Democratic Measures of Income Growth and Other Indicators of Welfare

Terraced Street

Democratic Measures of Income Growth and Other Indicators of Welfare

Summary

It is well established that GDP growth is not a good measure of welfare change. As an aggregate it does not reflect any changes in the distribution of income. It could be described as plutocratic because a given percentage increase has more impact on GDP growth if it accrues to high earners than if it accrues to low earners. Addressing these shortcomings, we have developed democratic measures of growth, which represent the average of each household’s growth experience. We also explored sub-national measures of welfare and well-being.

 

Overview

GDP was designed as an indicator of economic activity, but it is widely used as an indicator of welfare. Economists are well aware that a welfare indicator has to be net rather than gross of depreciation. Equally importantly, a single welfare aggregate needs to represent some aggregate of the welfare of the population. GDP, which adds up individual incomes, can do that only if welfare rises linearly in income; even then, it remains silent about the distribution of welfare. There is a growing body of evidence which suggests that welfare rises less and less with income, as income rises. This suggests that a measure of welfare constructed from the geometric rather than arithmetic mean of income would be appropriate. The focus, however, needs to be on the real rather than the nominal income growth of each household. In constructing real income growth, the appropriate deflator needs to take into account the fact that different households have different consumption patterns. Democratic measures of income growth can be constructed for several possible definitions of income; our focus has been on household income and national income.

By combining metrics related to real household disposable income, per capita expenditure, material deprivation, health and leisure time, we also explored composite measures of welfare for detailed geographies and changes over time.

Methods

The study was able to draw on the work on democratic price indices carried out by ONS, who also produced price indices with a treatment of housing consistent with the definition of household income in the Family Resources Survey (FRS). This allowed for the calculation of a democratic measure of household income growth. For the production of a democratic measure of national income growth it was further necessary to attribute public consumption, and the consumption of non-profit institutions serving households, to particular households. We drew on ONS work on education and health consumption and allocated other consumption on the basis of household size. We also had to allocate the income which was not distributed to households, such as retained profits or pension fund investments. Finally, there was an issue that income is generally under-recorded in household surveys. Where there was no further information, we scaled the household data to match the national accounts aggregate. Where possible, however, we drew on other data sources, including the Survey of Personal Incomes and the Wealth and Asset Survey.

We also developed welfare measures for lower-tier local authority areas (LTLAs) in England, extending a method developed by Jones and Klenow (2016). This is a single index capturing disparities in well-being, reflecting consumption, life expectancy and health status. To do this we employed small area estimation techniques, drawing on ONS experience. We used a range of survey and administrative data, including the Living Costs and Food Survey.

 

Findings

Over the period 2006 to 2017, the geometric mean of nominal household income (adjusted for household size) is materially faster than the arithmetic mean. This is consistent with declining inequality over the period, seen in many indicators. When deflated by a democratic price deflator (rather than a plutocratic deflator for the arithmetic mean), the resultant democratic real national income measure grew 0.1% per year faster than plutocratic real national income per household (the standard measure).

Our local area welfare measures show considerable variation in well-being between areas of England in 2015/16. Broadly speaking, the areas with the highest-welfare are around London, and the lowest levels are in northern England. The variation is in keeping with other findings that subjective well-being varies across the UK due to more than just population composition in each area.

The project has demonstrated the feasibility of constructing democratic measures of national income, as well as many of the challenges in doing so. One challenge was in the modelling of high incomes, which are often underreported on surveys. A second was with estimates at sub-national level, which were hampered by issues of data quality, sample sizes, and statistical disclosure control.

 

Impact

We have provided ONS with a template for producing democratic measures of income and growth. This may provide a means to regularly produce such measures as official statistics. The OECD are implementing related methodologies. Our stochastic imputation methods have been used more widely as a means of enhancing survey data. The findings on sub-national well-being are useful to inform policy-making around “levelling up”.

The methods developed in this project have benefitted from significant engagement with peers through meetings of the European Economic Association, the Royal Economic Society, the Society for the Study of Economic Inequality, the International Association for Research in Income and Wealth, and the World Inequality Database. The methods and results have been presented widely at conferences and workshops.

 

Outputs

Aitken, A. and Weale, M.R. (2022) “Measuring National Income Growth Democratically: Methods and Estimates for the United KingdomESCoE Discussion Paper Series, ESCoE DP 2022-17

Aitken, A. and Weale, M.R. “Measuring National Income Growth Democratically” ESCoE Blog, 4 July 2022

Aitken, A. and Weale, M.R. (2021) “On Household Costs IndicesESCoE Discussion Paper Series, ESCoE DP 2021-16

Weale, M.R. and Aitken, A. “Indicators for Lower Tier Local Authorities in England and Wales in 2016” ESCoE workshop Ever-increasing demand for regional statistics: COVID-19 era and beyond 24 June 2021

