmental taxes to substitute for distortionary labour (income) taxes.

The second is to consider whether environmental regulation destroys or creates jobs.

The broader socio-economic conception of sustainability makes more sense, we

argue, if the central policy aim is to promote ‘happiness’ (as opposed to GNP). This

opens a third channel to the labour market in that job satisfaction is a major

component of happiness. The implications of our analysis for Welsh Assembly

Government policy making are stressed throughout.

*The Welsh Economy Labour Market Evaluation and Research Centre, University of

Wales Swansea

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Sustainability, Jobs and Welfare

1. Introduction

‘Sustainability’ is a word widely used by politicians and the media and it has become

part of the day-to-day discourse of ordinary people. As such, it is a vague and elusive

concept, often used in contradictory ways. Even when refined by experts in specific

disciplines, it has meanings which are not obviously consistent with one another.

Sustainability may imply something quite different to an ecologist and an economist.

In this paper we take a sharply defined economics conception of sustainability as a

starting point and then consider how broader, and perhaps more practical, conceptions

may be developed from that. Broadening the idea of sustainability will allow us to

identify three points of contact with labour-market issues.

The first of these is the implicit tax effect of environmental intervention by

government. An intervention can have a positive or a negative effect on public

finances. A non-fossil-fuel subsidy uses up public funds whereas a carbon tax

generates revenues. Government expenditures have to be paid for, and a major source

of revenues is the labour market (notably via income tax), one of the biggest tax bases

available to the government (Smith, 1998). However, the issue here is more than a

matter of revenue substitution since any environmental intervention which raises the

cost of living (e.g., via higher fuel prices) has a further effect on the labour market.

The consequences are complex and far from intuitive.

The second point is conceptually more straightforward: is there a jobs-

environment trade-off? Environmental investments are at the expense of other

investments and could, potentially, reduce conventional (i.e., GNP) growth. On the

other hand, activities which are environmentally restrained could be more labour-

intensive than unregulated activities. The answer to this question has to come largely

through empirical investigation. The reference to ‘conventional’ growth hints at the

third point. As is now widely known, there is considerable dissatisfaction with the

use of GNP as a measure of social welfare. This is manifest in the proliferation of

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alternative welfare measures and in the recent growth of interest among economists in

the concept of ‘happiness’ (Frey, 2003). Happiness, or ‘satisfaction with life in

general’ has many components, not the least of which for many is job satisfaction. It

is worth considering, therefore, whether the conventional focus on the environment-

growth (or environment-consumption) trade-off is not misplaced. If there is no

environment-happiness trade-off then the set of feasible political interventions

becomes much wider.

These three issues may appear conceptual, if not theoretical, but they are

highly relevant to a proper evaluation of the sustainability agenda. They are of

potential relevance to Wales because of the Welsh Assembly Government’s

constitutionally embedded sustainability obligation. Their immediate practical

relevance is less clear, partly because the processes and procedures for carrying out

that obligation are still being developed and partly because the present legislative

powers of the Assembly Government are too weak to permit the use of instruments

that are suggested by the theory. Where relevant, and where possible, we shall try to

draw out the implications of the discussion for the Welsh economy and Welsh policy-

making.

2. The Economic Conception of Sustainability

The conventional economics approach to sustainability is framed in terms of a non-

declining level of per-capita consumption (C) or utility (U) over time (implicitly, all

future time). Since utility may depend on things other than per-capita consumption,

the conditions for a non-declining-U path are generally stricter than those for non-

declining C. The Hartwick-Solow (Hartwick, 1977, 1978) model sets out the

conditions for non-declining C in the context of the standard Solow (1956) growth

model. In the original Solow model, the two factors of production are capital and

labour. In the Hartwick-Solow version, these are replaced by capital, K, and natural

resources, N. K can be thought of as the sum of all manufactured capital (i.e.,

physical capital assets) and human capital (i.e., knowledge, skills and technology),

while N is often thought of as ‘natural capital’ in that it provides valuable services for

free.

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Because N is scarce, its exploitation provides its owners with rents (as in the

case of land, for example). Rents which would be generated in a perfectly

competitive economy in which the market rate of interest is equal to the social

discount rate are known as Hotelling rents (Hotelling, 1931). (An interest rate higher

than the social discount rate effectively means that the market is giving insufficient

weight to the welfare of future generations.) Hotelling rents are effectively those

which would arise from a socially-efficient exploitation of natural resources over

time. In the absence of population change and technical progress, sustainability

requires that the equivalent of the Hotelling rents from the exploitation of N are

invested, in their entirety, in new K-formation. Then provided there is sufficient

substitutability in the production function,1 the decline in N is exactly compensated

for by the accumulation of K so as to maintain a constant level of Q - I (output less

investment in K). Since C = Q - I, this yields a non-declining-C path. If population is

rising (at some exogenously given rate), investment needs to exceed the Hotelling

rents, implying a lower level of sustainable C; if technology is improving at some

exogenous rate, a higher level of C can be sustained with lower I. Note that the model

does not presuppose that resource rents are actually at the Hotelling level (nor

therefore, that the market rate of interest is equal to the social discount rate). It

merely requires that investment be equal to the Hotelling rents.

