Alternative measures of well-being

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. Background • 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

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 • Different national accounts measures of economic resources • 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. GDP and NNI per capita in current prices and PPPs, 2003 • Levels of NNI are lower than GDP per capita • Rankings based on NNI are similar to GDP

9. Growth rates of GDP and NNI are similar in most countries GDP and NNI per capita growth, average annual growth, 1994-2003 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. Consumption, actual consumption and GDP per capita, 2003 • Levels of the three measures lower than GDP per capita • Strong correlation between levels of household income/consumption and GDP per capita

12. Starker differences when looking at growth rates 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 • Integration of additional items into “enlarged” (money based) measures of well-being • Social indicators (Non-monetary) • 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 countriesLevels, relative to the US, in leisure-adjusted GDP per capita, 2001

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

18. Changes in living arrangements: some significant reductions in growth of household disposable income in some countries Real annual change of per capita household disposable income and adjustments for changes in household size, selected OECD countries

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

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

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

24. 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)