Seminar: Wellbeing, policy and social investment

31 March 2017 Seminar: Wellbeing, policy and social investment Conal Smith, former senior economist at OECD http://www.superu.govt.nz

Outline What is well-being? Can we measure well-being? The modern consensus model Well-being and policy Gaps in our understanding 2

What is well-being? Well-being 3

What is well-being? Welfare 4

What is well-being? Utility 5

What is well-being? Quality of Life 6

What is well-being? Well-being: Welfare, utility (as an economist means it), quality of life The degree to which a person is able to live the kind of life they have reason to value The stuff that matters to people in their lives 7

Can we measure well-being? 8

Can we measure well-being? People have different tastes 9

Can we measure well-being? People have different tastes Well-being might be different across cultures or belief systems 10

Can we measure well-being? People have different tastes Well-being might be different across cultures or belief systems Even the main theories of well-being are contradictory 11

Can we measure well-being? People have different tastes Well-being might be different across cultures or belief systems Even the main theories of well-being are contradictory Well-being is unobservable 12

Can we measure well-being? 14

Can we measure well-being? People have different tastes? Yes, but: Capabilities not consumption bundles Populations not individuals Empirical evidence suggests tastes across primary goods are not so diverse 15

Can we measure well-being? Well-being might be different across cultures or belief systems? Intuitively plausible, but empirically rejected 16

Can we measure well-being? 17

Can we measure well-being? Even the main theories of well-being are contradictory? In principle, yes. But they reconcile in practice: 18

What is well-being? W = f (Y, O 1, O 2, O 3 O n ) W = well-being Y = command over market goods (permanent income) O n = non market primary goods 19

What is well-being? W = f (Y, O 1, O 2, O 3 O n ) Sen: capabilities 20

What is well-being? W = f (Y, O 1, O 2, O 3 O n ) Layard: utility Sen: capabilities 21

Can we measure well-being? Well-being is unobservable? Intuitively plausible, but wrong: Most capabilities relate to objectively measurable outcomes Subjective well-being is much more empirically tractable than we realised 22

Can we measure well-being? 23

Can we measure well-being? Well-being frameworks are too complex and multidimensional to be useful for policy? Well-being is complex and multi-dimensional Reflecting this is a feature, not a bug, of the modern consensus model of well-being 24

The modern consensus 25

The modern consensus Sen, A., Stiglitz, J., and Fitoussi, J., (2009), Report of the Commission on the Measurement of Economic Performance and Social Progress 26

The modern consensus Sabina Alkire (2002)

The modern consensus 7 Relative effect sizes of different variables on life satisfaction 6 5 4 3 2 1 0 Source: Boarini, Comola, Smith, Manchin and De Keulenaer (2012). Data is for all OECD countries,, Gallup World Poll waves 2009 and 2010 28

The modern consensus OECD w ell-being dimensions Individual well-being Israeli indicators of Well-being, Resilience, and Sustainability Material Standard of Living Employment and W ork-leisure Balance Infrastructure and Housing Health Education Personal and Social Well-being Civic Engagement and Governance Environment Personal Safety Sustainability of well-being over time 29

The modern consensus OECD well-being dimensions Sustainable Development Goals Goal 1: End poverty / Goal 2: End hunger, achieve food security Goal 8: Promote full and productive employment Goal 11: Make human settlements inclusive, safe Goal 3: Ensure healthy lives Goal 8: Promote decent work for all Goal 4: Ensure inclusive and equitable quality education Goal 16: build effective, accountable and inclusive institutions Goal 6: Ensure availability of water for all Goal 16: Promote peaceful and inclusive societies, provide access to justice for all 30

The modern consensus Sustainability of well-being over time Natural Capital Human Capital Economic Capital Social Capital Sustainable Development Goals Goal 3: Ensure healthy lives Goal 4: Ensure inclusive and equitable quality education Goal 16: Promote peaceful and inclusive societies, provide access to justice for all and build effective, accountable and inclusive institutions Goal 7: Ensure access to modern energy for all Goal 9: Build resilient infrastructure and foster innovation Goal 12: Ensure sustainable consumption and production patterns Goal 13: Take urgent action to combat climate change Goal 14: Conserve and sustainably use the oceans Goal 15: promote sustainable use of terrestrial ecosystems 31

The modern consensus OECD well-being dimensions The Social Report, 2010 Economic standard of living\ Paid work Sustainability of well-being over time Health Leisure and recreation Knowledge and skills Social connectedness Civil and political rights Cultural identity Safety Life satisfaction 32

The modern consensus Source: Delhey & Kroll, 2013 33

Well-being and policy Alignment Strategy development Identify policy goals Accountability Evaluation and review Planning Policy options identified Analysis of costs and benefits Analysis Implementation and delivery 34

Well-being and policy Source: George Ward, 2015 35

Well-being and policy Source: George Ward, 2015 36

Well-being and policy 37

Well-being and policy 38

Well-being and policy High importance Poor performance 1.4 1.2 1 0.8 High importance High performance Importance to Israeli citizens 0.6 0.4 0.2 0-1.4-1 -0.6-0.2-0.2 0.2 0.6 1 1.4-0.4-0.6-0.8 Low importance Poor performance -1-1.2-1.4 Performance relative to the OECD Lowimportance High performance Source: Measuring and Assessing Well-being in Israel, OECD, 2015 39

Well-being and policy What is the money value of an improvement in an outcome for which we have no market price? ls = + + α + + + T U i, j, t a j dt log yi, j, t β Tj, t β U j, t ε i, j, t y = income T = longevity U = unemployment / y = 1 exp( / α) δ β Equivalent income of longevity or unemployment 40

Well-being and policy What is the money value of an improvement in an outcome for which we have no market price? 41

Gaps in our understanding The economics of well-being has seen rapid progress over the last decade and a half nonetheless, there are a large number of research gaps: Social contact measures largely unvalidated Using geospacial data to better measure the relationship between the physical environment and well-being Family, whanau, and interpersonal utility functions Applying subjective well-being valuation techniques to obtain values for non-market outcomes Measuring human, social, and natural capital stocks 42

Gaps in our understanding Social Contact Fleche, S., and Smith, C., (forthcoming) 43

Gaps in our understanding Environmental quality MacKerron, G., and Mourato, S., (2009) 44

Gaps in our understanding Family, whanau, and interpersonal utility functions Measurement is far from straight forward Average of individual outcomes across the family? Individual estimate of family well-being (Te Kupenga)? Average of individual estimates of family well-being? Outcome domains specific to group well-being (e.g. family harmony)? We need to investigate how other peoples wellbeing fits into the utility function 45

Gaps in our understanding Valuing non-market outcomes Murtin, F. et al. (2015), Beyond GDP: Is there a law of one shadow price?, OECD Statistics Working Papers, 2015/05, OECD Publishing, Paris 46

Gaps in our understanding Low income countries 26% Middle income countries 13% 59% Natural Capital Produced Capital Intangible Capital 19% Natural Capital Produced Capital Intangible Capital 16% 68% High income countries 2% 17% To a first approximation, intangible capital is the only capital stock that matters in the production function. Natural Capital Produced Capital Intangible Capital 80% World Bank, 2006 47