If utility is a function of C, only, then the conditions for non-declining U are

the same. A more realistic assumption would be that utility is a function of

consumption and the condition of the natural environment: U = U(C, N). In that case,

a constant consumption path will imply a declining utility path in the face of depleting

N. Again the issue here is one of substitutability. If C and N are sufficiently

substitutable, non-declining U can be sustained if C grows sufficiently over time to

compensate for the fall in N. Since a rising C means investing more than the

Hotelling rents, the conditions for non-declining U are more stringent than those for

non-declining C.

The basic message of this analysis is that a sustainable, though not necessarily

comfortable (C and/or U might be very low), path is possible given sufficient

substitutability in the production and, possibly, utility functions. This has led

economists to distinguish two sustainability criteria:

Weak sustainability. This is basically the Hartwick-Solow criterion, but it can be

simplified at the expense of approximation. If K and N are sufficiently substitutable

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then the aggregate quantity of capital matters more than the composition of capital.

Indeed, if K and N are perfect substitutes then only the aggregate quantity matters. In

that case an economy - considered as a closed system - is sustainable if it can maintain

a non-negative level of net investment (or net savings) (Pearce and Atkinson, 1993).

Strong sustainability. In the other limiting case, K and N are perfect complements

and any loss of N cannot be compensated for by net investment in K. In that case

consumption cannot be indefinitely sustainable. This degree of complementarity is

implausible. However, what is plausible is that there is a subset of N, so-called

‘critical’ natural capital NC, which is essential to any form of economic organisation.

That is, once N falls below NC the economy (gradually?) collapses. Whereas the

Hartwick-Solow criterion envisages N converging to zero as K accumulates, in the

present case sustainability would require that N converges to no lower than NC.

Strong sustainability therefore requires that there be no incursions into critical natural

capital.

It is likely that most ecological economists are persuaded by the Strong view.

It seems fairly clear that there are certain natural ‘life-support’ systems that cannot

meaningfully be substituted for (e.g., Erlich and Mooney, 1983). What is less clear is

the relationship between NC and N. If, say, N were homogeneous then NC would refer

to some minimum quantity of N. But if N consisted of various components some of

which bore complementary relationships with one another (as they surely do), then

some parts of N might be exploitable with impunity but others would be critical in

themselves or, perhaps, critical beyond some threshold.

3. Socio-economic Conceptions of Sustainability

The economics conception is well-focused – perhaps too much so. It is concerned

with trade-offs between the environment, considered as natural capital, and what

could crudely be thought of as marketable goods. A more social perspective would

substitute for the utility function a welfare function that gave weight not only to

private consumption and the state of the natural environment but also to community

welfare, jobs, culture, language, etc. Sufficient substitutability within this welfare

function would permit sustainability trade-offs. Thus welfare, so defined, could be

sustained over time in the face of a deteriorating environment if there were a

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compensating increase in, say, the number of jobs. This, in principle, is not a problem

for a Weak criterion since positive net savings can be used for any substitutable

investment: a deteriorating environment would be tolerable if other things were

growing fast enough to compensate. But even on the Weak criterion, the notion that

jobs for the current generation can be bought at the expense of the environmental

conditions of future generations raises the much broader issue of inter-generational

versus intra-generational equity. This socio-economic conception puts fairness within

the current generation on the same footing as fairness between generations. (The

Hartwick-Solow model is concerned exclusively with inter-generational fairness.)

When it comes to the Strong criterion this approach is problematic because

critical natural capital cannot be substituted for. Thus gains in jobs, culture, etc., at

the expense of critical capital are not sustainable. But the reverse may also be true if

current jobs are regarded as ‘critical’. Clearly, the more components of the welfare

function that are regarded as critical, the harder it is to achieve sustainability. More

generally, where there is some degree of complementarity between the objectives of

sustainability, the trade-offs have to be investigated and evaluated.

4. Sustainability Obligations of the Welsh Assembly

The Welsh Assembly Government (WAG) has a duty under section 121 of the

Government of Wales act to “make a scheme setting out how it proposes, in the

exercise of its functions, to promote sustainable development”. It is also required to

report annually on its proposals and their implementation. Its obligations under the

act are ambiguous. The Second WAG Report on Sustainable Development (WAG,

2002a) emphasises sustainability awareness, sharing best practice, disseminating

knowledge, seeking compacts, integrating sustainability principles into project

evaluation, establishing indicators, and reporting progress. Specific policy

commitments are tentative and consist mainly of the preparation of and consultation

on strategies for energy, transport, economy, waste and planning. However, an actual

policy instrument that differentiates Wales from UK/EU is difficult to find.

