Concepts and measurement of well-beingdasp.ecn.ulaval.ca/.../1-concepts-measurement.pdf · Basic needs Concepts and measurement of well-being PEP and UNDP June 2010 – 7 / 37 “Basic

Concepts and measurement of well-being PEP and UNDP June 2010 – 1 / 37

Concepts and measurement ofwell-being

Abdelkrim Araar, Sami Bibi and Jean-Yves Duclos

Workshop on poverty and social impact analysisDakar, Senegal, 8-12 June 2010

Outline


Multidimensional poverty

Illustrations

Measuring welfare

Measuring welfare in practice

Differences in prices and household composition

Conclusion

Objectives


� Understand the conceptual foundations of the measurement ofwell-being;

� Understand why well-being is often best understood in amultidimensional context;

� Understand the distinction between basic needs, functionings,capabilities, freedoms and well-being;

� Consider the challenges and the difficulties of measuring poverty andwelfare in a money-metric framework;

� Understand the distinctions between income and consumption;� Examine how adjustments for differences in and in household

composition can be made.

Multidimensional poverty

Outline

Objectives

Multidimensionalpoverty

Consensusvs practice

Ethics

Basic needs

Functionings

Functionings

Capabilities

Freedoms

Illustrations

Measuring welfare

Measuring welfare inpractice

Differences in pricesand householdcomposition

Conclusion


Consensusvs practice


� There is a widespread agreement that poverty is a multidimensional issue,including a number of monetary and non-monetary deprivations.

� Given:

� the presence of incomplete markets and of difficult-to-accountexternalities and public goods,

� and the fact that income is then imperfectly correlated withwelfare,

it is also natural to be concerned with the joint distribution of variouscapabilities and outcomes of interest.

Ethics


� Two major non-welfarist approaches: the basic-needs approach and thecapability approach.

� The first focuses on the need to attain some basic multidimensionaloutcomes.

� The second is linked to the concept of functionings.

Basic needs


“Basic needs may be interpreted in terms of minimum specifiedquantities of such things as food, shelter, water and sanitation thatare necessary to prevent ill health, undernourishment and the like.”(Streeten, Burki, Ul Haq, Hicks, and Stewart (1981)).

Functionings


“Living may be seen as consisting of a set of interrelated‘functionings’, consisting of beings and doings. A person’sachievement in this respect can be seen as the vector of his orherfunctionings. The relevant functionings can vary from suchelementary things as being adequately nourished, being in goodhealth, avoiding escapable morbidity and premature mortality, etc.,to more complex achievements such as being happy, havingself-respect, taking part in the life of the community, and so on.”(Sen (1992)).

Functionings


� Unlike functionings, the specification of basic needs depends on thecharacteristics of individuals and of the societies in which they live.

� For instance, the basic commodities required for someone tobe in goodhealth and not to be undernourished will depend on the climate and onthe physiological characteristics of individuals.

� Human diversity is such that equality in the space of basic needsgenerally translates into inequality in the space in functionings.

Capabilities


� The capability approach is defined by thecapacity to achievefunctionings, as defined above.

“the capability to function represents the various combinationsof functionings (beings and doings) that the person can achieve.Capability is, thus, a set of vectors of functionings, reflecting theperson’s freedom to lead one type of life or another.”(Sen (1992))

� What matters for the capability approach:

� the ability of an individual to function well in society;� not necessarily the functionings actually achieved.

Freedoms


� Importance of preference diversity:

� It is, for instance, not everyone’s wish to be well-clothed or toparticipate in society, even if the capability is present.

� Difference between the capability and the functioning/basic needsapproaches: analogous to difference between income and consumption:

� Income shows the capability to consume, and consumption is theexercise of that capability.

Illustrations

Outline

Objectives


Illustrations

Illustrations

Illustration 1

Illustration 2

Illustration 3

Measuring welfare



Conclusion


Illustrations


To illustrate the relationships between the main approaches to assessingpoverty, consider the following figures (Duclos and Araar (2006))

Illustration 1


CF

FC

T

A

U1

B

zT

zC

TC

TC

T

C

S1

Y1

T

Illustration 2


T

CF

FC

T

A

U1

B

zT

zC

DU2

E

TC

TC

T

C

S1

Y1

Illustration 3


CF

FC

T

A

U1

zT

zC

TC

TC

T

C

Y1

TTCT’

B’

S1’

Measuring welfare

Outline

Objectives


Illustrations

Measuring welfare

Key issues

The accountingperiod

Proxies for welfare

Arguments in favor ofconsumption

Arguments againstconsumption



Conclusion


Key issues


Poverty, inequality, and social welfare assessments and comparisons aretypically clouded by conceptual and methodological uncertainties related to:

� The choice of accounting period;� The choice of a well-being indicator: income, expenditure,consumption;� The treatment of durable goods, owner-occupied housing,

home-produced consumption, and exceptional consumption expenditures;

� The control for differences in cost of living;� The treatment of household size and composition.

The accounting period


Clark and Qizilbash (2005) have introduced the concept of “temporalvagueness”, which refers to the unit of time one should select when studyingdistributional issues.

