Beyond GDPMeasuring social progress in Europe

Koen Decancq – Erik Schokkaert

Frankfurt June 2013

Introduction

• Recent interest in going “beyond GDP” • This paper: how can (should) we measure social

progress? • Answer 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.

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.

Principle 1: focus on individual well-being

The ultimate criterion to evaluate social progress is the well-being of individuals making up a society.

• Quid future generations?• Sustainability as restriction to be imposed on

present generations.

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.

• 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, … ).

• Development of lists of specific policy indicators is a different issue. We focus on “outputs” rather than on “inputs”.

Principle 3: accounting for cumulative deprivation

income health “well-being”

individual 1 100 10 55

individual 2 10 100 55

average 55 55

ratio 10/1 10/1 1/1

income health “well-being”

individual 1 100 100 100

individual 2 10 10 10

average 55 55

ratio 10/1 10/1 10/1

Principle 3: accounting for cumulative deprivation

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.

• Compare with the HDI …• … and MPI

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 indicators, such as the Human Development Index, MPI, …

Principle 5: avoidance of physical-condition neglect

• Then why not use “happiness”?• Because it does not respect individual ideas about the

good life!– “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.

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.

Principle 6: inequality aversion

Justice requires accounting for inequality in individual well-being.

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 incomes

• 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

health

income

B

A

An example: income and health

health

income

B

A

Perfect health

An example: income and health

health

income

B

A

A’Perfect health

An example: income and health

health

income

B

A

A’Equivalent income A

Perfect health

An example: income and health

health

income

B

A

B’

A’

Equivalent income B

Equivalent income A

Perfect health

Pros (and cons) of equivalent incomes

• 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 or poverty measure.

(Pros and) cons of equivalent incomes

• Less intuitive than happiness or HDI – but these approaches do not satisfy our basic principles.

• Choice of reference values: An ethical question (not psychological!)

• More information is needed about “preferences” (or WTP)– Stated preferences: Contingent valuation surveys

(environment, health).– Revealed preference: estimate from observed choices and

behaviour.– Derive information about willingness-to-pay from life

satisfaction questions.

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 2010. (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:

Estimating preference differences

• Assumption: preferences do not differ between different countries.

• Different groups have different preferences:

Income, equivalent income, happiness (2010)

Income Equivalent income Happiness(NO, CH) (NO, CH) (DK, CH)

DE 28986 (6) 3272 (10) 7.26 (9)

DK 28162 (7) 6915 (4) 8.35 (1)

FR 25779 (10) 3604 (9) 6.34 (15)

ES 22282 (11) 3245 (11) 7.30 (8)

GR 19388 (13) 2547 (12) 5.71 (17)

(RU, EE) (RU, HU) (GR, RU)

Yearly growth rates (2008-2010)

income growth(=0)

Equivalent income growth (=5)

(CH, PL) (CH, RU)

CH + 7.35% (1) +11.18% (1)

DE + 0.09% (3) - 4.19% (9)

BE - 0.55% (4) + 6.21% (3)

DK - 1.73% (8) -4,64% (10)

ES - 2.24% (11) -11,19% (17)

GR - 5.81% (17) -21,72% (18)

EE - 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 findings

Data need: introduce questions on “willingness-to pay” or satisfaction with life on a regular basis in SILC.