Using Consumption to Measure Wellbeing

15/09/2016

Many Governments and economists are looking for better measures to assess how different populations are faring. Wellbeing is often proposed as a complementary measure to GDP, but there is much bickering about how to measure something as amorphous as ‘life satisfaction’.

A new study from Motu Economic and Public Policy Research Trust shows that the income measures commonly used by Government are not necessarily the best proxies for assessing poverty or subjective wellbeing.

“Higher levels of consumption and income are both associated with higher levels of wellbeing,” said Arthur Grimes, Senior Fellow at Motu Economic and Public Policy Research Trust. “However, our study shows that consumption is more accurate than income for predicting how people feel about their lives.”

The paper by Dr Grimes and his co-author Thomas Carver, uses 2012 household-level data from 8,500 individuals in New Zealand.

“Consumption adds considerable information to evaluations of wellbeing over and above merely focusing on income. If the level of consumption for vulnerable groups, such as Māori, people aged under 30, and those on the lowest incomes, is known, income tells us nothing further about their wellbeing,” said Dr Grimes.

The study also found that living in a poorer community is correlated with higher levels of life satisfaction.

“This result is consistent with the common finding that an individual’s income relative to their neighbours is positively correlated with life satisfaction. This means that both absolute and relative material wellbeing are seen to contribute to subjective wellbeing,” said Dr Grimes.

This paper provides useful context to the recent report from the Ministry of Social Development, Household Incomes in New Zealand: trends in indicators of inequality and hardship 1982 to 2015.

Other things the Motu study found include:
• Being unemployed, not having children, and being single are all negatively correlated with life satisfaction, as are being the victim of crime, having no support in a crisis, and smoking.
• Higher levels of self-assessed health and being female correlate with higher levels of life satisfaction.
• There is a U-shaped relationship between age and life satisfaction
• People in urban areas on average have lower levels of life satisfaction than those in rural regions.
• People who identify as Māori or of Pacific Island heritage are on average less happy than Pākehā (European) New Zealanders. However, once other factors are controlled for, this difference is no longer significant.

This paper is the first to unify two theories of the material wellbeing literature through empirical work. The first theory is Friedman’s permanent income hypothesis which says that current consumption is determined by lifetime resources. The second is the philosophical approach (championed by 2015 Nobel Prize winner Angus Deaton amongst others) which says that people are the best judges of their own circumstances.

The study Income or Consumption: Which Better Predicts Subjective Wellbeing by Thomas Carver and Arthur Grimes was funded by Marsden Fund grant MEP1201 from the Royal Society of New Zealand.