Not only is it difficult to find but it is difficult to envisage given the existing

powers of the NAW for the following reasons:

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i) Environmental restrictions that were significantly in excess of those in

England could be economically damaging if the costs fell on the private

sector or skilled workers; and

ii) Efficient controls are market-based: taxes, subsidies or tradable property

rights (Tietenberg, 1990). Taxes are out: the National Assembly does not

have tax-varying powers.2 Tradable rights are probably unviable given the

size of the economy. Subsidies are possible but will have to compete with

other budget claims. For now, though, this is the most available route to

sustainability above UK norms. An example, not mentioned in the Second

Report, might be agriculture. Tir Gofal could, in principle, account for a

greater proportion of agricultural support than the counterpart agri-

environment schemes in England. Additional subsidy support could also

work for waste management, renewables, energy-saving, transport, etc.

The WAG’s choice of sustainability indicators (WAG, 2002b) covers

employment, education, crime, housing and the Welsh language as well as more

obviously environmental qualities. It is implicit that the Assembly has adopted a

socio-economic conception of sustainability. From a political perspective this has the

attraction of allowing failures in some respects to be balanced by successes in others,

as in the case of a Weak indicator where the components of net investment are

substitutable. It also allows politicians to act in the traditional manner of promoting

jobs at the expense of the environment – in those cases where a trade-off might exist.

In some respects (greenhouse gases, biodiversity, etc), Wales is part of the

global/sub-global commons: Welsh people affect and are affected by what happens in

the rest of the world. Domestic (i.e., Welsh) natural capital can be protected to some

degree by domestic production controls (e.g., on emissions) but it will still suffer

imported pollution over which National Assembly has little direct control. Habitats in

Wales may, for example, suffer from global warming. Conversely, ‘dirty’ production

processes located in Wales may export the bulk of the emissions to other countries (as

with acid rain from power stations). Alternatively, dirty processes may move abroad

to escape regulation but we continue to consume their products. The fundamental

problem of common property is that each ‘commoner’ has little incentive to act for

the common good (Hardin, 1968). Rather, each has an incentive to free-ride on the

efforts of others. (In the global environmental context, this is admirably illustrated by

the difficulties in getting an agreement to curb greenhouse gases.) If Welsh policy is

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motivated by free-riding on global efforts, discretionary instruments will focus on

maximising benefits that are internal to Wales. If policy is motivated, or tempered, by

global fairness, the emphasis would have to shift away from production controls to

consumption controls; ie, ensuring that Wales uses up its ‘fair’ share of global

resources. This is the justification for the ‘ecological footprint’ approach to the

national/regional contribution to global sustainability.3

Despite the fact that the ecological footprint is one of WAG’s sustainability

indicators, it is likely that the Assembly Government would regard its wider

obligations as being catered for by UK participation in EU agreements and by UK/EU

participation in global agreements. Beyond that, actions are likely to be token or

symbolic or focus on ‘moral’ incentives. Consumption controls, which would be

central to a ‘global’ sustainability strategy, are almost certain to conflict with WAG

objectives to raise Welsh GDP to UK/EU norms (WAG, 2000c). Given that, the

thrust of the Welsh sustainability agenda is likely to be measurable improvements

within Wales.

To maintain focus in the following sections (5 - 7), we interpret a

sustainability policy as one which helps to maintain or enhance natural capital within

Wales. (Whether such capital is truly ‘critical’ or not is impossible to say.) In other

words, sustainability is environmentally oriented and there is a potential cost in terms

of other objectives foregone. This is a narrower approach than follows from the

socio-economic conception, but it has the advantage of clarity. We shall return to a

broader perspective in section 8.

5. The Porter-Linde Thesis

The neoclassical sustainability criteria discussed above are resource-based. The

theory does not, in its simplest form, assume the existence of market failures – except

those of an inter-generational nature (the inability of future generations to express and

exercise their preferences). The theory is concerned simply with the distribution of

resources over time to ensure non-declining C or U. That being so, the purpose of a

sustainability policy is to restrain the current generation’s claim on resources by

ensuring sufficient investment for the future. Sustainability implies redistribution of

welfare from the present to succeeding generations.

