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His central thesis is that methods for measuring the value of manufactured goods are inappropriate for measuring the value of many types of services, emphasizing that even in the manufacturing sector 80 of what we regard as production cost now also consists of service activities.
In this way he challenges the adequacy of GDP as a measure of economic growth, when applied to the valuation of basic services such as health care, insurance, education, RampD, etc. Can the value of longer life expectancy and better health, higher levels of education, greater social security be adequately evaluated in terms of the cost of production and delivery In Limits to Certainty, Giarini argues that value in the new economy is probabilistic, rather than deterministic, because it involves new types of risk and far greater degrees of complexity, vulnerability and uncertainty.
Cost in manufacturing is measured at the stage up to the point of final sale. Whereas in regard to services the actual cost of full delivery may not be known until long after the sale. This is most obviously the case with regard to various forms of insurance, but it applies also to the cost of fulfilling on-going product and service obligations.
Toyotas worldwide recall of more than nine million vehicles in equal in quantity to 90 of total light vehicle sales in the USA in cost the company and its dealers upwards of 4 billion.
Hurricane Katrina is estimated to have cost upwards of billion. This includes billion in insured catastrophic losses, but does not include the significant increase in the cost of home insurance that affected all US homeowners in the years following the disaster. The losses associated with Katrina are dwarfed by the costs associated with the collapse in value of mortgaged-back securities following the subprime crisis, an instance in which the linkage between the theory of value and its measurement is transparent and direct.
Between July and June , rating agencies lowered the credit ratings on these securities by 1. Indeed, many regard wrong valuation as the principal cause of the crisis. Valuation errors led to bad policy and bad business decisions on an inconceivable scale. Residential properties in the US declined in value by more than 5 trillion or 32 in the following year. The value of retirement assets and other investment assets dropped by more than 8 trillion. These examples illustrate the magnitude of uncertainty and systemic risk inherent in the modern service-based economy in which contractual obligations of the seller as well as the uncertainties of the buyer may extend long after the date of sale, throughout the entire life cycle of utilization and even disposal.
This view challenges the fundamental notion of price based on the equilibrium between supply and demand as an adequate measure of value.
And it goes to the heart of the question, What do we really mean by value The ingenious device of equating price with value has served as the basis for the entire development of modern mathematical economics as a science, yet all the major objections to GDP as an indicator of human welfare and well-being point to the inadequacies, gross distortions, disastrous policy measures and catastrophic consequences that can arise from implicit faith in this equation.
This perspective, which highlights the linkage between theory and measurement, reinforces the need for more fundamental reassessment of economic theory as proposed in the companion article Wealth of Nations Revisited. Evolving measures to adequately reflect risk and uncertainty is a formidable challenge for the future of economics.
Price is a powerful tool for measurement, but it can also introduce gross distortions for the simple reason that price is an inadequate measure of value. Can we really place a dollar value on an extra hour of leisure A college education A cataract operation that restores eyesight to the elderly An extra year of human life GDP and other price-based indices grossly understate real improvements in living standards and quality of life, because they measure only the cost of goods and services, while ignoring real and often substantial improvements in product quality and quality of life.
These gains accrue from real advances in social development, including advances in science and technology, improvements in social organization, e. Differences in product quality can cause gross distortions in the measurement of inflation and the price deflators used to compare GDP growth over time.
The price of a mans shirt in USA is about the same as it was fifty years ago in current dollars as a result of world trade, which represents a decline in price of 80 in constant dollars. Efforts to measure social progress over time are also impeded by radical changes in the quality of goods, services, jobs and life in general.
A Model-T Ford and Mercedes or Lexus are both cars, but in other ways they are far from equivalent. Traveling across the USA on horseback in five months or by car or train in five days or plane in five hours are all forms of transportation, but the difference between them cannot be reduced simply to measures of speed and cost. Because of technological advances, a long distance telephone call from USA to India, which cost 1.
Similarly, the price of personal computers has declined 90 in real terms since , while their speed has increased fold and storage capacity 10, fold.
