Beyond GDP
Measuring 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 wellbeing 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
individual 1
100
10
55
individual 2
10
100
55
average
55
55
10/1
10/1
income
health
individual 1
100
100
100
individual 2
10
10
10
average
55
55
10/1
10/1
ratio
ratio
“well-being”
1/1
“well-being”
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 nonincome dimensions, would place the individual in a
situation that she finds equally good as her actual
situation.
An example: income and health
income
A
B
health
An example: income and health
income
A
B
Perfect health
health
An example: income and health
income
A
B
A’
Perfect health
health
An example: income and health
income
A
B
Equivalent
income A
A’
Perfect health
health
An example: income and health
income
A
Equivalent
income B
Equivalent
income A
B
B’
A’
Perfect health
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, HU)
(GR, RU)
(RU, EE)
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.