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On the other hand, conventional pollution-control theory recognises pollution

as a negative externality (Baumol and Oates, 1975). Long ago, Alfred Pigou (1920)

showed, in a static context, that an appropriate (in modern jargon, ‘Pigouvian’) tax on

the level of emissions would correct the externality and that the resulting gain to

society in general would exceed the private costs of implementation borne by the

polluters and their consumers. An optimal corrective policy may therefore increase the

welfare of the present generation and (assuming that the pollution is not merely

shifted forward in time) protect natural capital for future generations. Of course, as

with greenhouse gases, the externality may impinge more on future generations and

require a sacrifice of the present generation to control it. Aside from such long-lived

pollutants, however, pollution control offers the prospect of a multi-generational ‘win-

win’ outcome. But this depends on the policy being optimal or sufficiently near

optimal that the benefits of externality correction exceed the costs of implementation

– assuming that there are such costs. It is the essence of the Porter-Linde thesis that,

provided environmental controls are efficiently framed, such costs will typically be

zero or even negative.

Porter and Linde (1995) argue that tight environmental regulations induce product

and process innovations that typically offset the private costs of compliance. The

reasons why firms do not voluntarily and spontaneously engage in such cost-saving

activities are: that they lack experience in environmental innovation; that managers

are subject to competing claims on their attentions; and that attention spans are

limited. In other words, firms are effectively inside their potential production

frontiers and regulation forces them towards the frontiers. Porter and Linde give many

case-study examples of ‘innovation offsets’ but they admit to the absence of large-

scale cross-section data. Nevertheless, they claim that there is little evidence to show

that offsets are unlikely. They also make an additional and quite separate (and less

controversial) point that a country that anticipates international trends in

environmental regulation can gain a competitive first-mover advantage.

Not surprisingly, conventional economists find the basic argument

unpersuasive (e.g., Palmer, Oates and Portney, 1995). It is straightforward to show

that a firm which is presently equating the marginal costs and benefits of abatement

must suffer a cost of compliance to new regulations, even if it responds by innovating.

This in itself does not contradict Porter and Linde because the latter assume non-

efficient behaviour to begin with. But there may be a whole spectrum of investments

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that would allow a firm to approach its potential frontier. An environmental

innovation, therefore, has an opportunity cost in terms of other investments foregone.

It could still be argued that some enforced innovation is better than none, and that can

only be countered by looking again at the empirical evidence. Palmer, et al’s own

review of the evidence strongly suggests that the Porter-Linde case study evidence is

highly selective and that, in general, regulation leads to a significant net private cost

burden. (This does not, of course, mean that regulation is welfare reducing: private

costs must still be weighed against social benefits.)

What this argument misses is the possibility that any benefits of regulation

may be external to the individual firm. Mohr (2002) has developed a general

equilibrium model with external economies of scale that generates results consistent

with the Porter-Linder conclusion. Whilst the theoretical debate is likely to continue,

it can at least be accepted that Porter and Linde have usefully drawn attention to the

design of regulatory mechanisms. Those that induce innovation offsets are less likely

to prove burdensome in the longer run. Apart from the obvious fact that this supports

the neoclassical preference for market-based incentives like Pigouvian taxes, it

highlights the need “to regulate as late in the production chain as practical” to give the

greatest scope for innovative activity. Their observations have stimulated research

into innovation-inducing environmental controls (eg., Hemmelskamp, Rennings and

Leone, 2000).

6. The ‘Double Dividend’

The purpose of a Pigouvian tax is to correct a market that is not working well because

it generates a negative externality. Most other taxes, however, exist to raise revenue

and their effects, typically, are to make the markets they fall on work more

inefficiently. While Pigouvian taxes correct distortions, other taxes typically create

distortions. The double dividend refers to the fact that while a Pigouvian tax can be

used to correct a distortion and thereby increase welfare it can also contribute to

government budgets. This means that governments can reduce taxes which create

distortions, such as labour taxes. Removing one distortion allows the removal of

another; hence the ‘double dividend’. Unfortunately, this logic is based on

considering the (polluting) product market and the labour market separately in partial

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equilibrium terms. Once market interactions are taken into account, the logic falters

(see, e.g., Goulder, 1998).

A correctly framed tax on pollution undoubtedly increases welfare by

eliminating a distortion. But it also increases the prices of the associated goods and,

indirectly, the prices of all goods which use these as inputs (e.g., a carbon tax

increases fuel prices, etc.). This is the equivalent of an indirect tax on wages. Such a

tax builds on any remaining direct tax and has a magnifying effect on welfare losses.

The argument is illustrated in Figure 1, adapted from Goulder, which depicts the

labour market.