Advance in social development leads to enhancements in the quality of life which are very difficult to quantify or reduce to monetary terms. These qualitative dimensions are linked to rising levels of education, greater social security provided by private and government-funded insurance programs, improved medical treatment and public health, new forms of entertainment, machines that reduce physical labour, and many other types of comfort and convenience.
It is impossible to value in terms of price the impact on quality of life resulting from antibiotics, year-round access to a full range of fruits and vegetables from all over the world, email, the Internet, on-line education and training, social networking, global access to a free encyclopedia like Wikipedia, e-books, i-Pods, cell phones, ATMs, improvements in the quality of automobiles, and countless other social and technological innovations of the past few decades.
The nature and quality of employment required to achieve economic security has also changed dramatically. Manual labor on farms and in factories has been largely replaced by white collar categories of employment which are less physically demanding. In the USA, for example, professional, technical, managerial and other categories of white collar employment rose from 24 to 75 of total employment between and , while employment in crafts, manual labor, farming, mining and household services declined from 76 to Workers engaged in farm labour fell from 18 to under 1.
Nearly 25 of all workers in the USA are now engaged in professional, technical and related activities. These qualitative changes continue. In addition, the qualitative value of employment cannot be assessed strictly in terms of physical working conditions, type of labour or compensation. Types of employment differ widely in terms of the social status and self-esteem they carry, a major reason why the more highly educated shun even undemanding, well-paying jobs that they deem beneath their social status.
In our effort to scrupulously account for hidden costs such as environmental degradation and social problems, we should not err in the opposite direction by overlooking the enormous hidden gains that have accrued to the entire society. What Are we Trying to Measure GDP and similar measures may be very useful tools for monitoring short term changes in industrial activity over the course of a few years, but they are grossly inadequate to reflect the complex structural changes that occur during the process of social development and the longer term implications and sustainability of the present mode of economic activity.
As Giarini reminds us, like other man-made powerful tools, financial information can be either positive or negative, depending on the values it is used to express.
The production of powerful tools is one thing, but the definition of their goals and their positive utilization is a matter of human choice and responsibility. This naturally raises the question, what are we trying to measure A very wide range of individual indicators are now being monitored which purport to reflect economic and social progress.
The OECD regularly monitors indices relating to fertility rates, migration, marriage and divorce, education, unemployment, income inequality, gender wage gaps, social spending, old age replacement rates, poverty, life expectancy, health expenditure, birth weight, infant mortality, health risks, life satisfaction, use of alcohol, drugs and tobacco, strikes, voting, public policies, work accidents, prisoners and many others.
Before examining the utility of these alternatives, it is necessary first to examine more closely the theoretical conceptions and definitions on which they are based. All of these measures attempt to address one or more of the following aspects of progress.
These terms are so commonly used today that it is natural to assume that they have standardized meanings, but this is far from the case. Although most criticism of GDP focuses on what are considered its wrongful inclusions and exclusions, Orio Giarini raises a more fundamental challenge regarding the basic methodology for measuring value and risk in a modern service economy, an issue already discussed in Section 7.
It includes in-kind services provided by government such as subsidized health care and educational services, while excluding defense spending and general government expenses which do not directly contribute to household consumption. Economic welfare is commonly measured in terms of per capita GDP or per capita household consumption expenditure at constant currency value.
International comparisons are made in purchasing power parity equivalent. We argue later in this paper that improvements in the measurement of economic welfare can and should be rapidly adopted, which will significantly enhance our understanding of the impact of economic activity on human beings.
Sections of this paper present a tentative model and supporting data for a new index of human economic welfare HEWI.
Socio-economic development is frequently used as a proxy for per capita economic growth measured in real terms. Sometimes it is used with reference to the economic welfare of citizens sometimes more broadly to include non-economic factors such as health, education, life expectancy, social inclusion, gender equity, social cohesion, freedom, democratic participation and good governance and at others with reference to national investments in infrastructure, education, science and technology, energy and other fields deemed essential for national progress.
