Has Economic Well-being improved in Canada and the

United States?

Lars OsbergDepartment of Economics, Dalhousie University

Halifax, Nova Scotia

Andrew SharpeCenter 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 Standard Indicators

– GDP per capita up, more so in USA– Hourly wages up, but not much– Employment up, especially in USA

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 Has economic well being increased or

decreased ?

How “productive” is economic growth for economic well-being?

What should we do differently, if well-being is actually what we want to improve ?

Outline of Paper Standard Indicator Trends

– GDP per capita, Unemployment, Hourly Wages Index of Economic Well Being

– Consumption flows– Stocks of wealth– Distribution: inequality & poverty– Economic Insecurity

Compare trends in the index and its components to GDP per capita trends

What are the policy implications ?

Real Gross Domestic Product per Capita1970-1999

1999 US Dollars at Purchasing Power Parity

0

5000

10000

15000

20000

25000

30000

35000

40000

Canada

United States

Sources: Canada GDP - CANSIM matrices 9219 (series d28609) , 6967 (series D44960) price deflator matrix 8625 US - GDP & price deflator Bureau of Economic Analysis (see: http://www.bea.doc.gov/bea/dn1.htm) population: US census bureau (see:http://www.census.gov/population/estimates/nation/popclockest.txt) PPP's OECD (see: http://www.oecd.org/std/ppp/pps.htm)

GDP per capita GDP rigorously standardized across countries

(SNA) 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

poor match to popular perceptions of trends in economic well-being

Unemployment & Employment

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

Decade ended with tightening labour markets in both countries

Unemployment Rates Canada and the United States

1970-1999

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Canada

United States

Sources: Canada: CANSIM matrices 9219 (series d28599) and 6967 (series d44950) United States CANSIM matrix 2537 (series b53106)

Figure 3Employment / Population Ratio Canada and the United States

48

50

52

54

56

58

60

62

64

66

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

pe

rce

nt

CANADA

UNITED STATES

source: U.S. Bureau of Labor Statistics, International Comparisons of Foreign Labor Statistics (see: http://stats.bls.gov/special.requests/ForeignLabor/flslforc.pdf )

Trends in Wages

Rising Inequality in earnings 1980-97; little change in real wages for

median worker, but rapid rise at top Canada / USA level comparisons

– use PPP or exchange rate ??– Living standards of production workers

higher in Canada

Hourly Direct Pay for Production Workers in ManufacturingCanada and the US 1975-1990

0

5

10

15

20

25

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

1999

US

$

Canada-PPP

United States

Canada-Exchange rate

Hourly direct pay includes (a) pay for time worked (basic time and piece rates plus overtime premiums, shift differentials, other premiums and bonuses paid regularly each pay period, and cost-of-living adjustments) and (b) other direct pay (pay for time not worked (vacations, holidays, and other leave, except sick leave), seasonal or irregular bonuses and other special payments, selected social allowances, and the cost of payments in kind), before payroll deductions of any kind. Direct pay is also measured on an hours-worked basis for every country. source : US Bureau of Labor Statistics (ftp://ftp.bls.gov/pub/special.requests/ForeignLabor/supptab.txt)

Presumably Economic & Social Policy aim at improving Economic Well-Being

Consumption & Leisure are enjoyable – But Employment & Unemployment refer to

supply of Labour– Leisure is not counted in GDP

To know if policy is successful, should measure target variable

But what does this have to do with Economic Well-Being ?

ECONOMIC WELL-BEING= a1 [ CONSUMPTION]+ a2 [TOTAL WEALTH]+ a3 [ DISTRIBUTION]+ a4 [INSECURITY]

DIFFERENT VALUES WILL IMPLY DIFFERENT WEIGHTS

Setting weight equal to Zero is a (strong) value choice

Model

Consumption flows

Stocks of wealth

Economic equality

Economic security

EconomicWell-Being

Average Consumption Flows $ 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 $

Government services– provision of non-marketed or heavily

subsidized services• includes defense and capital consumption

allowances

– excludes debt service charges and transfer payments

Unpaid work

Figure 5 Trends in Average Consumption in the USA and Canada

0.000

0.200

0.400

0.600

0.800

1.000

1.200

1.400

1.600

1.800

Canada

United States

Source:see appendix tables A1

Wealth Stocks, Sustainability and Intergenerational Bequest $

Physical capital stock Research and development capital stock Value of natural resource stocks

– price + quantity change Stocks of human capital (@ cost education) Net foreign indebtedness (-) State of environment and national heritage

(degradation -)

Figure 6Wealth Accumulation Trends in the USA and Canada

0.000

0.200

0.400

0.600

0.800

1.000

1.200

1.400

1.600

Canada

United States

Source: see appendix table A1

Distribution

Inequality– Gini coefficient

• After-tax & transfer household income• Equivalence scale =

Poverty– Sen-Shorrocks-Thon measure

• Rate• Average poverty gap ratio• Intensity = rate x gap

familysize

Figure 7 Trends in Income Equality

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Canada

United States

Source: see appendix table A1

“Economic Security” Risk income loss due to unemployment

– changes in employment rate x UI coverage x UI replacement rate

Risk of illness– medical expenses as share of disposable income

Risk of single parent poverty– poverty rate & gap for single women with children

– divorce rate of legally married couples

Risk of poverty in old age– chance x depth of elderly poverty

Economic Security weights for 1997

Figure 8 Trends in Economic Security

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1.4000

Canada

United States

Source: see appendix table A1

Figure 9 Trends in Economic Well-Being in Canada and the USA

[Equal weighting of Consumption, Accumulation, Distribution and Economic Security

0.0000

0.2000

0.4000

0.6000

0.8000

1.0000

1.2000

1.4000

Canada

United States

Source: see table A1

Policy Implications ? Much less gain in economic well-being than

in real GDP per capita 1970-99 Major reason has been growth in inequality

& insecurity – Reducing Inequality & Insecurity has been the

major objective of social programmes – de-emphasized in recent years

Social Policy Design should aim at increasing Well-Being

Human Well-being

Economic 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

GDPEWB

Physical Investment

Natural Capital

Produced Capital

GDPEWB

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