In the Figure, DL and SL are the demand and supply schedules for labour in a

market that is not subject to taxation. The imposition of a labour tax at the amount

cb raises the supply schedule to SL (because workers require a higher wage to

compensate them for the tax). Employment falls from L to L. At L, one more hour

of work is worth Lb to employers and costs workers Lc. Because the tax has

driven a wedge between the potential benefits and costs of supplying work, bc is a

welfare loss. The triangle abc is the total loss corresponding to the fall in

employment. If the labour tax rate can be reduced because of partial substitution of

revenues from Pigouvian taxes, the new labour supply schedule becomes SL. The

effect of this reduced distortion is a lower welfare loss abc. This is not the end of

the story, however. An increase in fuel prices (say) feeds through to all consumer

goods and workers will attempt to gain compensation by higher wages. The supply

schedule must, therefore, be shifted back up to, say, SL. The net effect is an even

greater welfare loss in the labour market. (Note that because the supply and demand

schedules move apart, a doubling of the effective labour tax generates a more-than-

double loss of welfare: additional taxes have a ‘magnifying’ effect on welfare loss.)

Of course, the precise effects have to be worked out in a properly specified

general equilibrium model. In most specifications, gains from reducing the direct

labour tax are more than offset by the induced distortionary effects of the indirect tax

(as in Figure 1). Only where the indirect tax is itself correcting a distortion (e.g., the

under-taxing of labour compared to capital) would this not be true. There is still a

gain in correcting the pollution externality but if the labour-market distortion is

exacerbated then we are left with a win-lose outcome than a win-win. In that case,

environmental gains have to be balanced against labour-market losses.

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Figure 1

It may be thought that these considerations are irrelevant to the Welsh

sustainability debate because WAG has no tax varying powers. That is not the case

because any interventions on behalf of the environment that directly or indirectly

impose costs on private agents have a similar effect to taxes, in that those agents will

attempt to pass those costs on. They thus create an indirect tax on labour which

magnifies any direct tax distortion in the labour market. However, the situation here

is worse than where intervention is by means of a Pigouvian tax. Pigouvian taxes can

be used to reduce the direct labour taxes so that the magnifying effect of the indirect

tax has a smaller base to work on (SL rather than SL). If the government does not

get revenues from its environmental interventions then the initial intuition of the

double dividend argument fails immediately. If there is no revenue substitution then

SL will be much higher than in Figure 1 and the balance of environmental gain over

labour-market loss will be correspondingly smaller (or more negative).

In the case of Wales, environmental interventions (in excess of UK norms)

cannot be via taxation, but subsidies out of the Assembly’s block grant would be

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SL

wage rate

SL

SL

SL

b

b

a

cc

L L L Lhours of work

possible. Taxes and subsidies can both be used to induce a shift towards an optimal

level of pollution. Taxes are imposed on the level of pollution whereas subsidies are

given to pollution abatement. Although they have a short-run equivalence in bringing

about a desired level of the polluting activity, their implications for firms and for the

government are diametrically opposed. Taxes benefit the government and harm

firms; subsidies benefit firms and cost the government. Subsidies have to be paid for

either by raising taxes elsewhere or, in the case of Wales, by diverting resources from

other programmes. Even in the latter case the SL schedule will shift up to SL (Figure

2) as workers attempt to compensate themselves for the reduction in public

healthcare, education, transport, etc. If the subsidy is fully used to pay for the costs of

abatement (yielding no net benefit to the firm) then there is no further change. In this

case there is clearly no double dividend: the environment is improved but at the cost

to other social programmes and a magnified distortion in the labour market. This

gloomy prognosis is ameliorated slightly if some of the subsidy is absorbed by firms

(as will generally be the case) and passed on to consumers. The labour supply

schedule will then fall back a little, reducing the labour-market distortion.

Figure 2

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wage rate

SL

SL

SL

DL

L L Lhours of work

This consideration of revenue substitution effects suggests that the social

benefits of environmental interventions by the Assembly Government are reduced,

possibly considerably, by its inability to impose taxes on external damages. Whether

the Assembly Government imposes restrictions on polluters that increase their costs

without yielding tax revenue or draw on public revenues to subsidise pollution

abatement, the net benefits will be lower than they would from a revenue-yielding

policy.

7. Sustainability and Jobs

There is a growing literature on the relationship between environmental protection

and job creation/retention. Research methodologies are discussed in Berck and

Hoffman (2002). There are basically three alternative procedures for predicting the

effects of a regulatory ‘shock’ and predictions will depend critically on which is

chosen. Input-output and social-accounting matrix methods assume fixed-coefficient

production functions so that shocks will affect the number of jobs. Computable

general equilibrium models have conventional production functions and typically

assume market clearing, guaranteeing full employment and leaving impacts to fall on

incomes. Standard econometric procedures look for statistical regularities and

generally make no explicit assumptions about market clearing.

Application of any of these methodologies to Wales would be problematic, not

least because it is unclear how to ‘capture’ whatever environmental control is implied

by the WAG’s sustainability obligation. Even if we were able to identify (and

quantify) a discretionary Welsh instrument, it would be some time before its effects

became apparent and measurable.

