A broader range of indicators is required to assess social policy reforms to find out which of them actually improve wellbeing. That is the conclusion of a new study by Dr Holguer Xavier Jara Tamayo of the Institute for Social and Economic Research at the University of Essex and Professor Erik Schokkaert from the University of Leuven.
Their research, to be presented at the Royal Economic Society''s annual conference at the University of Sussex in Brighton in March 2018, notes that over the last decade, increasing attention has been given to the idea of going beyond monetary measures to assess social progress. Their analysis looks at how the effect of hypothetical policy reforms differs, depending on the measure of wellbeing considered in the evaluation: income, life satisfaction or ''equivalent income'', which encompasses multiple life dimensions, including health, employment and housing quality.
Measuring individual wellbeing
Income has been predominantly used as a measure of individual wellbeing. This is particularly the case for the evaluation of tax-benefit reforms, which focus mainly on the effects on the income distribution. In recent years, however, there has been increasing agreement about the importance of considering other life dimensions in the evaluation of wellbeing in society.
Subjective wellbeing measures, such as happiness and life satisfaction, have recently become popular. Numerous studies have shown that, in addition to income, life dimensions such as health, employment, housing and environmental quality are important determinants of subjective wellbeing; and increasing effort has been put by national statistics offices to collect subjective wellbeing measures in large representative surveys.
The use of subjective life satisfaction for policy evaluation has, however, been called into question because it is not only determined by objective outcomes of life and the importance that individuals attach to life dimensions, but also by aspirations and expectations. As Nobel Prize-winning economist Amartya Sen says, ''A person who is ill-fed, undernourished, unsheltered and ill can still be high up in the scale of happiness or desire-fulfilment if he or she has learned to have ''realistic'' desires and to take pleasure in small mercies.''
Different approaches have been considered to define wellbeing measures that go beyond income but also beyond subjective wellbeing. An alternative measure is the so called ''equivalent income'', which determines the level of income that, combined with the best values of non-income life dimensions (perfect health, for example), would keep a person in a situation she considers equally good as her initial situation.
Equivalent income encompasses multiple life dimensions and is not affected by aspirations and expectations, ensuring respect for the relative importance that individuals attach to different life dimensions.
What works best for wellbeing?
From a policy perspective, it is essential to assess the effect of a reform on the population. The researchers find that this assessment really does depend on which wellbeing indicators are used.
The researchers use the EU tax-benefit microsimulation model, EUROMOD, alongside data from the official EU Statistics of Income and Living Conditions survey 2013 for Sweden, which includes rich information about life satisfaction and satisfaction with specific life domains, as well as data on reported feelings and emotions.
The researchers look at how the effect of hypothetical policy reforms differed, depending on the measure of wellbeing considered in the evaluation: income, life satisfaction or equivalent income.
The study simulates four alternative and budget neutral tax-benefit reforms:
(A) An additional payment for recipients of social assistance;
(B) An increase in the basic amount of child benefit;
(C) An additional payment of housing allowance for pensioners
(D) An improvement in the quality of low-quality housing.
The researchers find that the effect of the potential reforms varies widely depending on the wellbeing measure used in the evaluation. Dr Jara comments:
''Looking beyond income provides a better picture of individual wellbeing and makes it possible to analyse the effects of non-monetary policy reforms. For example, if we consider disposable income as our measure of wellbeing, potential reforms aiming to improve housing quality can never be welfare-improving because they only represent costs and no benefits.''
''But such policies are preferred over other income transfer policies, if we evaluate wellbeing in terms of life satisfaction or in terms of equivalent income with a sufficiently large degree of inequality aversion. Additionally, interactions between different life dimensions should be considered. For example, the effect of income changes on health following a policy reform.''
''Our study is particularly relevant given the increased effort by national governments and international organisations to collect data on monetary and non-monetary life dimensions and subjective life satisfaction.''
''Microsimulation models should exploit the availability of richer data to analyse the role of the welfare state on individual and social welfare taking into account a wide range of life dimensions.''