� For poverty analysis, the importance of time may in fact be consideredfrom different angles:

1. chronic and transient poverty;2. poverty vulnerability;

� For the analysis of inequality and social welfare, this can lead to thinkingabout mobility and welfare uncertainty.

It is difficult to address such issues in the absence of panel data.

Proxies for welfare


� Income, expenditure (what is purchased), and consumption (what isconsumed) vary from month to month, year to year, and over a lifetime.

� But income typically varies more than expenditure. In turn,expenditurevaries more than consumption.

� One reason is that households usually try to smooth their consumptionover time, for instance by saving and borrowing through formal orinformal arrangements with others.

Regardless of the strength of the different views for or against a given proxy,distributive analysis is often restricted in practice to what is available.

Arguments in favor of consumption


� Consumption can reflect better than income the resources actuallycontrolled by individuals;

� Consumption can reveal better the long-term flow of income (permanentincome);

� Income can be difficult to measure accurately in poorer countries;� There might be reluctance to disclose real income levels in some

environments (e.g., income earned in the black market or illegally, orwhich can be taxed).

Arguments against consumption


� Consumption is a choice. Consumption levels may differ because ofpreferences, even though income and the capacity to spend may be thesame.

� Individuals can under-declare what they spend on luxuries (e.g. alcohol,tobacco) or illicit items.

� Details provided on questions have typically increased over time inconsumption surveys. Respondents are likely to remember better andreport higher consumption when questions are more detailed. This canlead to biases when comparing welfare across time.

� Consumption estimates impute values for services yielded by durablegoods using approximate procedures.


Outline

Objectives


Illustrations

Measuring welfare


Usual definition ofthe income concept

Usual definition ofthe consumptionconcept

Usual definition ofthe expenditureconcept

The rental value ofdurables


Conclusion


Usual definition of the income concept


� Employee income (cash wages and salaries) and imputed income fromself-employment and home production;

� Income less expenses from rentals and properties (interestreceived lessinterest paid, dividends,etc.);

� Imputed rent from owner-occupied dwellings;� Public and private transfers received.

Usual definition of the consumption concept


� Food and non-food consumption: these include non-durable goodspurchased, produced at home, and received as gift or in-kindtransfer andevaluated at market prices;

� The user value (rental value or user cost) of durables such astelevision,car, bicycle, washing machine,etc;

� The rents paid and the imputed rent for occupying one’s own dwelling.� Exceptional expenditures, such as weddings, funerals or others.

Usual definition of the expenditure concept


� Food and non-food consumption: these include non-durable goodspurchased, produced at home, and received as gift or in-kindtransfer andevaluated at market prices;

� The purchase of durable goods, assets, and repayments of loans;� The rents paid and the imputed rent for occupying one’s own dwelling;� Exceptional expenditures, such as weddings, funerals or others.

The rental value of durables


� Durable goods, such as bicycles and cars, are bought at a point in time,and then consumed (i.e. “eaten up” and depreciated) over several timeperiods (sometimes several years);

� Consumption should only include the amount of a durable goodthat iseaten up during a year;

� This can be measured by the loss in the value of the asset during the year(typically given by the depreciation rate,d), plus the opportunity cost ofthe funds locked up during the period under concern (given bythe realinterest rate):

user cost = valuet(ιt −∆cpit + d) (1)

wherevaluet is the value of the asset at timet, ∆cpit is the inflation ratebetweent andt+ 1 given by the relative change in the consumer priceindex andιt is the nominal interest rate (Deaton and Zaidi (2002)).

Differences in prices andhousehold composition

Outline

Objectives


Illustrations

Measuring welfare



Differences in cost ofliving

Accounting fordifferences inhouseholdcomposition

Example of anequivalence scaleformula

Computing summarystatistics

Conclusion


Differences in cost of living


� To compare distributions across different geographical regions, spatialconsumer price indices (CPI) should be applied to regional distributionsprior to any distributional analysis,

� The absence of appropriate spatial CPI can be a serious draw-back inattempting to make valid comparisons of regional inequality and poverty,and this is often a problem in many developing countries.

� Many such countries estimate, however, specific poverty lines for specificregions (e.g., urbanversus rural poverty lines).

� In the absence of spatial CPI, the ratio of regional poverty lines (denotedby ztl , for locality l and timet) may be used to capture differences inregional cost-of-living indices.



� Let ψ be a vector ofnominal incomes for 7 individuals. Two regions (0for rural and1 for urban) are surveyed for periodst = 1, 2. Assume thatzt=1

l=0= 100. Letyz be the vector of income expressed in the units of the

cost of living for region 0 at time 1.



Table 1: Spatial and temporal variation of prices

i = 1 i = 2 i = 3 i = 4 i = 5 i = 6 i = 7

Region 0 1 0 0 1 1 1ψt=1 10 15 20 25 50 100 500ψt=2 12 20 30 45 100 240 1600zt=1 100 125 100 100 125 125 125zt=2 150 200 150 150 200 200 200yt=1

z 10 12 20 25 40 80 400yt=2

z 8 10 20 30 50 120 800

Accounting for differences in householdcomposition


� The simplest method is to divide total household income (orconsumption), denoted byΨi, by household size to obtainper capitaincome:ψi =

Ψi

si.

