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 Papers 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 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,

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 Consumption, actual consumption and GDP per capita, 2003

12 Starker differences when looking at growth rates Real annual growth in households disposable income, actual consumption expenditure and real GDP per capita,

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

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

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

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

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

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)