In contrast to this vague general usage, we would argue for making a clear and emphatic distinction between growth and development. Growth represents a horizontal quantitative expansion of existing capacities and activities in society whereas development involves a qualitative enhancement in the structural capabilities of society, an increasing capacity for organization, coordination, and complexity.
Growth may be regarded primarily as an economic concept, but development in any field belongs to the wider realm of society as a whole. Growth generates more of the same on a larger scale. Development generates something new and better that was not possible earlier. Development relates to enhancement of social productivity through strategies such as investments in human capital by education and training, enhancement of social capital and organizational capabilities with regard to governance, production, commerce, research, social welfare, etc.
Indias dilemma in discussed earlier highlights the distinction. Improvements in food security, life expectancy, education, and the like represent not only real tangible benefits, but also investments in future generations that cannot be quantified in terms of present income. Although growth of per capita GDP was relatively modest, the overall improvements in quality of life and national capacity were many times greater but they were not reflected by existing measures, because none of these parameters adequately lend themselves to either precise definition or quantification.
They can only be assessed on a combination of quantitative and qualitative dimensions, both tangible and intangible. But the problem of defining and measuring development lies even deeper, for it is rooted in underlying, invisible social processes that may be apparent on the surface only long afterwards.
A notable instance is a phenomenon which Harlan Cleveland, former US diplomat, educator and World Academy President, observed in East Asia 60 years ago and termed the revolution of rising expectations. There he witnessed a rapid change in social attitudes expressing as higher aspirations, greater dynamism and individual initiative, sweeping aside the sense of resignation, complacency, submission to the status quo which had characterized earlier periods of relative social stagnation.
He rightly perceived that this underlying wave of surging human aspirations would dramatically alter the future of East Asia in the decades to come and eventually spread its influence to other parts of the world.
His insight reminds us that all economic processes occur on a bedrock social foundation and are ultimately determined by more basic social and cultural attitudes and values. The sudden explosive transformation of Eastern Europe following the fall of the Berlin Wall appears abrupt and unpredictable when viewed in terms of measurable events, but the undercurrents of revolutionary transformation were active long before they manifested on the surface in public life.
The relatively recent recognition of the economic power and potential of China, India, and Brazil has a similar character. Measurement of this social process lies beyond the scope of the present study, but we note here that the future evolution of economics and other social sciences will compel us to inquire more deeply into the common principles underlying all social change and to evolve effective measures or indicators that may be very different than those currently in use to measure growth and development.
The underlying concept is that both economy and society are constrained by environmental limits. Sustainable development is subject to the same vagaries as the other terms discussed above.
Often, it is applied in a context that might more aptly be referred to as sustainable growth. The justification for focusing on sustainability is too obvious to require elucidation.
Traditional economics made no distinction between consumption of renewable and non-renewable resources, between productive activities that enhance the environment and those that pollute or destroy it, between those that ensure the security of future generations and those that place human and other forms of life at dire risk.
Although most measures of sustainability focus on ecological issues, we would argue that the term applies equally to the development of human capital, where issues such as assured access to education, vocational training, health care and employment opportunities as well as income distribution are also crucial. Views on sustainability differ with regard to future generations. Advocates of strong sustainability argue that the aim must be to ensure that individual stocks of critical natural capital, such as biological diversity, ozone layer, and carbon cycle do not decrease over time as the result of global warming, ozone layer depletion, and land degradation, i.
Weak sustainability defines the concept more broadly to encompass economic and social as well as environmental sustainability to ensure that the overall wealth of a society, i. In recent decades the concept of zero growth or de-growth has gained ground, as a stronger rejection of traditional economic growth. Degrowth challenges the necessity of current modes of consumption and advocates a return to voluntary simplicity of life style, relocalization of economic activities, and decreased energy and other resource consumption.
It seeks to reverse national and global production and consumption trends to reduce the overall ecological footprint of human activity. Actions that contribute to higher rates of economic growth and higher living standards may or may not enhance human welfare, well-being, and overall quality of life.
