Subjective Well-Being: Concepts and Measurements

1. Subjective Well-Being: Concepts and Measurements Siobhan McAndrew Institute for Social Change University of Manchester

2. Objective In scope • Introduction to concepts, measurement issues, main findings • Discussion of what we know • Work still to be done • Implications for public policy and policy analysis Out of scope • Presentation of own research and findings

3. What do I have to do with well-being? • Economic historian by training • Avner Offer, Challenge of Affluence • 1999-2001 M.Phil. seminar • 2001-2004 research assistance • 2005: the ‘happiness agenda’ takes off! • Whitehall Well-being Working Group, 2006-07 • Policy position paper with Jonathan Lepper, HMT • Religion and well-being; spatial models of well-being

4. Three strands of well-being • Utility: • pleasure (18c.); • preference satisfaction (20.c) • Objective well-being: • welfare measures • Subjective well-being: • self-reports of life satisfaction and happiness

5. Utility and ‘old’ welfare economics • Jeremy Bentham’s hedonic calculus • Utilitarianism: an action is right iff productive of the greatest happiness of the greatest number – ‘the only right and proper end of government’ • Neoclassical economics: • Edgeworth (1845-1926) and Pigou (1877-1959) • Choices arise from preferences, constraints, and expectations • Utility can be cardinally measured (measurable and comparable) • To measure social welfare, add up utility functions.

6. New welfare economics (Pareto, Kaldor, Hicks) • Utility can’t be observed directly, but revealed in the prices people are willing to pay, and the choices they make (revealed preference theory) • Society is allocatively efficient if goods are distributed to people who get the most utility from them • Social welfare maximised if nobody can be made better off without someone else being made worse off (Paretian efficiency)

7. Arrow’s impossibility theorem • To calculate a social welfare function via a voting rule, we need to relax one of the following: • Non-dictatorship • Universality • Independence of Irrelevant Alternatives • Pareto efficiency • No utilitarian social welfare function (fair voting rule) can convert individual choice into social optimality • i.e. Cannot add up individual happiness meaningfully.

8. Measuring welfare, 1950- • Avoid direct interpersonal comparisons: ethical problem if Government imputes a ‘universal preference ordering’ • Assume heuristically that underneath ‘we are all really alike’ – our preference orderings are similar • Use proxies for utility: • National income per capita (mean, median) • UN System of National Accounts from 1953 • Adjust for unemployment, inflation, inequality • Leisure time, household production • Pollution and environmental costs • But if income growth is not broadly shared, or particular groups lose, then can’t infer a Pareto gain. • Must take care in interpreting real GDP increase as a good thing.

9. Heuristics for public policy • Important to improve productive and allocative efficiency (e.g. via technological progress, competition): • Higher income means budget constraints relaxed – so higher levels of satisfaction possible • Allocative efficiency means that goods and services go to the people who value them most • Pareto criterion may be impossible. So, assess interventions by Cost Benefit Analysis: can losers be compensated by gainers? Can they be potentially compensated by gainers? (Kaldor-Hicks criterion) • Examples: • Immigration – costs felt locally, benefits spread widely • Local economic development – infrastructure, construction, congestion • Reduction in tariffs – lower-priced imports but threat to domestic jobs • Opening up of professions

10. Philosophical problems • Commitment to value only outcomes is not neutral. • Is preference satisfaction an adequate conception of well-being? • Needs, individual dignity, opportunity, rights and fairness • Not necessarily reducible to utility • Rawls: well-being should be measured by an index of ‘primary social goods’ • Sen: should not focus on the external means that permit individuals to attain various functionings. Should rather focus on ‘capabilities’: what individuals are free to do or to become. This takes into account all the relevant dimensions of life, rather than being purely concerned with either access to resources, or achieved utility.

11. Conceptual problems, psychological evidence Herbert Simon: We are boundedly rational and use heuristics to make decisions Kahneman and Tversky: Prospect Theory (losses weigh more than gains) • People aren’t so rational • framing effects • habituation • loss aversion and risk aversion • struggle to predict future tastes • pleasure is related to novelty • Smaller rewards given sooner preferred to larger, deferred rewards • Building up picture of economy from individual choices and preferences flawed if utility functions are not ‘well behaved’ • Richer does not mean better off.

