Beyond GDP: Measuring social progress in Europe Koen Decancq – Erik Schokkaert Stirling June 2014.

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Beyond GDP: Measuring social progress in Europe Koen Decancq – Erik Schokkaert Stirling June 2014

Introduction “Beyond GDP” Quest for a measure of social progress Discussion on three levels: 1.Principles for a measure of social progress 2.A specific proposal: equivalent income. 3.Illustration: well-being and social progress in Europe between 2008 and 2010.

Introduction “Beyond GDP” Quest for a measure of social progress Discussion on three levels: 1.Principles for a measure of social progress 2.A specific proposal: equivalent income. 3.Illustration: well-being and social progress in Europe between 2008 and 2010.

Principle 1: Focus on individual well-being The ultimate criterion to evaluate social progress is the well-being of individuals making up the society.

Principle 2: Focus on outcomes The well-being of individuals depends on the outcomes in the different dimensions of life. Well-being is not fully determined by income. Other dimensions of life are essential (e.g., health, quality of social interactions and of the natural environment, safety, … ).

Some examples

Principle 3: Account for cumulative deprivation incomehealth“well-being” individual individual average55 ratio10/1 1/1 incomehealth“well-being” individual 1100 individual 210 average55 ratio10/1

Principle 3: Account for cumulative deprivation incomehealth“well-being” individual individual average55 ratio10/1 1/1 incomehealth“well-being” individual 1100 individual 210 average55 ratio10/1

Principle 3: Account for cumulative deprivation Accounting for cumulative deprivation requires to construct first an index of well-being at the individual level and then aggregate these well-being indices across individuals. Compare with dashboards of development … and the Human Development Index (HDI)

Principle 4: Respect for individual ideas about a good life The measure of individual well-being should respect the individual ideas about what is a good life. This discards the use of objective indicators, such as the Human Development Index (HDI) And also the Multidimensional Poverty Index, …

Life satisfaction measures do not respect preferences Then why not use “happiness”?

Life satisfaction measures do not respect preferences Then why not use “happiness”? If Ann and Bob have the same preferences, respect for preferences means that Ann should be seen as better off than Bob. Now look at what could happen, when we ask to Ann and Bob how satisfied they would be in both situations Bob is happier than Ann 5 for Ann 3 for Ann 9 for Bob 7 for Bob

Principle 5: inequality aversion Justice requires accounting for inequality in individual well-being. Social welfare = M (1 - I  ) Average Inequality

Principle 5: inequality aversion

Outline 1.Principles for a measure of social progress. 2.A specific proposal: equivalent income. 3.Illustration: well-being and social progress in Europe between 2008 and 2010.

A specific proposal: Equivalent income Fix reference values for all the non-income dimensions. Equivalent income = the hypothetical income that, if combined with the reference value on all non- income dimensions, would place the individual in a situation that she finds equally good as her actual situation.

An example: income and health

Pros and cons of equivalent incomes Pros: –Satisfies all our basic principles. –Measurable in money terms, can be introduced in any social welfare, inequality or poverty measure. Cons: –Less intuitive than happiness or HDI – but these approaches do not satisfy our basic principles. –Choice of reference values: an ethical question, hence room for debate. –More information is needed about “preferences”.

Outline 1.Principles for a measure of social progress. 2.A specific proposal: equivalent income. 3.Illustration: well-being and social progress in Europe between 2008 and 2010.

Social Progress in Europe: An illustration European Social Survey, 2008 and countries: 15 EU-members, Switzerland, Norway, the Russian Federation. About 52,000 individual observations. Dimensions:

Estimating preferences c c

Estimating preference differences Assumption: preference heterogeneity between socio- demographic groups, not between countries. c

Income, equivalent income, happiness (2010) IncomeEquivalent incomeHappiness (Norway, Swits.) (Denmark, Swits.) Germany28986(6)3272(10)7.26(9) Denmark28162(7)6915(4)8.35(1) France25779(10)3604(9)6.34(15) Spain22282(11)3245(11)7.30(8) Greece19388(13)2547(12)5.71(17) (Russia, Estonia)(Russia, Hungary)(Greece, Russia)

Income, equivalent income, happiness (2010) IncomeEquivalent incomeHappiness (Norway, Swits.) (Denmark, Swits.) Germany28986(6)3272(10)7.26(9) Denmark28162(7)6915(4)8.35(1) France25779(10)3604(9)6.34(15) Spain22282(11)3245(11)7.30(8) Greece19388(13)2547(12)5.71(17) (Russia, Estonia)(Russia, Hungary)(Greece, Russia)

Income, equivalent income, happiness (2010) IncomeEquivalent incomeHappiness (Norway, Swits.) (Denmark, Swits.) Germany28986(6)3272(10)7.26(9) Denmark28162(7)6915(4)8.35(1) France25779(10)3604(9)6.34(15) Spain22282(11)3245(11)7.30(8) Greece19388(13)2547(12)5.71(17) (Russia, Estonia)(Russia, Hungary)(Greece, Russia)

Social welfare (2010) Income (  = 1)Income (  = 5) Equivalent income (  = 5) (NO, CH)(NO, SE)(NO, CH) United Kingdom29794(5)11262(9)281(7) Germany28986(6)12754(7)180(10) Denmark28162(7)13828(5)595(4) Belgium27477(8)13299(6)390(5) Spain22282(11)8668(13)156(11) Greece19388(13)7716(14)115(12) Czech Republic16729(14)8983(11)89(14) (RU, EE)(EE, RU)(RU, HU)

Yearly growth rates ( ) income growth (  =0) Equivalent income growth (  =5) (CH, PL)(CH, RU) Switserland+ 7.35%(1)+11.18%(1) Germany+ 0.09%(3)- 4.19%(9) Belgium- 0.55%(4)+ 6.21%(3) Denmark- 1.73%(8)-4,64%(10) Spain- 2.24%(11)-11,19%(17) Greece- 5.81%(17)-21,72%(18) Estonia- 8.60%(18)-9,29%(15) (GR, EE)(ES, GR)

Conclusion 1.We strongly believe in the basic principles. Debate should be about their ethical foundation. 2.The equivalent income is an interesting concept, but there may be other approaches. 3.Our empirical illustration is only meant to be an illustration, but interesting (first) findings.

From income to equivalent income (2010) from income to equivalent income healthunemploy- ment social interactions safety (DK, NO, SE) Germany-75%-52%-3%-38%-20% Denmark-86%-67%-6%-39%-31% France-86%-67%-3%-44%-29% Spain-87%-45%-5%-61%-44% Greece-89%-73%-1%-48%-30% (EE, HU, RU)

Direct effects for some typical countries POOLEDFranceGermanyGreat Brit.Switserland log income0.371***0.673***0.530***0.189**0.205*** health0.661***0.614***0.703***0.469***1.109*** unemployment-0.840***-0.672*-0.883***-1.088***-1.357* social interactions 0.143***0.108**0.170***0.179***0.049 personal safety0.224***0.215**0.263***0.274*** N

Results Equivalent income (2010)Gini equivalent income POOLEDSPECIFICPOOLEDSPECIFIC France3529(9)7797(3)0.70(8)0.50(1) Germany3188(10)5230(6)0.74(11)0.64(3) Great Brittain5324(5)2688(11)0.72(9)0.82(16) Switserland7706(2)5100(7)0.66(3)0.81(14)