There is a survey of US evidence in Jaffe et al (1995). The overall impression

given by this evidence is that environmental regulation has little impact on jobs,

mainly because inter-state differences in regime are not great. A more recent paper

by Morgenstern, Pizer and Shih (2002) reinforces this conclusion. They found that

for four heavily polluting industries (that are, incidentally, significant in the Welsh

economy), pulp and paper, plastics, petroleum, and iron and steel, increased

environmental spending does not cause a significant change in employment. Slightly

dissenting views are found in List and Co (2000) and List and Kunce (2000) who find

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significant sensitivity of industries to regulatory variations in US states, operating via

location decisions. In a similar vein, Xing and Kolstad (2002) find that countries with

lax emission standards are more successful in attracting foreign direct investment by

pollution-intensive US firms. One study, of potential relevance to Wales, is that while

environmental regulation appears to have no measurable effect on the start-up of large

establishments, it does appear to discourage small business formation (Dean, Brown

and Stango, 2000). We are unaware of employment or firm-formation studies

conducted on UK/EU regions.

Note that in non-market-clearing situations the impact of regulation on jobs is

not clear a priori. If environmental compliance is labour-intensive then net job

creation may result. In the study by Morgenstern, Pizer and Shih, there did appear

small but statistically significant increases in employment in two of the industries

“linked to labour-using factor shifts and relatively inelastic demand” (2002, p. 412).

Niche markets for protected goods (e.g., organic food, landscapes) may also result. In

the Welsh context, sectoral case studies may be the obvious way forward but only

agriculture (potentially) offers itself as a clear case of specifically Welsh

environmental intervention. Even there, the effective differences between Welsh and

English agri-environment schemes may be too small to quantify.

8. The Environment and the Frame of Reference4

Porter and Linde notwithstanding, the preceding sections are consistent with the view

that environmental protection and more immediate ‘economic’ objectives are subject

to a potential trade-off. This is because an underlying premise of the theory is that

utility, or welfare, is derived from fixed individual preferences. If U = U(C, N) for

each individual, then as N falls each person needs absolutely more C to compensate.

There is a growing awareness of the limitations of this premise and, in particular, of

the importance to an individual’s utility of his or her consumption or position relative

to others. The problem then, as Fred Hirsch pointed out, is that the desire for relative

improvement may be thwarted by the similar desires of others: “If everyone stands on

tiptoe, no one sees better” (1976, p.5). Since there is only one top spot, relative

position is inherently scarce and each must strive constantly even to stay in the same

place.

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Hirsch’s insights were adapted by Robert Frank (1985, 1997) and given a

more explicit psychological basis by appealing to the concept of a frame of reference.

If a ‘positional’ good is valued in relation to a frame of reference (e.g., my car relative

to your car), then the good must be observable. Material goods are certainly

observable and, beyond some basic threshold, their contribution to our welfare derives

to some degree from our desire to keep up appearances or convince ourselves of our

success in life. It does not immediately follow that positional goods are those which

use up scarce natural resources. Status is the archetypal positional good and, being

non-material, cannot be resource-intensive whereas certain basic (and non-positional)

needs, such as food, may be very demanding on nature. Yet, in Western societies,

status is typically advertised by the conspicuous consumption of material goods and

leisure activities. To the extent that in such societies basic needs are largely met,

there will be a strong overlap in the growth in demand for positional goods and the

growth in demand for scarce natural resources. At the same time, the using up of

natural resources eliminates values arising from contemplative recreation, spiritual

enrichment and altruism to future generations. These values are relatively

unobservable and hence relatively non-positional.

The implications of positioning for sustainable development should be

obvious (Lintott, 1998). If the supply of positional goods is correlated to

environmental depletion then growth driven by positional aspirations has a

cumulatively destructive effect on the environment. The substantial body of empirical

findings showing that economic growth, as conventionally measured, is either not

associated or only weakly associated with a general increase in happiness (Inglehart

and Rabier, 1986; Easterlin, 1995; Clark and Oswald, 1996) is not at all surprising

from this perspective. Evidence on the GDP-happiness relationship for Wales is

limited. A consistent happiness series from the British Household Panel Survey

(BHPS) is available from 1991 to 2000 (Figure 3) but only the last three years of the

Survey have been subject to a Welsh ‘boost’. The thin coverage of Wales in previous

years reduces somewhat the reliability of the index. For what it is worth, over this

ten-year period, GDP per capita has increased by about 16 per cent, whereas reported

happiness has risen by just over one per cent.