� Assuming equal distribution of welfare within households,this leads toan individual welfare of welfare.

� This procedure may not be satisfactory:

� individuals have different needs (according to gender, age, etc.);� there may be economies of scale in a household.

� One improvement may be to divide total income by the number ofequivalent adults living in the household, given by some equivalencescaleη: ψηi =

Ψi

ηi.

� Each member of the household then counts as some fraction of areference person (usually a single adult).

Example of an equivalence scale formula


η = (1 + βadults(sadults − 1) + βchildrenschildren)βscale , (2)

� βadults measures the cost of an additional adult relative to the firstadult;� βchildren measures the cost of a child relative to the first adult;� βscale < 1 is a parameter that captures the effect of economies to scale.

In practice, any choice of equivalence scale depends on assumptions that canbe deemed arbitrary.

Computing summary statistics


� Let νi be the sampling weight. We assume thatβadults = 0.8, βkids = 0.5,and (for expositional simplicity)βscale = 1.

Table 2: Household composition and individual welfare

i = 1 i = 2 i = 3 i = 4 i = 5

νi 25 75 100 75 25schidren 0 0 1 2 4sadults 1 2 1 3 4si 1 2 2 5 8ηi 1 1.8 1.5 3,6 5.4Ψi 100 198 180 540 1080

ψi =Ψi

si100 99 90 108 135

ψηi =

Ψi

ηi100 110 120 150 200



How can we now compute per-adult-equivalent summary statistics on thisdistribution?

Proposal 1 Summingψηi across all households and dividing that sum by thenumber of observations,n:

µψ =1

n

n∑

i=1

ψηi (= 136).

Proposal 2 Weighting with sampling weights (inflation factors)νi:

µψ =n∑

i=1

νi∑n

i=1νiψηi (= 130).



Proposal 3 Weighting with the number of equivalent adults in thehousehold,ηi:

µψ =n∑

i=1

ηi∑n

i=1ηiψηi (= 157.7).

Proposal 4 Weighting by the product ofνi andηi:

µψ =n∑

i=1

(νiηi)∑n

i=1(νiηi)

ψηi (= 143.8).



Proposal 5 Weighting by household size,si:

µψ =n∑

i=1

si∑n

i=1siψηi (= 161.7).

Proposal 6 Weighting by the product ofνi andsi:

µψ =n∑

i=1

(νisi)∑n

i=1(νisi)

ψηi (= 146.6).

Conclusion

Outline

Objectives


Illustrations

Measuring welfare



Conclusion

Summary

Relevant DASPcommands

Exercises with Stataand DASP

References


Summary


� There is widespread agreement that poverty is a multidimensional issue,including a number of monetary and non-monetary deprivations.

� There are two major non-welfarist approaches: the basic-needs approachand the capability approach.

� The capability approach focuses on the ability of individuals to functionwell in society.

� Poverty, inequality, and social welfare assessments and comparisons canbe sensitive to the choice of accounting period, the choice of a well-beingindicator, the treatment of durable and other special goods, differences incost of living, and differences in household size and composition.

� The computation of distributive statistics needs careful thought on issuesof sampling weights, family composition adjustments, individualweighting, and choice and measure of a well-being indicator.

Relevant DASP commands


� Mean index (imean).� Difference between mean indices (dimean).

http://132.203.59.36/DASP/help/DASP_MANUAL_V2.1.htm#_Toc247593919

http://132.203.59.36/DASP/help/DASP_MANUAL_V2.1.htm#_Toc247593919

Exercises with Stata and DASP


� Part I : Exercises 1.1, 1.2, 1.3� Part I : Exercise 4� Part II: Exercises 3.1, 3.2, 3.3, 3.4

http://dasp.ecn.ulaval.ca/exercises/exercises.htm#_Toc255461629



References


CLARK , D. A. AND M. QIZILBASH (2005): “Core Poverty, BasicCapabilities and Vagueness: An Application to the South African Context,”Working Paper GPRG-WPS-026, Global Poverty Research Group.

DEATON, A. AND S. ZAIDI (2002): “Guidelines for constructingconsumption aggregates for welfare analysis,” Working Paper LSM-135,World Bank.

DUCLOS, J.-Y. AND A. A RAAR (2006):Poverty and Equity Measurement,Policy, and Estimation with DAD, Berlin and Ottawa: Springer and IDRC.

SEN, A. (1992):Inequality Re-examined, Oxford: Clarendon Press.

STREETEN, P., S. BURKI , M. UL HAQ, N. HICKS, AND F. STEWART

(1981):First Things First. Meeting Basic Human Needs in the DevelopingWorld, New York and Oxford: World Bank and Oxford University Press.

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Concepts and measurement of well-beingdasp.ecn.ulaval.ca/.../1-concepts-measurement.pdf · Basic needs Concepts and measurement of well-being PEP and UNDP June 2010 – 7 / 37 “Basic