Beyond GDP Measuring social progress in Europe

1. Beyond GDPMeasuring social progress in Europe Koen Decancq Erik Schokkaert

2. Introduction • Development of measures that go “beyond GDP” is booming in recent decades: • Sen-Nussbaum approach to human capabilities; happiness literature. • Human Development Index (UNDP); “Better Life Initiative” (OECD). • Stiglitz-Sen-Fitoussi report (2009).

3. Europe and “quality of life” • Europe 2020 strategy is inherently multidimensional. • Communication European Commission (2009): “Beyond GDP”. • Initiatives launched by the European Statistical System on (multidimensional) “Quality of life”-indicators, focusing on EU-SILC(2013 ad hoc-module). • This paper: how should we proceed? A specific proposal.

4. Caveats • We focus on the measurement of the well-being of the present generation. • CAVEAT 1: sustainability is an essential challenge, but should be measured by separate indicators (and should act as a constraint). • CAVEAT 2: development of lists of specific policy indicators is useful, but a different issue. Operational targets often refer to “inputs” and not to directly relevant “outputs”.

5. Structure • Basic principles. • A specific proposal: equivalent income. • Application: well-being and social progress in Europe between 2008 and 2010.

6. Basic principles

7. Principle 1: focus on individual well-being The ultimate goal of policy and the ultimate criterion to evaluate social progress is the well-being of individuals making up a society. • Recall: sustainability is a restriction to be imposed on present generations.

8. Principle 2: focus on outcomes Information must be collected on the different dimensions of life that are important for the well-being of individual citizens. This information should be about outcomes, and not about inputs. • Well-being is not fully determined by income or material consumption. Other dimensions of life are essential (e.g. health, quality of social interactions and of the natural environment, safety). Collective characteristics are included!

9. Although there are many different lists, they are largely overlapping.

10. Principle 3: accounting for cumulative deprivation

11. Accounting for cumulative deprivation requires that one first constructs an index of well-being at the individual level and then aggregates these well-being indices across individuals.

12. Principle 4: respect for individual ideas about a good life The weighting scheme applied to construct the measure of individual well-being should respect the individual ideas about what is a good life. • This discards the use of objective “synthetic” indicators, such as the Human Development Index:

13. Reluctance towards “indicator aggregation” is easily understandable if one aims at defining trade-offs at the aggregate level. Weights are arbitrary. • At the level of individual evaluation, however, different dimensions of life are commensurable. In daily life, we continuously trade off life dimensions.

14. Principle 5: what about life satisfaction or happiness? • There seems to be a general presumption that subjective satisfaction measures are attractive precisely because they satisfy the principle of individual sovereignty, i.e. they do respect preferences. • Richard Layard: “If we accept the Marxist idea of ‘false consciousness, we play God and decide what is good for others, even if they will never feel it to be so” (2005, p. 121). • Is this interpretation correct?

15. Influence of social background • PERSON 2 • High income, prestigious job, now and then somewhat stressed. • Dissatisfied with life. His father did much better. • PERSON 1 • Low income, poor job, ill. • All by all, relatively satisfied with life. Comes from a deprived social background and lives in a deprived neighbourhood.

16. Adaptation • “A person who is ill-fed, undernourished, unsheltered and ill can still be high up in the scale of happiness or desire-fulfillment if he or she has learned to have ‘realistic’ desires and to take pleasure in small mercies” (Sen, 1985). • Much evidence on adaptation in the empirical literature: • Countries with higher rates of HIV prevalence do not report poorer life satisfaction, yet individuals care about HIV (Deaton, 2008). • Individuals who have lost a limb may, after adaptation, recover a good satisfaction score – but still express a strong aversion to disability (Loewenstein and Ubel, 2008).

17. Conflict conflict between “respecting preferences” and using life satisfaction as a measure of well-being. • Ethical issue: how do we treat differences in aspirations, adaptation etc. • Yet, “it would be odd to claim that a person broken down by pain and misery is doing very well” (Sen, 1985). Happiness or (subjective life satisfaction) may be one of the important dimensions of life, but it should not be seen as an encompassing measure of individual well-being.

18. Principle 6: inequality aversion Justice requires accounting for inequality in individual well-being. This can be done in a natural and flexible way by introducing an inequality aversion parameter in the analysis. Social welfare = M (1 - I ) “AVERAGE” WELL-BEING INEQUALITY MEASURE

19. ZERO INEQUALITY GINI LARGER WEIGHT TO THE POOR

20. A specific proposal: equivalent income

21. Equivalent incomes • Fix reference values for all the non-income dimensions. • DEFINITION: The equivalent income of an individual is the hypothetical income that, if combined with the reference value on all non-income dimensions, would place the individual in a situation that he/she finds equally good as his/her actual situation.

22. An example: income and health To “estimate” A’ and B’ we need information about willingness to pay for perfect health. Equivalent income = actual income – WTP.

23. Choice of reference values • THIS IS AN ETHICAL OR POLITICAL, NOT A PSYCHOLOGICAL QUESTION! • When can we say that someone with a larger income is necessarily better off? If the two individuals are “equally ill”? Not really, because the “richer” individual may care more about her poor health. • But what if they both are in perfect health? Would it then be reasonable for the rich to claim that he is not better off because he cares less about being healthy? • Combine this choice of reference values with “respect for individual opinions about the good life”.

24. Pros and cons • Equivalent income = actual income minus the welfare loss incurred on the non-income dimensions (measured as willingness-to-pay). • Satisfies all our basic principles. • Measurable in money terms, can be introduced in any social welfare/inequality measure. • Yet, NOT money fetishism. Just a methodology that allows us to capture the (personal) trade-offs.

25. Pros and cons • Less intuitive than happiness or HDI – but these approaches do not satisfy our basic principles. • Choice of reference values: room for debate. • Information needed about “preferences” (or WTP), yet techniques are well-known. • Behaviour. • Contingent valuation surveys (environment, health). • Derive information about willingness-to-pay from life satisfaction questions.

26. Pros and cons • Less intuitive than happiness or HDI – but these approaches do not satisfy our basic principles. • Choice of reference values: room for debate. • Information needed about “preferences” (or WTP), yet techniques are well-known. • Behaviour. • Contingent valuation surveys (environment, health). • Derive information about willingness-to-pay from life satisfaction questions.

27. Equivalent income derived from satisfaction data

28. Social progress in Europe: an illustration with pooled data

29. Data • European Social Survey, 2008 and 20 10. (SILC does not contain a question on life satisfaction). • 18 countries: 15 EU-members, Switzerland, Norway, the Russian Federation. About 52,000 individual observations. • Dimensions:

30. Estimating preference differences • Assumption: preferences do not differ between different countries. • Different groups within the countries have different preferences: • The higher educated give a (relatively) larger weight to income. • Health is less important to the young. • Unemployment is relatively less important for women, social interactions are (relatively) more important for women than for men.

31. Estimation results Controls: household size, education, education squared, gender, age, age squared, marital status, religious, urban, ethnic minority, time, country.

32. Income, equivalent income, happiness (2010)

33. From income to equivalent income (2010)

34. Inequality (2010)

35. Social well-being (2010)

36. Yearly growth rates (2008-2010)

38. Social progress in Europe: exploration of intercountry differences in preferences

39. Direct effects for some typical countries

40. Results

41. What to do?

42. Conclusion • We stronglybelieve in the basic principles. Debateshould turn on theirethical foundation. • The equivalent income is aninteresting concept, but theremaybeother approaches. • Ourempiricalillustration is onlymeanttobeanillustration.