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«Chapter 2 Economic well-being This chapter provides a brief introduction to the concept of human well-being, with a particular emphasis on economic ...»

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OECD Framework for Statistics on the Distribution

of Household Income, Consumption and Wealth

© OECD 2013

Chapter 2

Economic well-being

This chapter provides a brief introduction to the concept of human well-being, with

a particular emphasis on economic (or material) well-being. In doing so, it

highlights the importance of considering income, consumption and wealth together

as part of a conceptual framework. The chapter then goes on to explain the nature

of the OECD framework for measuring human well-being, and the role of economic well-being within this framework. It concludes by setting out the broad policy, research and analytical objectives/uses of information collected in these fields.

2. ECONOMIC WELL-BEING Introduction In recent years, there have been increasing concerns about the adequacy of traditional macro-economic statistics, such as GDP, as measures of people’s current and future living conditions. Moreover, there are broader concerns about the relevance of these figures as measures of national or societal well-being. On the micro side, there are concerns about the comparability and comprehensiveness of the statistics being produced. Recognising these deficiencies, there has been widespread interest in adding to, and improving upon, existing measures of household income, consumption and wealth as part of a process of developing more comprehensive measures of human well-being.

Defining well-being Although the concept of well-being is widely used, there is no commonly agreed definition of just what it is. Moreover, the terms well-being, quality of life, happiness and life satisfaction are often used interchangeably. Table 2.1 presents examples of the Table 2.1. Examples of well-being definitions Definition Reference “This is a dynamic state, in which the individual is able to develop their New Economics Foundation, 2008 potential, work productively and creatively, build strong and positive relationships with others, and contribute to their community. It is enhanced when an individual is able to fulfil their personal and social goals and achieve a sense of purpose in society.” “Well-being is a state of being with others, where human needs are ESRC Research Group on Wellbeing in Developing Countries met, where one can act meaningfully to pursue one’s goals, and where www.welldev.org.uk one enjoys a satisfactory quality of life.” “The individual’s experience, or perception, of how well he or she lives Naess, 1999 is taken as the criterion of quality of life.” “Subjective well-being research is concerned with individuals’ Diener, Suh, Lucas and Smith, 1999 subjective experience of their own lives.” “Subjective well-being consists of three interrelated components: life Diener, Suh, Lucas and Smith, 1999 satisfaction, pleasant affect, and unpleasant affect. Affect refers to pleasant and unpleasant moods and emotions, whereas life satisfaction refers to a cognitive sense of satisfaction with life.” Differently from the “traditional clinical models of mental health, subjective well-being does not simply refer to an absence of negative experiences”.

“We find that surveys of well-being utilise one or more of three Kahn and Juster, 2002 definitions: 1) satisfaction with life 2) health and ability/disability, and

3) composite indexes of positive functioning.” “Well-being has been defined by individual characteristics of an Pollard and Lee, 2003 inherently positive state (happiness). It has also been defined on a continuum from positive to negative, such as how one might measure self-esteem. Well-being can also be defined in terms of one’s context (standard of living), absence of well-being (depression), or in a collective manner (shared understanding).” “Well-being stems from the degree of fit between individuals’ Andrews and Withey, 1976 perceptions of their objective situations and their needs, aspirations or values.”

–  –  –

definitions of well-being used in the literature. These definitions can be broadly classified

into three main groups:

General or global definitions that do no detail the possible components of well-being.

● Component definitions that break down well-being into its constituent parts, ● dimensions or domains, or identify key characteristics considered essential to evaluate well-being.

Focused definitions that either explicitly or implicitly refer to just one or a few ● components, of well-being.

Despite the absence of a single definition of well-being, OECD (2011) argues that most experts and ordinary people around the world would agree that it requires meeting various human needs, some of which are essential (e.g. being in good health), and includes the ability to pursue one’s goals, to thrive and feel satisfied with their life. OECD (2011) also argues that since well-being is a complex phenomenon and many of its determinants are strongly correlated with each other, assessing well-being requires a comprehensive framework that includes a large number of components and that, ideally, allows gauging how their interrelations shape people’s lives. Reflecting this multi-dimensional approach, the OECD’s Better Life Initiative, presented in OECD (2011), identifies three pillars for

understanding and measuring people’s well-being:

Material living conditions (or economic well-being), which determine people’s consumption ● possibilities and their command over resources.

Quality of life, which is defined as the set of non-monetary attributes of individuals that ● shapes their opportunities and life chances, and has intrinsic value under different cultures and contexts.

The sustainability of the socio-economic and natural systems where people live and ● work, which is important for well-being to last over time. Sustainability depends on how current human activities impact on the stocks of different types of capital (natural, economic, human and social) that underpin well-being.

The OECD’s approach draws closely on that proposed by Stiglitz et al. (2009) and by previous OECD work (Hall et al., 2010). The ICW Framework presented in this report has been developed from the viewpoint that material living conditions, or economic wellbeing, are a critical factor for overall well-being.