The loss of leisure time and sense of community, breakdown of the family and social cohesion, rising incidents of divorce, crime and mental illness, deterioration of social and cultural values are common concerns.
This concept emphasizes the value of non-market human activities that do not fall within the monetized economy, such as household and personal services provided by members of the family, home schooling, care for children and the elderly.
This broader conception recognizes the value of intangible but vitally important elements of human life, including the sense of security, belonging, social acceptance, self-esteem, and personal fulfillment. Alternative Indices The debate regarding GDP has served a meaningful purpose by helping to shape broader, more sustainable, human-centered conceptions.
It has also given birth to a wide variety of alternative indices, each intended to address one or more of the deficiencies inherent in GDP. For example, Eurostat monitors 11 major categories of sustainable development indicators related to socio-economic development, sustainable consumption and production, social inclusion, demographic changes, public health, climate change and energy, sustainable transport, natural resources, global partnership and good governance, but it considers each of them separately, rather than as a composite index.
We examine a few of the most salient in this section. The income component adjusts per capita GDP as measured in constant international dollars at purchasing power parity PPP for inequality by discounting the income of countries that exceed the world average. Life expectancy at birth is used as an index of health. Educational attainments are measured by a weighted sum of literacy and gross enrollment rates at the primary, secondary and tertiary level, assigning two-thirds weight to the literacy subcomponent.
HDI is a relatively simple composite index with a transparent structure that readily lends itself to comprehension and analysis. It is primarily suitable as a normative tool for inter-country comparisons, especially those at the lower end of the scale, rather than as an aid to policy-formation and evaluation.
It consists of three main sub-indices designed to measure per capita income, education and life expectancy, each on a scale from 0 to 1. Scores on the three sub-indices are averaged to arrive at an overall score for HDI. The use of an abstract, arbitrary rating scale makes it very difficult for the general public to relate to HDIs scores as a measure of welfare.
The substantial weightage given to literacy HDI does not take into account income inequality or ecological factors.
It is based on the personal consumption expenditure component of GDP. It measures changes in inequality rather than absolute levels of inequality based on the Gini coefficient and Income Distribution Index. It also takes into account the costs associated with pollution, resource depletion, crime, car accidents and other defensive expenditures, including loss of leisure time. GPI assigns and incorporates a dollar value for every year of higher education, household work, parenting, volunteering.
While GDP data is widely interpreted to show a near tripling of per capita income in the USA during second half of the 20th Century, GPI shows 63 rise from to , then a gradual leveling followed by flat or negative growth from to as shown in Figure 1.
The difference between the measures is largely the result of rising marginal costs associated with income inequality, natural capital depletion, consumer durable expenditures, defensive expenditures, undesirable side effects of growth, and net foreign borrowing since as reflected in GPI.
GDP per capita amp GPI per capita in GPI is an admirable attempt to assess progress on a wide range of indicators related to human welfare and quality of life. However, the necessity of combining indicators of economic, social and ecological indicators and of assigning arbitrary monetary value to a wide spectrum of immeasurable and intangible components diminishes its credibility as a real reflection of living standards.
The difficulty in obtaining reliable data and evolving internationally valid standards for interpretation on a very wide spectrum of economic and social variables, e. It makes modifications to take into account services that directly influence human welfare, e. It applies the Atkinson Index to correct for income inequality.
The economic sub-index includes GDPcapita, GDP growth rate, unemployment rate, external debt and Gini index as a measure of inequality. The index has been applied to rank the progress of 16 OECD and developing countries over the period to WISP arrives at scores for each of the sub-indices, which are statistically weighted by factor analysis based on an assessment of their relative contribution to social progress. The utility of each of these and many other indices depends precisely on the intended application.
GPI and ISEW can provide useful insights into changes over time within specific OECD countries, regions and urban areas, but are not suitable for cross-country comparisons on a global scale. HDI is a narrow, partial measure of social development, while WISP is very broad, but lacks depth or precision in the dimensions it encompasses. This brief summary of concepts and composite indices is intended to emphasize the complexity of the challenge we face in striving to evolve more effective measures and the inherent ambiguity of the terms used to describe various conceptions.
