OECD Statistics Working Papers 2015/01 How Should One Measure Lars Osberg Economic Insecurity? https://dx.doi.org/10.1787/5js4t78q9lq7-en Unclassified STD/DOC(2015)1 Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 05-Mar-2015 ___________________________________________________________________________________________ _____________ English - Or. English STATISTICS DIRECTORATE Unclassified STD/DOC(2015)1 Cancels & replaces the same document of 03 March 2015 HOW SHOULD ONE MEASURE ECONOMIC INSECURITY? WORKING PAPER No.59 Contact: Marco Mira D'Ercole, Statistics Directorate, +(33-1) 45 24 87 48; [email protected] English JT03371665 Complete document available on OLIS in its original format - This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of Or. English international frontiers and boundaries and to the name of any territory, city or area. STD/DOC(2015)1 HOW SHOULD ONE MEASURE ECONOMIC INSECURITY? Lars Osberg McCulloch Professor of Economics Dalhousie University, Halifax, Canada Email: [email protected] 2 STD/DOC(2015)1 OECD STATISTICS WORKING PAPER SERIES The OECD Statistics Working Paper Series – managed by the OECD Statistics Directorate – is designed to make available in a timely fashion and to a wider readership selected studies prepared by OECD staff or by outside consultants working on OECD projects. The papers included are of a technical, methodological or statistical policy nature and relate to statistical work relevant to the Organisation. The Working Papers are generally available only in their original language – English or French – with a summary in the other. OECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author. Working Papers describe preliminary results or research in progress by the author and are published to stimulate discussion on a broad range of issues on which the OECD works. Comments on Working Papers are welcomed, and may be sent to the Statistics Directorate, OECD, 2 rue André-Pascal, 75775 Paris Cedex 16, France. The release of this working paper has been authorised by Martine Durand, OECD Chief Statistician and Director of the OECD Statistics Directorate. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. ___________________________________________________________ www.oecd.org/std/publicationsdocuments/workingpapers/ _______________________________________________ 3 STD/DOC(2015)1 ACKNOWLEDGEMENTS This paper was prepared during the author’s sabbatical period spent at the OECD Statistics Directorate in 2014. Special thanks to Carlotta Balestra, who provided much of the data and tactful suggestions for improvements, and to Marco Mira d’Ercole, for many detailed comments on early drafts. Martine Durand, Herwig Immervoll and Alexander Hijzen also provided useful comments. 4 STD/DOC(2015)1 ABSTRACT This paper suggests that individuals feel economically insecure when they perceive a significant downside economic risk – i.e. a hazard or danger – looming in their economic future, which they are unable to adequately insure against or avoid or ignore. After having noted that the costs of public policies to mitigate economic insecurity comprise significant shares of GDP in all OECD nations, the paper surveys critically the four main alternative methodologies for measuring economic insecurity, which are based on: i) large losses in household available disposable income; ii) the private wealth of the household adjusted for past wealth volatility; iii) the probability of downside household income volatility; and iv) the anticipated costs of specific named risks. It then discusses the optimal aggregation of hazards, the appropriate unit of analysis, the time frame for accounting, and the ideal criteria that a measure of economic insecurity should satisfy. The paper advocates the construction, using household level data, of sub-indices of the economic insecurities produced by the hazards identified in Clause 25 of the UN Universal Declaration of Human Rights (i.e. unemployment, illness, widowhood, disability and old age), and their aggregation to an over-all summary index of economic insecurity. It concludes by addressing what can be done with existing data and discussing possible measures if new surveys were implemented. RÉSUMÉ Les gens se sentent économiquement vulnérables lorsqu’ils pressentent qu’un risque important – autrement dit une menace ou un danger – de dégradation de la situation économique, contre lequel il ne sont pas en mesure de se prémunir et qu’ils ne peuvent éviter ou ignorer, pèsera sur leur avenir économique. Il y est fait observer que les coûts des politiques publiques destinées à atténuer l’incertitude économique représentent des proportions importantes du PIB de tous les pays de l’OCDE, sans exception. L’auteur de la note se livre ensuite à un examen critique des quatre principales méthodes distinctes de mesure de l’insécurité économique reposant sur : i) la baisse importante du revenu disponible des ménages ; ii) la valeur du patrimoine privé des ménages calculée en tenant compte des fluctuations passées de ce patrimoine ; iii) la probabilité d’aggravation de la volatilité du revenu des ménages et iv) les coûts anticipés de certains risques spécifiques désignés. Sont ensuite étudiés les modes d’agrégation optimale des risques, l’unité appropriée d’analyse, le cadre temporel de comptabilisation et les critères que devrait remplir un indicateur de l’insécurité économique. La note plaide en faveur de la construction – à l’aide de données recueillies au niveau des ménages – de sous-indicateurs des insécurités économiques induites par les risques recensés à l’article 25 de la Déclaration universelle des droits de l’homme des Nations Unies (à savoir le chômage, la maladie, le veuvage, l'invalidité et la vieillesse), ainsi que de leur regroupement au sein d’un indice synthétique global de l’insécurité économique. La note se conclut en évoquant ce qui peut être fait au moyen des données existantes et en examinant d’éventuelles mesures à utiliser dans l’éventualité où de nouvelles enquêtes seraient menées à bien. 5 STD/DOC(2015)1 TABLE OF CONTENTS HOW SHOULD ONE MEASURE ECONOMIC INSECURITY? ................................................................ 2 OECD STATISTICS WORKING PAPER SERIES ....................................................................................... 3 ABSTRACT .................................................................................................................................................... 5 1. Introduction .......................................................................................................................................... 7 2. The costs of reducing economic insecurity........................................................................................... 8 3. How is “economic insecurity” now measured? .................................................................................. 10 3.1. Large income losses: the “Economic Security Index” of Jacob Hacker et al. ........................... 11 3.2. The buffering role of private wealth: the D’Ambrosio et al. approach ..................................... 12 3.3. Downside income volatility relative to trend: Rohde, Tang and Rao ........................................ 13 3.4. A compound “macro” index: The IEWB Index of Economic Security of Osberg and Sharpe . 14 4. Measurement choices and desirable principles ................................................................................... 15 4.1. Dimensionality and the optimal aggregation of hazards ........................................................... 15 4.2. Unit of analysis .......................................................................................................................... 17 4.3. What time period should be used? ............................................................................................. 19 4.4. Desirable principles of measurement ........................................................................................ 20 5. Measuring named risk insecurity ........................................................................................................ 21 5.1. Security in the event of unemployment ..................................................................................... 21 5.2. Security in the event of illness ................................................................................................... 23 5.3. Security in the event of disability .............................................................................................. 24 5.4. Security in the event of widowhood .......................................................................................... 25 5.5. Security in old age ..................................................................................................................... 27 6. Why not just ask people directly? ................................................................................................... 29 7. Conclusion .........................................................................................................................................