12. Quality of life: objective measures • Index of Sustainable Economic Welfare (Daly & Cobb, 1989) • UK Sustainable Development Indicators: • 68 measures (though includes SWB and self-reported health) for Balanced Scorecard approach • UN Human Development Index • Life expectancy, education, income • Results sensitive to variables included or adjustments made

13. UK ranks 16/177 as of 2005

14. Index of Sustainable Economic Welfare • Refined by Jackson and Marks for the New Economics Foundation • GDP measured by consumer expenditure • minus spending on crime, private health and education, and pollution; • adjustment for longer-term environmental damage and depreciation of natural capital; • economic adjustments to give higher weighting to ‘prudent investment’ and trade balances; • adjustment for rising inequality; and • adjustment for household labour

15. ‘Measure of Domestic Progress’

16. Challenge of ‘happiness economics’ • 1960s antimaterialism; 1970s environmentalism • Fred Hirsch, Social Limits to Growth (1974) • Economy = material economy + positional economy • Socially scarce goods, or subject to congestion • If no market pricing, then screening, queuing or quality dilution • e.g. leadership, suburban living, scenic land • Brickman and Campbell (1971), hedonic treadmill

17. Arrival of surveys! Eurobarometer US General Social Survey World Values Survey European Social Survey British Household Panel Study GSOEP, HILDA UK Sustainable Development Indicators Gallup polls archive

18. Subjective well-being indicators • Allows direct measurement of individuals’ well-being Definition: ‘all of the various types of evaluations, both positive and negative, that people make of their lives... reflective cognitive evaluations, such as life satisfaction and work satisfaction, interest and engagement and affective reactions to life events, such as joy and sadness. Thus, SWB is an umbrella term for the different valuations people make regarding their lives, the events happening to them, their bodies and minds, and the circumstances in which they live’. Ed Diener, 2005

19. Typical instruments • Single life satisfaction or happiness questions • Eurobarometer : • ‘On the whole, are you very satisfied, fairly satisfied, not very satisfied, or not at all satisfied with the life you lead?’ • Data available 1973-present for EU members. • European Social Survey: • ‘On a scale of 0 to 10, how happy are you?’ • ‘On a scale of 0 to 10, how satisfied are you with life as a whole?’ • British Household Panel Study: • Using a 1-7 scale how dissatisfied or satisfied are you with your life overall? • Eurobarometer periodically asks: • ‘Taking all things together… would you say you are very happy, fairly happy or not too happy?’

20. Life satisfaction ratings, 2007-2009

21. Accuracy and reliability • Ceiling effects from finite scales • Cultural meanings, language effects • People remember peak or end experiences more clearly than moment-by-moment life satisfaction • But self-reports correlate well with: • likely attributes such as unemployment; • respondents’ recall of positive or negative life-events; • family and friends’ estimates; • duration of authentic smiles; • physiological measures (cortisol, ECG measures)responses to stress. • Praag: • ‘in reality we have never met a respondent who would refuse to answer because his happiness level, being a ‘‘12’’ was not included... each respondent accepts and understands a finite scale’. • Multi-item scales (e.g. BHPS GHQ-12; satisfaction with life domain questions) help solve measurement problems

22. Data and path dependence • If multiple items available, can assess validity of single items • Comparability of data across countries and over time gives existing measures a comparative advantage • Multi-item scales are more expensive • Continuing scepticism: • ‘the concept sounds incredibly flaky and allencompassing based around subjective interpretations/expectations andexperiences’ (Political Science colleague)

23. Dimensions of subjective well-being • Newton/Defra: • hedonic well-being – includes happiness and life satisfaction; and • eudaimonic or psychological well-being (PWB), relating to meaning and self-actualisation. • e.g. is it better to be the pig satisfied or Socrates dissatisfied? • Difficult to measure ‘self actualisation’ • Overlap with/reduction to hedonic well-being. • Well-being and ill-being: distinct dimensions rather than mirror images

24. UK 20th/91

25. Adjusted for ‘ecological footprint’ (global hectares per capita). For full set, UK ranks 74 out of 173.

26. Findings from survey data • Positively related to SWB at individual level: • income • marriage • job status • health • religion • being right-wing • sex once a week (optimal number of partners in past month= 1)

27. Easterlin paradox • Easterlin’s 1974 study suggested negative relationship between income and SWB across countries • Income effect dependent on standards which were inherently changeable • expectation, habituation levels, and social comparisons • Famous result that SWB flat in US since 1945, despite sustained economic growth

29. GDP, Wellbeing and MDP, 1973-2002

30. Reasons for Easterlin paradox • UK GDP pc doubled since 1973, mean life satisfaction has not: • Basic needs largely met • Relative income standards matter more for well-being • Hedonic adaptation • Individual well-being increases with income, decreases with loss of position • Positive income-wellbeing relationship at individual level, and across countries, but not national level over time

31. Literature debate: relative effects • Individual SWB responds positively to increases in income, negatively to increases in inequality and relative loss of position • Income-SWB relationship stronger within a country at a point in time, than over time by country • Status benefit of high income within a country – but zero-sum • Clark & Oswald (1996): coefficients on income and relative income equal and opposite • Helliwell & Huang (2005): life satisfaction completely relative in income. • Alesinaet al. (2004): individuals less happy if inequality is high. Effect stronger in Europe than the US.

