Has Economic Well-being improved in Western

Nations?

Lars OsbergDepartment of Economics, Dalhousie University

Halifax, Nova Scotia

Presentation at Wuhan University, November 24, 2001.

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 ?

What is Economic Well-Being?

Economic Well-Being < Well-Being Economic Well-Being > GDP Economic output > Marketed output

– GDP omits value household labor GDP omits many sources utility

– value of leisure, length life, etc. GDP includes “regrettable expenditures”

– Costs of pollution, crime, etc

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”

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

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 • value of increased longevity• reduced economies of scale in household consumption• changes in working hours – leisure

Government services– provision of non-marketed or heavily subsidized

services• includes defense and capital consumption allowances

– excludes debt service charges and transfer payments

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

“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

How different is trend in Economic Well Being &GDP?

Trend in Economic Well Being depends partly on how heavily current consumption is weighted compared to accumulation, inequality & insecurity

Experiment with two sets weights– Heavily weighted to consumption (70%)– Equal weighting all components (25%)

Australia

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

United Kingdom

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

United States

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

Canada

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

Sweden

0.85

0.95

1.05

1.15

1.25

1.35

1.45

1.55

Index of Wellbeing, Equal Weighting (0.25+0.25+0.25+0.25)

Index of Wellbeing, Alternative Weighting (0.7+0.1+0.1+0.1)

GDP per capita Index

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

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