The importance of material living conditions for well-being OECD (2011) argues that income and wealth are essential components of individual well-being. Income refers to the flow of economic resources that an individual or household receives over time. It includes wages and salaries and money earned through self-employment as well as resources received from other sources such as property, pensions and social transfers. These concepts and components of household income are further elaborated in the Canberra Group Handbook on Household Income Statistics (UNECE, 2011). In contrast, wealth is a “stock” concept: it refers to the value of accumulated assets at a given point in time. It includes the value of property, pensions and financial assets, along with physical assets such as vehicles and household goods. In calculating a measure of net wealth, debt and other liabilities are subtracted from the value of assets.

Income allows people to satisfy their needs and pursue many other goals that they deem important to their lives, while wealth makes it possible to sustain these choices over



–  –  –

Source: OECD (2011).

time. Both income and wealth enhance individuals’ freedom to choose the lives that they want to live. Moreover, increases in income have been associated with improvements in other dimensions of well-being, such as life expectancy, educational attainments, etc., although there are discussions on the strength of associations and the directions of causality. At the macroeconomic level, economic resources allow countries to invest in education, health, security, etc.

The importance of economic well-being to overall well-being has been recognised by

almost all the institutions producing measures of well-being. For example:

The Australian Bureau of Statistics includes household economic well-being as one of ● the dimensions of its Measures of Australia’s Progress (MAP).1 The UK Office for National Statistics has included “personal finance”, which includes ● household income and wealth, its distribution and stability, amongst its proposed domains of national well-being (ONS, 2011) and has published proposals for reporting on economic well-being.

–  –  –

The New Economics Foundation incorporates income into its framework for National ● Accounts of well-being (NEF, 2011).

The relationships between economic well-being and overall well-being is not always direct, particularly when comparing well-being over time, between individuals or through market prices. These issues are explored further in the sections below.

Changes in well-being over time Generally, in a given society at a given time, income is positively related to reported subjective well-being, so that individuals with a higher income tend to report higher subjective well-being than those with a lower income. However, Graham and Pettinato (2002) present evidence that people’s aspirations change over time so that their idea of the minimum satisfactory level of income increases over time (in a growing economy); this implies that one is forever chasing a receding target. Income growth may thus generate little increase in this component of well-being (even though, at each point in the growth process, the better-off are happier than the less well-off). This is consistent with the earlier work by Easterlin (1974), who reported that average national happiness does not appear to increase over long spans of time, in spite of large increases in per capita income, i.e. the socalled “Easterlin Paradox”. Much of the above research is limited, however, in terms of fully understanding household economic well-being, as it relies on GDP per capita as a proxy of the typical income of each individual. These limitations come about both because GDP growth may differ from growth in household income and also because average income is generally a poor proxy of the typical (i.e. median) income.

Comparisons of well-being across individuals Care also has to be taken when making comparisons between the well-being of individuals, especially when measured with a single indicator such as income. Economists have tended to argue that there is no meaningful way to make comparisons of welfare between different people, as there is no metric for comparing “utilities”. Thus, since the degree of satisfaction of a person’s preferences cannot be observed directly, assessments of well-being need to rely on proxies. The most commonly used proxy has been an economic variable, i.e. real income. Real income constrains a household’s consumption possibilities while, for nations, production of both consumer and investment goods contributes to the well-being of households’ today and in the future.

Sen (1999) argues that it is not enough to look at the resources available to individuals, because their abilities to transform those resources into functionings (i.e. their “capability” to “do and be”) vary from individual to individual. A common illustration is that someone who needs a wheelchair will require more financial resources to achieve the same amount of mobility as someone who does not. Naturally, people’s ability to transform the functionings they actually achieve into well-being also varies considerably between individuals.

Dunn, Gilbert and Wilson (2011) argue that the way in which individuals spend their money can influence the satisfaction they receive from their spending, whilst Taylor, Jenkins and Sacker (2011) report that an individual’s financial capability – i.e. the ability to control their finances, make appropriate financial decisions, understand how to manage credit and debt and identify appropriate products and services – is an important determinant of the individual’s subjective well-being, regardless of how much money they have.


2. ECONOMIC WELL-BEING These considerations highlight that simple comparisons of individual income levels are limited in their ability to compare levels of well-being across people. The capability approach therefore points towards the need for a richer and multi-dimensional perspective in order to make comparisons of individual well-being. This issue of variability between individuals and households is addressed, to a certain extent, by the use of equivalisation scales when analysing income, which take into account the composition of households.

Relationship between market values and well-being The use of aggregate measures of economic resources drawn from the National Accounts, in particular Gross Domestic Product (GDP), as a proxy for economic well-being is based on the idea that valuing quantities through market prices assures that, in equilibrium and under various assumptions, these prices are representative of the marginal contributions of the different goods consumed to the utility of households.

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