Lui, S. and Rincon Aznar, A. “Modelling Productivity and Wellbeing in the UK Regions: Results from the UK Household Longitudinal Study” ESCoE Conference on Economic Measurement 2021, Poster Exhibition, 11-13 May 2021

Aitken, A. “Welfare Indicators for Lower Tier Local Authorities in England and Wales in 2016” Royal Economic Society 2021 Annual Conference, 12-14 April 2021

Weale, M.R. “Household Cost Indices” ESCoE Webinar Series, 14 January 2021

Weale, M.R. and Aitken, A. (2021) “Deflation of Distributional National AccountsESCoE Discussion Paper Series, ESCoE DP 2021-01

Aitken, A. and Weale, M.R. (2020) “A Democratic Measure of Household Income Growth: Theory and Application to the United KingdomEconomica, Volume 87, Issues 34,7 Wiley https://doi.org/10.1111/ecca.12329

Aitken, A. “Measuring and pursuing wellbeing .. the promise and the pitfalls” UCL Dept of Political Science, UCL, 21 November 2019

Aitken, A and Weale. M.R  “Decomposing Democratic National Income for the United Kingdom”,  ESCoE Conference on Economic Measurement 2020 Special Session H: Distributional Aspects of the National Accounts, 16-18 September 2020

Weale, M.R.  “Small Area Estimation of Price Index Weights“, ESCoE Conference on Economic Measurement 2020 Contributed Session N: Sub-national, 16-18 September 2020

Weale, M.R. “A Democratic Measure of National Income Growth” OECD, 16 September 2019

Aitken, A.“A Democratic Measure of National Income Growth” European Economic Association Conference, Session 14: Inequality, Manchester, 26 August 2019

Aitken, A. and Weale, M.R. “A democratic measure of national income growth for the United Kingdom, 2006-2015” ESCoE Conference on Economic Measurement 2019, Contributed Session E: GDP and beyond (i), King’s College London, 8-10 May 2019

Oulton, N. “GDP is a measure of output, not welfare. Or, HOS meets the SNA” ESCoE Conference on Economic Measurement 2019, Contributed Session E: GDP and beyond (i), King’s College London, 8-10 May 2019

Aitken, A. and Oulton, N. “Estimating true cost-of-living (Konus) price indices from household data” ESCoE Conference on Economic Measurement 2019, Contributed Session P: Applications of economic statistics, King’s College London, 8-10 May 2019

ESCoE-ONS Workshop: The Conceptual Foundations of the Household Costs Indices,  Church House, Westminster, 25 April 2019

Aitken, A. (2019) “Measuring Welfare Beyond GDP” National Institute Economic Review, Vol 249, Issue 1 https://doi.org/10.1177/002795011924900110

Weale, M.R. “Household Costs and the Life Cycle“, ESCoE-ONS Workshop: The Conceptual Foundations of the Household Costs Indices, 25 April 2019, Church House, Westminster, London

Oulton, N. “GDP is a measure of output, not welfare. Or, HOS meets the SNA” ESCoE Research Seminar, Office for National Statistics, 1 Drummond Gate, London

Oulton, N. (2019) “GDP is a Measure of Output, Not Welfare. Or, HOS Meets the SNAESCoE Discussion Paper Series, ESCoE DP 2019-06

Weale, M.R. and Aitken, A. “A Democratic Measure of National Income Growth for the United Kingdom, 2006-2015: Methods and Estimates” ESCoE ESCoE Research Seminar, Office for National Statistics, 1 Drummond Gate, London, 29 January 2019

Aitken, A. (2019) “Measuring Welfare Beyond GDPNational Institute Economic Review, Volume 249, Issue 1, 2019 Sage Journals https://doi.org/10.1177/002795011924900110

Aitken, A. and Weale, M.R. “A democratic measure of household income growth: theory and application to the United Kingdom” ESCoE Conference on Economic Measurement 2018, Contributed Session II: Aspects of the measurement of growth, Bank of England, 16-17 May 2018

Weale, M. “A Democratic Measure of Income Growth” ESCoE Research Seminar, NIESR, 2 Dean Trench Street, London, 1 May 2018

Aitken, A. and Weale, M.R. (2018) “Imputation of Pension Accruals and Investment Income in Survey Data” ESCoE Discussion Paper Series, ESCoE DP 2018-05

Aitken, A. and Weale, M.R. (2018) “A Democratic Measure of Household Income Growth: Theory and Application to the United KingdomESCoE Discussion Paper Series, ESCoE DP 2018-02

Aitken, A. and Weale, M.R. “Stochastic imputation of pension accruals and investment income“, ESCoE Workshop Imputation of data into household surveys, NIESR, 2 Dean Trench Street, London, 2 October 2017

Weale, M.R. “Democratic Economic Statistics” ESCoE Blog, 25 August 2017

Aitken, A. and Weale, M.R. “A Democratic Measure of Income GrowthMeasurement in the Modern Economy, ESCoE Measurement Series, NIESR, 2 Dean Trench Street, London, 2 May 2017

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