STATISTICS BRIEF Alternative Measures May 2006 No. 11 of Well-being By Romina Boarini, Åsa Johansson and Marco Mira d’Ercole The OECD, in common with many other organisations, has normally measured material living standards in member countries in terms of the level and growth of gross domestic product (GDP). But clearly, policy makers do not focus single-mindedly on GDP. They rather seek to enhance the overall well-being of citizens, today and in the future, taking into account other factors such as distributional concerns and environmental quality. This Statistics Brief1 reviews the various potential components of well-being, and assesses whether measures of economic growth can serve as adequate proxies for the development and level of well-being in OECD countries. In this issue “Well-being” is a complex concept. Dictionary definitions differ, but notions of prosperity, health and happiness generally figure. Well-being is not something that one can give a 2 Monetary measures precise number to. Numerical indicators relevant to measuring the different components of well-being of well-being exist, and it is plausible to argue that the general well-being of society as a whole has risen or fallen if a set of indicators move in a given direction. However, when 3 Non-monetary these different indicators move in opposite directions, it is not possible to say if well-being measures of well-being is being enhanced or reduced unless all indicators are expressed in a common metric. 6 Summary and conclusions 8 Further information Figure 1. Gross Domestic Product and Net National Income per capita, 2003 (US$ current prices and PPPs) ��� ��� ������ ������ ������ ������ ������ ������ ������ ������ ������ ������ ������ ������ � � � � � � � � � � � � � � � � �� ��� ��� �� �� �� �� �� ��� ��� ��� �� ��� ��� ��� �� �� ��� �� ��� ��� ��� �� �� ��� �� ��� �� ��� ��� Source: OECD, National Accounts of OECD Countries, 2005. 1. The background analysis is reported in R. Boarini, A. Johansson and M. Mira d’Ercole, «Alternative measures of well-being», OECD Economics Department Working Papers No. 476 and Social, Employment and Migration Working Papers No. 33, Paris, 2006. Organisation for Economic Co-operation and Development This Statistics Brief reviews different approaches to the GDP also makes no allowance for the using up of capital measurement of well-being. It first looks at monetary goods during the production process and thereby measures: these include both measures directly available overestimates the value of output that contributes to in the national accounts for the economy as a whole or well-being. An allowance for depreciation of capital for households and those that try to capture the influence can be subtracted from GDP and GNI to arrive at the of other components of well-being (such as leisure time corresponding net concepts of NDP and NNI. While all and income distribution) in money terms. It then looks at countries provide estimates of capital depreciation, it is various non-monetary measures (such as indicators of known that they are difficult to derive accurately. social conditions and environmental quality) and at surveys of self-reported happiness and life-satisfaction. Data for GDP, NDP, GNI and NNI are collected in terms of the local currency used by the country. International Monetary measures of well-being comparisons can be made by converting the data to a common currency, usually the US dollar, using either GDP and other national accounts indicators exchange rates or purchasing power parities (PPPs), but the latter are much preferred for making comparisons of Economists often assess well-being through measures of this nature.2 For the majority of countries there is little GDP per capita. Within the national account framework, difference between NNI and GDP per capita relativities, however, better measures of material living standards although there are exceptions, most notably Ireland and than GDP per capita exist, even if data availability and Luxembourg. Growth rates of the two measures are also reliability restrict the scope for cross-country and inter- similar for most countries. temporal comparisons. One such measure is national income. While GDP is a production concept, the way that Even per capita NNI is a poor approximation of the it is constructed makes it equal to the total income earned economic resources actually enjoyed by individuals and in the production process. Some of this income is paid households. A better measure is the per capita income to non-residents, while residents receive some income from all sources available to households after they have from production in other countries. GDP can be adjusted paid taxes, and how much of it they consume, including for “net income from abroad” to arrive at the concept of goods and services that they receive free of charge from gross national income, GNI, which is more relevant for the the government and non-profit institutions. For all countries well-being of residents of a country. household disposable income per person is lower than per capita GDP, and per capita household consumption levels are generally lower still. But cross-country comparisons show that there is a reasonably close correspondence between household incomes, their consumption, and GDP Figure 2. Growth of per capita Gross Domestic per capita. On the other hand, household incomes and Product and Net National Income, 1994-2003 consumption have in general risen less quickly than GDP in (Annual average growth rate) most countries in the past decade, mostly reflecting a shift towards higher company profits. As households are the ultimate owners of companies, a faster growth of business income should increase household well-being (through higher asset values) but this effect is not taken into account in national accounts measures of income flows. Accounting for other components of well-being within a monetary framework The determinants of individual and societal well-being go obviously beyond production and consumption of economic resources. As a result, several approaches have been explored to extend national account aggregates to a Source: OECD, National Accounts of OECD Countries, 2005. 2. See the March 2002 edition of the Statistics Brief Purchasing Power Parities – Measurement and Uses. 2 range of other dimensions that have value for individuals assumption that the economic needs of households rise and communities. While monetary valuation of non-market less than their size: a household comprising one couple factors requires some problematic assumptions, illustrative and two children does not need twice the income of a calculations highlight the potential importance of some of childless couple to maintain the same level of well-being. these factors.3 While the adjustment is bound to be somewhat arbitrary, assuming some “sharing” of resources within households Leisure time is clearly preferable than the alternative. Correcting per capita income data for the decline in household size that There is no doubt that for most people longer holidays and occurred in all OECD countries over the past decades shorter working hours contribute to well-being as long as implies a lower growth in «equivalised» income (i.e. income they are not accompanied by lower incomes (Beckerman, adjusted for household size) than in income per capita. 1978). Leisure in this sense is a “good”, but it is not sold on Since 1995 Mexico, the Czech Republic and Portugal are markets and therefore (as many other non-market factors) among those countries where the reduction is greatest does not enter into the national accounts. While there are (Boarini et. al 2006). no direct measures of the quantity of leisure time enjoyed by OECD citizens, there are big differences between Income distribution countries in the hours of paid work performed each year, and these differences have themselves changed over time. Incomes also vary between individuals, and OECD Workers in the United States, one of the countries with countries differ in the degree of inequality and in how the highest per capita GDP, work many hours each year, these have changed over time. It is not possible to say a surpassed only by a few other OECD countries.4 Hence priori what impact income inequality has on well-being. ascribing monetary value to leisure, however arbitrarily, If it is assumed that extra income brings smaller and adds something to well-being above and beyond the smaller increments in well-being to individuals and that value of money income in all countries. While the ranking all individuals with the same income experience the same of countries on this adjusted measure is not so very well-being, then general well-being will be highest if all different from that based on per capita GDP, the growth individuals have the same income; a corollary would be rates of these two measures differ more significantly for that any increase in income inequality with no increase several countries. In general, average annual growth rates in average income reduces well-being. But it can also be are boosted, particularly so for Denmark, France, the argued that the possibility of becoming rich is needed Netherlands and Portugal (Boarini et al., 2006). to spur effort and innovation, which benefit society as a whole, and that individuals differ in their preferences for Household size leisure as opposed to material goods. All estimates of per capita income are obtained by It is possible to adjust national account measures of summing income across all units and dividing the total household income per capita to incorporate distributional among the resident population. This ignores the pooling of concerns. One such adjustment involves weighting resources that occurs within each household and that fact average incomes in each decile of the distribution with a that these have different sizes, often containing individuals coefficient representing the degree of aversion to inequality with no independent income (e.g. children and spouses). of each society, where a higher value of this coefficient It is possible to adjust per capita income for household implies that lower weight is given to higher incomes (Kolm, size using data from household surveys.