Has Economic Well-being improved in Canada and the United States? Lars Osberg Department of Economics, Dalhousie University Halifax, Nova Scotia Andrew Sharpe Center for the Study of Living Standards Ottawa, Ontario Conference on “What Has Happened to the Quality of Life in America and Other Advanced Industrial Nations?” June 6-7, 2001 Jerome Levy Economics Institute of Bard College, Annandale-on-the-Hudson, New York.

Recent Trends l Standard Indicators –GDP per capita up, more so in USA –Hourly wages up, but not much –Employment up, especially in USA l So What ? –What is the connection to Economic Well- being ? GDP excludes leisure, environment & more Wage = price of labour ; potential consumption? Unemployment = unused labour; insecurity ??

Questions l Has economic well being increased or decreased ? l How “productive” is economic growth for economic well-being? l What should we do differently, if well- being is actually what we want to improve ?

Outline of Paper l Standard Indicator Trends –GDP per capita, Unemployment, Hourly Wages l Index of Economic Well Being –Consumption flows –Stocks of wealth –Distribution: inequality & poverty –Economic Insecurity l Compare trends in the index and its components to GDP per capita trends l What are the policy implications ?

GDP per capita l GDP rigorously standardized across countries (SNA) l Strong Implicit assumptions when used as measure of economic well-being –aggregate share of income devoted to accumulation (including value of unpriced environmental assets) automatically optimal –poverty, inequality & economic insecurity do not matter –changes in leisure time, length of life, family size, costs of commuting, pollution & crime - all irrelevant l poor match to popular perceptions of trends in economic well-being

Unemployment & Employment l Canada & USA diverged in 1980s & 1990s –1980s: greater increase in labour force participation in Canada - employment growth was similar –1990s: anti inflation zealotry in Canada produced collapse in aggregate demand & deeper, longer recession + fiscal after shock Growth since 1996 similar but 11% gap not recovered l Decade ended with tightening labour markets in both countries

Trends in Wages l Rising Inequality in earnings l ; little change in real wages for median worker, but rapid rise at top l Canada / USA level comparisons – use PPP or exchange rate ?? –Living standards of production workers higher in Canada

l Presumably Economic & Social Policy aim at improving Economic Well-Being l Consumption & Leisure are enjoyable –But Employment & Unemployment refer to supply of Labour –Leisure is not counted in GDP l To know if policy is successful, should measure target variable But what does this have to do with Economic Well-Being ?

l ECONOMIC WELL-BEING= a 1 [ CONSUMPTION] + a 2 [TOTAL WEALTH] + a 3 [ DISTRIBUTION] + a 4 [INSECURITY] l DIFFERENT VALUES WILL IMPLY DIFFERENT WEIGHTS l Setting weight equal to Zero is a (strong) value choice

Model Consumption flows Stocks of wealth Economic equality Economic security Economic Well-Being

Average Consumption Flows $ l Marketed real consumption per capita –Adjustments underground economy value of increased longevity –health-adjusted life expectancy reduced economies of scale in household consumption regrettables and intermediate goods –increase in costs of commuting, crime, pollution abatement changes in working hours - leisure

Average Consumption Flows $ l Government services –provision of non-marketed or heavily subsidized services includes defense and capital consumption allowances –excludes debt service charges and transfer payments l Unpaid work

Wealth Stocks, Sustainability and Intergenerational Bequest $ l Physical capital stock l Research and development capital stock l Value of natural resource stocks –price + quantity change l Stocks of human capital cost education) l Net foreign indebtedness (-) l State of environment and national heritage (degradation -)

Distribution l Inequality –Gini coefficient After-tax & transfer household income Equivalence scale = l Poverty –Sen-Shorrocks-Thon measure Rate Average poverty gap ratio Intensity = rate x gap

“Economic Security” l Risk income loss due to unemployment –changes in employment rate x UI coverage x UI replacement rate l Risk of illness –medical expenses as share of disposable income l Risk of single parent poverty –poverty rate & gap for single women with children –divorce rate of legally married couples l Risk of poverty in old age –chance x depth of elderly poverty

Economic Security weights for 1997

Policy Implications ? l Much less gain in economic well-being than in real GDP per capita l Major reason has been growth in inequality & insecurity –Reducing Inequality & Insecurity has been the major objective of social programmes –de-emphasized in recent years l Social Policy Design should aim at increasing Well-Being

Human Well-being

Economic Well-being

Well-being and GDP GDP Economic Well-being GDP

“Social regrettables” GDP Economic Well-being GDP “Social regrettables”

The role of the natural environment Natural Capital GDP EWB

Physical Investment Natural Capital Produced Capital GDP EWB

Human and Social Capabilities Natural Capital GDP Human and Social Capabilities Produced capital EWB

The role of knowledge/skills Natural Capital GDP Human and Social Capabilities Human capital Produced capital EWB

The role of networks/social norms Natural Capital GDP Human and Social Capabilities Human capital Produced capital EWB Social capital

A DIGRESSION

Human Capital “ The knowledge, skills, competencies and attributes embodied in individuals which facilitate the creation of personal, social and economic well-being ”

Social Capital “ Networks together with shared norms, values and understandings which facilitate co-operation within or among groups ”

Close ties between human and social capital Natural Capital GDP Human and Social Capabilities Human capital Produced capital EWB Social capital

The role of institutions Natural Capital GDP Human and Social Capabilities Human capital Produced capital EWB Social capital Political, institutional and legal arrangements

Natural Capital GDP Human and Social Capabilities Human capital Produced capital EWB Social capital Political, institutional and legal arrangements

Natural Capital GDP Human and Social Capabilities Human capital Produced capital EWB Social capital Political, institutional and legal arrangements