Each of the composite indices reviewed above incorporates a range of variables that span multiple dimensions of social progress economic welfare, development, sustainability, social welfare and well-being. The remainder of this article focuses on a narrower range of issues more strictly confined to measurement of economic welfare and proposes an alternative composite index somewhat narrower in scope but more proximate in its utility to GDP per capita.
Components of Economic Welfare Much of the criticism of GDP as a measure centers around the way it accounts or fails to account for important attributes of economic welfare. In this section we examine the most prominent of these attributes and discuss the desirability and feasibility of effectively incorporating them in a composite index suitable for both cross-country and historical comparisons. Human economic welfare can be more accurately assessed by focusing on that portion of national income which relates directly to households, namely disposable income, consumption expenditure and net savings plus that portion of government expenditure related to health, education, housing, environment and social welfare.
For cross-country comparisons, the most widely available and reliable data concerns household consumption expenditure HCE and human welfare-related government expenditure HWGE , which includes government expenditure on education Ed , health He , housing and community amenities HC , social protection SP , environmental protection EP , recreation, culture and religion RCR. This omits expenditure on general public services, defense, public order and safety, and economic affairs.
The sum of the above two components is divided by the total population to derive per capita human welfare consumption expenditure HWEc , which is converted to PPP constant international dollars to facilitate cross-country and historical comparisons. HCE omits information regarding NHS, net household savings after deducting the total of all debt by households in the country, a crucial piece of information needed to assess overall human welfare and progress. Net household savings reflects the amount of financial capital available for investment by households in their future economic welfare.
Combining household expenditure and household savings, we derive personal disposable income per capita PDI: This dramatic change in relative welfare results because Chinese households receive only 50 of national income as PDI whereas Indian households receive This is consistent with the frequent assertion that growth of real wages is being suppressed by undervaluation of Chinas currency.
Chinas low level of household consumption expenditure and relatively high household savings rate 24 is fueled by uncertainty over provision of pensions, and the rising costs of healthcare and education. These facts indicate that human economic welfare in India and China is much more similar than the wide gap that GDP figures reflects, but they do not invalidate Chinas remarkable economic gains.
They only suggest that a larger proportion of those gains have thus far gone for investment in public goods than for the personal consumption and welfare. It may be justifiable as a temporary expediency, but as a long term strategy it can be used to subordinate human welfare to national economic and political power.
Values are for the year UK savings rate was 4 compared with a zero net household savings rate in the USA throughout the first half of the decade due to a rising level of household debt.
As we shall see, the gap in welfare between these countries shrinks even further when other aspects of human welfare are taken into account. This is explained by the fact that Germans receive a 13 lower share in national income but save a very high portion of what they receive As expected, Sweden has the highest rate of HWGE at 16 as well as the highest proportion of overall government expenditure, 50 higher than in the USA, offset by smaller share of household consumption in GDP.
These differences point to the need for economic theory and measurement to openly adopt a position on the purpose of economic growth and development. Like any human activity that loses sight of its central purpose and place in the wider scheme of social existence, economic growth for its own sake is subject to diminishing returns and potentially disastrous consequences. Here we are not dealing with impersonal values that are the creation of physical nature, but rather personal values which are wholly the creation of human beings and need to reflect universal human aspirations.
We have both the capacity and a responsibility to redefine our concepts to reflect human values. After suffering from scarcity for millennium, it was natural of people to assume that more is always good. Today we are faced with the fallacy in the facile assumption. Everywhere we confront the consequences of unconscious and unconscionable excess that depletes the abundant riches of our natural environment, while concentrating destabilizing accumulations of wealth among the few, an essential cause for the Great Crashes of and In recent decades income inequality has risen in many cases sharply in most countries in the world.