32. Dissenting opinions • For the very poor, absolute effect outweighs relative effect • Dieneret al. (1993): • ‘To the degree that people compare themselves to virtually anybody, the theory becomes harder to rigorously test... if people’s standards adapt to virtually all conditions, why don’t they adapt to certain expectancies and social comparisons?’ • Some theoretical work suggesting people choose their reference groups • Not only relative rank but distance (Hopkins 2008).

33. Adaptation effects: pro-Easterlin • Bjørnskovet al. (2008): accelerated growth is needed to influence trends in life satisfaction – because aspirations change over time • Di Tellaet al.;van Praag: effect of an income increase in long term only 40-42 per cent of effect after one year • Gardner & Oswald study of moderate lottery wins: not complete return to original ‘set point’.

34. Recent challenges • Economic security rather than income; ill-being rather than well-being • Veenhoven and Hagerty (2006): • data too fragile; • Richer does mean happier; inequality in SWB has fallen; happy life years increased. • Stevenson and Wolfers (2008): • Income-happiness gradient robust across countries and over time; no evidence of a satiation point. Life Satisfaction in 91 nations, 1995-2005, and log GDP per capita, 2005

35. The final word? • Layard, Mayraz and Nickell (2009) • US GSS (data from 1972); W. Germany GSOEP (data from 1984); Eurobarometer from 1973 • US GSS and GSOEP: comparator income has a negative effect on happiness equal in magnitude to the positive effect of own income • US data : perceived relative income has same effect as actual relative income – comparisons matter • Europe from 1973: trend income effect small and weak – so long-run effect of higher income at country level is unimportant for indidual SWB • Differ from Stevenson & Wolfers because their study is largely cross-sectional and includes poor as well as rich countries.

36. Models (1) • Difficulty establishing causality from cross-sectional surveys • e.g. well-being and divorce, well-being and unemployment • longitudinal studies more rigorous • Clark and Oswald (2002) from BHPS analysis: ‘the biases in cross-section patterns may be less dramatic than has sometimes been supposed’

37. Models (2) • Self-selection: • People can pay more to live in more pleasant areas • Choose to have more or fewer children • Leave education or stay on • ‘these have a strong choice element to them, so that at the margin we would expect the utility effect to be zero’ (Clark et al. 2007)

38. Models (3) • Make as few assumptions as possible: • What causes what? • Causal effect of health on well-being? – mental health difficult to distinguish from SWB • Many health behaviours ‘chosen’ (self-medicating) • Examine health and SWB as joint dependent variables • Add alcohol consumption/exercise etc. as mediating variables in path analytic framework

39. e.g. Tampubolon (2010)

40. Models (4) • Multi-level effects • Individual level • Household level • Neighbourhood level • National level • Latent variables or manifest variables • Spatial and temporal effects: • ‘everything is related to everything else, but near things are more related than distant things’ • correct for spatial & temporal dependence

41. Disciplinary wars • Economics and its discontents - the ‘dismal science’; ‘autistic’ • But: • ‘Economics is a study of mankind in the ordinary business of life… [and] that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of well-being’ (Alfred Marshall) • ‘Well-being isn’t the same as utility’ • ‘Anti-growth nuts’

42. Policy future • Cameron interest in ‘General Well-Being’: • At height of asset bubble • ‘Red Tory’ angle • Quality of life important to the retired; anti-development attitudes in the South East • Previous Governments’ sustainable development strategy document drawn up by DEFRA: • ‘the goal of sustainable development is to enable all people throughout the world to satisfy their basic needs and to enjoy a better quality of life, without compromising the quality of life of future generations’ • Well-being surveyed alongside battery of questions regarding consumption, energy use and the environment.

43. But wicked issues... • ‘We must tell people to consume less!’ • Loss aversion • Resistance to congestion charging and petrol taxes • Alcohol duty increased inflation this month • Obesity: taxes on processed food? • Marriage tax break? • Avoidance of progressive taxes • Ameliorating climate change is costly – requires growth • Austerity reduces funds for long-term interventions • Fragility of IAPTs programme • Governments and institutions face race to bottom • Policy usually more political than technocratic.

44. Conclusions • Good and growing evidence of what correlates with well-being at the individual level: health, relationships, employment, good governance. • Weaker evidence on ‘place’ and causality – need further waves of panel data • Relative income hypothesis appears confirmed but need to understand mechanisms • Technocratic magic bullets, even if possible, would not be desirable: people care about quality and fairness of process, as well as outcome • Current economic priority is macroeconomic stability and reduction of unemployment. Evidence also highlights importance of: • alleviation of chronic illness, including mental illness; • strengthening relationships and social capital.