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100

110

120

130

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Year

Inde

x

Happiness ISEW per cap GDP per cap

Figure 3: Happiness, GDP and ISEW in Wales

The rat race is not merely a game that individuals play with their fellow

citizens. In the modern world, frames of reference cut across national boundaries.

Few can fail to be aware of the barrage of statistics comparing national economic

performance in terms of GNP levels or growth rates. Lane (1991, p. 547) suggests

that individuals “take pride in national gains [and] interpret evidence of national well-

being as evidence of their own well-being”. In consequence, governments who

measure and sell their records – and their promises – on the basis of such comparisons

become part of the game rather than a means for effecting a solution. This could be

nowhere more clearly illustrated than by the Welsh Assembly Government’s

economic development strategy, a central plank of which are GNP targets set relative

to the UK average (WAG, 2000c).5

In the case of inter-personal positioning, the solution involves an across-the-

board change in the frame of reference. Frank (1997) advocates a consumption tax

which could be combined with incentives to channel savings into non-positional

investments such as environmental conservation. In the case of international

positioning, however, there is no single authority that can impose a solution. A

possible step in the right direction might be the international adoption of a more

17

comprehensive welfare measure in the spirit of the Index of Sustainable Economic

Welfare (ISEW) (Daly and Cobb, 1989).

The ISEW corresponds very much to the socio-economic concept of

sustainability discussed above. The accepted rational for the index is that it corrects

for the biases of conventional accounts. The corrections are, of course, based on

standard valuation procedures that do not recognise the positional/non-positional

distinction (except implicitly via a higher weighting for a more equal distribution of

income). Even so, the incorporation of environmental costs, even on this basis, ought

to give a more accurate measure of welfare. Important as that is, it is only part of the

case for adopting such a measure. The ISEW aspires to make measurable, and hence

observable, those social and environmental qualities that have previously eluded

statistical comparison. Those qualities thus become more highly positional. The

frame-of-reference argument implies that if nations were to compete on the basis of

ISEW performance then the dynamics of competition would work cumulatively in the

direction of sustainability. The limit of this process would not, it hardly needs saying,

be a ‘first-best’ world because the underlying valuations remain those of individuals’

positional preferences. Although a first-best world would be one without positional

competition, this would still represent a considerable improvement on the situation in

which competition for position is based on GNP.

A Welsh ISEW series has been constructed by Matthews, Munday and

Roberts (2003), following on earlier work by Midmore, Matthews and Christie

(2000), and is reproduced as an index in Figure 3. Compared to GDP, the ISEW

index is clearly much more volatile and, over short periods, bears little relation with

the more static happiness index. It remains to be seen whether, over the longer run,

Welsh ISEW has a much flatter trend than GDP and/or whether ISEW trends are more

closely related to happiness than are GDP trends. If we concur with Thomas

Jefferson that the “pursuit of happiness” is a prime objective of good government,

then identifying an instrument to facilitate it ought to be of importance to policy

makers. As yet it is too soon to say whether an ISEW is such an instrument. (In any

case, whether a Welsh ISEW target set relative to UK norms would be any more

achievable than an equivalent GNP target is a matter for conjecture.)

This brings us to the third point of contact between sustainability and the

labour market. The sources of happiness are many and complex. One source

undoubtedly is job satisfaction, including satisfaction with the nature of work,

18

absolute and relative pay, hours of work and job security. There is considerable

evidence that people who wish to work but don’t have a job are less happy than those

that do (e.g., Warr, 1987; Gallie, Marsh and Vogler, 1994). What is more complex

and less predictable is the relationship between pay and job satisfaction. Specifically,

the expectation that workers in Wales would have lower job satisfaction than workers

in England - on account of lower average wages in Wales – is not borne out by the

evidence. Jones and Sloane’s (2003) analysis of BHPS returns shows that Welsh

workers are relatively satisfied compared to English workers. They conclude that

“the claim that low paid jobs are of inherent low quality has no basis at least as far as

Wales is concerned”.

This conclusion must be a guarded one insofar as Welsh coverage of the

BHPS has been boosted only during the last three years. It does, however, give some

retrospective justification to past strategies of attracting any jobs as opposed to

specifically high-skill/high-wage jobs – a strategy that is now being de-emphasised.

But, of course, matters remain complicated. High wages may not imply high job

satisfaction as such, but they may allow the purchase of satisfactions in other respects.

(And satisfaction with life in general in Wales is considerably lower than it is in

England.) Clearly some research is needed to untangle the threads of happiness. If

we can gain a clearer understanding of the causes of happiness and how to measure

them then it might be possible to re-frame the concept of sustainability. In place of

non-declining consumption or non-declining utility we could adopt non-declining

happiness as a desirable criterion.

In the meantime, refinements of ISEW measures seem the best bet for

incorporating broad sustainability notions into policy making. If nothing else,

international competition in terms of ISEW per capita ought to focus policy-makers

minds on the issue of sustainability.