From the s to the s, inequality declined in only 9 out of 73 countries for which data is available. During this period, the after-tax income of this group rose by , whereas the growth of the middle fifth of households averaged only 25 and the bottom fifth only 16 as shown in Figure 3. In simple terms, this means that the good news about economic progress over the past three decades applied almost exclusively to a small portion of the entire population.
Krugman estimates that perhaps as much as 70 of all of the income growth in the United States during the s went to the richest 1 of all families. Percent Change in After-Tax Income since in USA Thus, it is evident that income distribution is an important determinant of the impact of economic growth on economic welfare.
As Stiglitz, Sen and Fitoussi observe in the report of the Commission on the Measurement of Economic Performance and Social Progress, When there are large changes in inequality more generally a change in income distribution , gross domestic product GDP or any other aggregate computed per capita may not provide an accurate assessment of the situation in which most people find themselves.
If inequality increases enough relative to the increase in average per capita GDP, most people can be worse off even though average income is increasing. Studies in the USA show that states with greater inequality in the distribution of income also had higher rates of unemployment, higher rates of incarceration, a higher percentage of people receiving income assistance and food stamps, and a greater percentage of people without medical insurance.
The gap between rich and poor was the best predictor of these problems, not the average income in the state. In addition, states with greater inequality of income distribution also spent less per person on education and had lower school completion rates, poorer educational performance, a greater proportion of babies born with low birth weight, higher rates of homicide, higher rates of violent crime, a greater proportion of disabled workers, and a higher proportion of the population being inactive.
Indeed, the same distorting impact of income inequality on the validity of per capita GDP is universal. Internationally, high levels of inequality are also associated with lower levels of economic growth, decreasing life expectancy, poorer educational performance, increasing crime rates, higher levels of corruption, and increased macro-economic instability, as well as low levels of development of human capital. Income inequality is a more accurate predictor of problems than actual level of income.
IMF research confirms the growing recognition that an excessively unequal income distribution may itself be detrimental to sustainable growth. Fogel found that one third or more of the economic growth in England over the past two centuries was attributable to improvements in nutrition.
Bloom and Canning found that an extra year of life expectancy is associated with a 4 rise in per capita GDP in the long run.
While employment rates and incomes levels tend to be high for educated and skilled workers, unemployment and underemployment are much higher for those with lower levels of educational attainment, especially among youth, the poor and the unskilled in many countries.
High levels of inequality are also associated with economic instability. Rising levels of income inequality result in the increasing concentration of wealth, a major source of international currency flows and speculative investments and a contributor to traumatic economic events.
Since the rich spend a much smaller proportion of their incomes than other income groups, a rise in income at the top creates fewer jobs and slower growth. In addition much of their earnings are invested in commodities, stocks and real estate, a stimulus to price bubbles. In the s, 5 of Americans earned a third of the total national income and the top 1 owned an all-time-high 36 of the nations assets.
While in the bottom half of American households debt was roughly equivalent to its net wealth, in its debt was twice the value of its net wealth. It has been accompanied by weak investment and sluggish consumption.
Since , currency trading has soared 69 to over 4 trillion per day. The assets of the top richest people amount to more than the combined income of 41 of the worlds population. It is also the source of huge philanthropic endowments in support of health, education, research and cultural activities by well-known foundations such as Carnegie, Rockefeller, Gates and many others.
Charitable donations in the USA were over billion in , equivalent to 2. The impact of income inequality on economic growth and human welfare consumption expenditure is complex and difficult to isolate from innumerable other factors. But the notion that high levels of inequality are necessary for high rates of economic growth is clearly not valid. During the period to , a period of falling inequality within most countries, the world experienced the fastest rates of economic growth in recorded history, with the exception of subsequent achievements by the Asian Tigers.
In contrast, the post has seen much slower rates of economic growth amid rising levels of income inequality. High income inequality can also retard investments in human capital, which are essential for rising living standards.
