Beyond GDP:Measuring social progress in Europe

Koen Decancq – Erik Schokkaert

Stirling June 2014

Introduction

• “Beyond GDP” • Quest for a measure of social progress• Discussion 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.

Introduction

• “Beyond GDP” • Quest for a measure of social progress• Discussion 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.

Principle 1: Focus on individual well-being

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

Principle 2: Focus on outcomes

The well-being of individuals depends on the outcomes in the different dimensions of life.

• Well-being is not fully determined by income. • Other dimensions of life are essential (e.g., health,

quality of social interactions and of the natural environment, safety, … ).

Principle 3: Account 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: Account 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: Account for cumulative deprivation

Accounting for cumulative deprivation requires to construct first an index of well-being at the individual level and then aggregate these well-being indices across individuals.

• Compare with dashboards of development• … and the Human Development Index (HDI)

Principle 4: Respect for individual ideas about a good life

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 (HDI)

• And also the Multidimensional Poverty Index, …

Life satisfaction measures do not respect preferences

• Then why not use “happiness”?

health

income

Bob

Ann

Life satisfaction measures do not respect preferences

• Then why not use “happiness”?

health

income

Bob

Ann

• If Ann and Bob have the same preferences, respect for preferences means that Ann should be seen as better off than Bob.

• Now look at what could happen, when we ask to Ann and Bob how satisfied they would be in both situations

• Bob is happier than Ann

5 for Ann

3 for Ann

9 for Bob

7 for Bob

Principle 5: inequality aversion

Justice requires accounting for inequality in individual well-being.

• Social welfare = M (1 - I )

Average Inequality

Principle 5: inequality aversion

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 income

• 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

Benny

Ann

An example: income and health

health

income

Benny

Ann

Perfect health

An example: income and health

health

income

Benny

Ann

A’Perfect health

An example: income and health

health

income

Benny

Ann

A’Equivalent income A

Perfect health

An example: income and health

health

income

Benny

Ann

B’

A’

Equivalent income B

Equivalent income A

Perfect health

Pros and cons of equivalent incomes

• Pros: – Satisfies all our basic principles.– Measurable in money terms, can be introduced in

any social welfare, inequality or poverty measure.

• Cons: – Less intuitive than happiness or HDI – but these

approaches do not satisfy our basic principles.– Choice of reference values: an ethical question,

hence room for debate.– More information is needed about “preferences”.

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.• 18 countries: 15 EU-members, Switzerland, Norway,

the Russian Federation. About 52,000 individual observations.

• Dimensions:

Estimating preferences

c

c

Estimating preference differences

• Assumption: preference heterogeneity between socio-demographic groups, not between countries.

c

Income, equivalent income, happiness (2010)

Income Equivalent income Happiness(Norway, Swits.) (Norway, Swits.) (Denmark, Swits.)

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

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

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

Spain 22282 (11) 3245 (11) 7.30 (8)

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

(Russia, Estonia) (Russia, Hungary) (Greece, Russia)

Income, equivalent income, happiness (2010)

Income Equivalent income Happiness(Norway, Swits.) (Norway, Swits.) (Denmark, Swits.)

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

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

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

Spain 22282 (11) 3245 (11) 7.30 (8)

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

(Russia, Estonia) (Russia, Hungary) (Greece, Russia)

Income, equivalent income, happiness (2010)

Income Equivalent income Happiness(Norway, Swits.) (Norway, Swits.) (Denmark, Swits.)

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

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

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

Spain 22282 (11) 3245 (11) 7.30 (8)

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

(Russia, Estonia) (Russia, Hungary) (Greece, Russia)

Social welfare (2010)

Income ( = 1) Income ( = 5) Equivalent income ( = 5)

(NO, CH) (NO, SE) (NO, CH)

United Kingdom 29794 (5) 11262 (9) 281 (7)

Germany 28986 (6) 12754 (7) 180 (10)

Denmark 28162 (7) 13828 (5) 595 (4)

Belgium 27477 (8) 13299 (6) 390 (5)

Spain 22282 (11) 8668 (13) 156 (11)

Greece 19388 (13) 7716 (14) 115 (12)

Czech Republic 16729 (14) 8983 (11) 89 (14)

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

Yearly growth rates (2008-2010)

income growth(=0)

Equivalent income growth (=5)

(CH, PL) (CH, RU)

Switserland + 7.35% (1) +11.18% (1)

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

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

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

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

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

Estonia - 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 (first) findings.

From income to equivalent income (2010)

from income to equivalent

income

health unemploy-ment

social in-teractions

safety

(DK, NO, SE)

Germany -75% -52% -3% -38% -20%

Denmark -86% -67% -6% -39% -31%

France -86% -67% -3% -44% -29%

Spain -87% -45% -5% -61% -44%

Greece -89% -73% -1% -48% -30%

(EE, HU, RU)

Direct effects for some typical countries

POOLED France Germany Great Brit. Switserland

log income 0.371*** 0.673*** 0.530*** 0.189** 0.205***

health 0.661*** 0.614*** 0.703*** 0.469*** 1.109***

unemployment -0.840*** -0.672* -0.883*** -1.088*** -1.357*

social interactions

0.143*** 0.108** 0.170*** 0.179*** 0.049

personal safety 0.224*** 0.215** 0.263*** 0.274*** 0.189+

N 52137 3334 4620 3812 2584

Results

Equivalent income (2010) Gini equivalent income

POOLED SPECIFIC POOLED SPECIFIC

France 3529 (9) 7797 (3) 0.70 (8) 0.50 (1)

Germany 3188 (10) 5230 (6) 0.74 (11) 0.64 (3)

Great Brittain 5324 (5) 2688 (11) 0.72 (9) 0.82 (16)

Switserland 7706 (2) 5100 (7) 0.66 (3) 0.81 (14)