9. Conclusion

In this paper, we have identified a precise, economic conception of sustainability,

namely a non-declining per capita welfare path over time. Welfare may be defined as

consumption or some broader concept like utility. The conception is economic

insofar as the maximisation and/or distribution of welfare is a central concern of

19

economists. It does, however, clearly imply an environmental focus in that the

difficulty of sustaining welfare over generations arises from the inexorable

deterioration of the natural capital stock. It appears, however, that the current public

policy discourse in Wales (and, no doubt, elsewhere) treats sustainability in a much

broader way. The environment has become one of many incommensurable

components, following a shift of emphasis away from fundamental inter-generational

concerns towards issues of more immediate ‘survivability’ – of jobs, communities,

cultures, etc. Thus, in attempting to identify the labour-market issues arising out of

the sustainability agenda, it is necessary to be clear what conception of sustainability

we dealing with.

Taking the first approach, which emphasises the environment, two points of

contact with the labour market have been noted. One is the interaction between

environmental regulation and taxes on labour incomes. The interaction is complex to

say the least, but what clearly emerges from the analysis is that potential welfare

losses due to induced distortions in the labour market are minimised when

environmental regulation is effected via tax instruments. This is one more reason why

the Welsh Assembly Government is constrained in its ability to exercise effective

policy-making by its lack of tax-varying powers. The second issue is whether

environmental regulation comes at the cost of jobs (and if so, how many). The Porter-

Linde thesis says there is no private cost to regulation, and perhaps even a benefit,

provided regulatory instruments give firms flexibility to adapt and innovate (again

supporting taxes). Of course, even if the thesis is valid, private benefits needn’t

appear in the form of jobs. We really need to look at the evidence – and what

evidence we have (mostly from the USA) is ambivalent. Whether the Welsh

sustainability agenda encourages or discourages job formation is too soon to answer,

and, in any case, may be impossible to answer in the absence of a distinct – and

measurable – Welsh instrument.

Although Porter and Linde dispute the necessity of an environment/private

benefits trade-off, it is around such a trade-off that the conventional economics debate

has centred. There is no dispute between Porter and Linde and their critics that costs

and benefits are to be conventionally measured, in the manner of GNP. But if we

consider that happiness is the prime goal of individuals and, further, if we take into

account the psychological determinants of happiness, then both our understanding of

sustainability and the possibilities of attaining it are broadened. To the extent that

20

happiness is dependent on position, it is relative rather than absolute material

standards that matter. If everyone could be induced to cut their standards

proportionately, positions would remain the same and happiness little affected, but the

environment would gain. Thus the trade-off between current private benefits (in this

case, happiness) and the environment is ameliorated. A happiness-driven policy sits

more comfortably with the socio-economic conception of sustainability. This is partly

because happiness can be achieved with less threat to future generations, and partly

because one must also take account of the non-positional elements of happiness:

culture, spiritual well-being, personal relationships, etc. The connection to the labour

market afforded by this perspective (our third point of contact) comes via the

substantial importance of job-satisfaction in contributing to happiness. The Welsh

evidence again supports the view that position, rather than absolute rewards, is the

critical determinant. But the issues are complex and need further analysis.

In the current policy context, the socio-economic approach is combined with

competitive GNP targets. This only makes sense if the interests of future generations

are marginalized. Persuading policy makers to adopt happiness as their prime

objective is unlikely in the near future, even if happiness were not an unproblematic

concept. It seems likely (but remains to be confirmed) that the ISEW is a better long-

term predictor of happiness than is GNP. If so, the promotion of ISEW in place of

GNP will not only give a better measure of sustainability success but will also

stimulate sustainability via competitive international positioning.

Footnotes

1 The condition is that the elasticity of substitution between the factors of

production should be greater than or equal to unity.

2 There does exist some potential for local-authority variations in

environmental taxes, notably in the case of road-space pricing (Jackson,

2001) (cf., the London central area congestion charge). There is also an

element of local flexibility in the operation of the landfill tax. These

21

possibilities, however, are relevant to all UK local authorities and do not

help to define a uniquely Welsh tax-based regulatory regime.

3 For 2000, the ecological footprint for Wales is estimated to be 5.25 area

units, about 2.75 times the average earthshare. On the same methodology,

the UK footprint is 6.0 area units.

4 This section draws heavily on Mainwaring (2001).

5 “Success would mean Welsh GDP per person rising from 80 per cent to 90

per cent of the UK average over the next decade – with the ultimate aim of

achieving parity. This is the main goal of our economic policies ….”

(WAG, 2002c, p.20). The document goes on to acknowledge that “GDP

does not automatically lead to a better quality of life for our people”.

22

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