The importance of measuring income inequality is heightened in an age of globalization. Even while inter-country inequalities have declined in some cases, studies by Cornia and Kiiski and others have found increased intra-country inequalities. As UNDP has pointed out, in the top 20 of the worlds people in the richest countries had 30 times the income in terms of total GDP of the poorest This grew to 32 times in , 45 times in , and 59 times in By , the top 20 received 74 times the income of the bottom While economic growth in the 19th century was largely driven by increasing capital investment in industry, we now live in a world of excess production capacity where growth depends primarily on increasing levels of consumption expenditure, which means that the greatest benefit will accrue from raising the incomes of the 2.
Barro cites four broad categories of economic theory that have been constructed to assess the macroeconomic relations between inequality and economic growth.
These theories can be classed according to the main feature stressed: As he observes, each of these theories has offsetting effects that lead to ambiguous conclusions. Based on his empirical research, Barro concluded that income-equalizing policies might be justified on growth promotion grounds in poor countries, but not necessarily in more prosperous countries.
Differences in levels of accomplishment can ignite aspirations and act as a powerful spur to growth and development, provided the distance and obstacles are not so great as to discourage effort and generate alienation. Much more theoretical and empirical work is needed regarding the impact of economic inequality on overall levels of economic welfare, sustainable social development, human welfare and well-being.
Both theoretical and practical efforts to assess the real impact of economic activity on human welfare at the household level necessitate the inclusion of some measure of income distribution. The Gini coefficient is the most frequently-used index for assessing differences in inequality between countries and over time.
But Gini is a stand-alone figure that is not based on any distributional model. Nor does it tell us where within a population the inequality occurs or the impact of that inequality on human economic welfare of the society. Based solely on net household income, Gini does not accurately reflect differences in wealth. Some countries with a relatively low coefficient of inequality for income have a much higher coefficient for inequality of wealth.
Nor does it reflect differences in inequality of opportunity arising from social barriers to upward mobility. In addition, Gini does not take into account non-monetized goods and services, such as the consumption of home-grown food, which is very high among the rural poor in many countries, e. Other measures of inequality are subject to similar constraints.
The quintile or weighted average method, Atkinson method and max-min method apply alternative approaches which explicitly introduce distributional objectives into measures of inequality.
Jorgenson showed how information about consumption expenditure and aversion towards inequality can be combined to yield a measure of living standards. Hoover measures the proportion of all income which would have to be redistributed to achieve a state of perfect equality on a scale of 0 perfect equality to 1 maximum inequality. Theil is a measure of distributional entropy on a scale of 0 to 1.
It takes an Theil has the added characteristic of being decomposable to distinguish between inequality in different sub-regions. It can be converted into a normative measure by imposing a coefficient to weight incomes. UNDP and Eurostat monitor inequality by the ratio of total disposable income received by the 20 of the population with the highest income top quintile to that received by the 20 of the population with the lowest income lowest quintile.
Gini measures differences in income between a state in which all households in the population have the same income and the Lorenz curve which measures the actual distribution. Country scores on the Gini index range from a low of 23 in Sweden to a high of 60 or more in several African nations.
The quintile dispersion method shows that the ratio of the lowest to highest income groups ranges from 3. Each provides some insight into the extent and distribution of inequality, but they are not strictly comparable because they have different levels of sensitivity to incomes in different parts of the distribution.
Atkinsons sensitivity varies according to the level of inequality and weight assigned to the normative coefficient. Ryscavage applied four of these indices to measure income inequality in the USA from to and found significant variations both in the extent of inequality recorded as well as the rate of change over time.
An advantage of this approach is that it is a real-valued function which enables monitoring of changes in per capita income in a manner that more closely approximates the actual impact on the majority of households. SWF is a measure of both equality and efficiency. It reflects both overall economic performance as well as income distribution. It can rise as a result either of higher economic performance or more equitable distribution. Mukhopadhaya has proposed an alternative SWF to eliminate its inherent bias toward higher income groups.
There is no justification for concluding that such a perfect state of equality as measured by Gini would lead to the optimal level of economic welfare for the population as a whole. Rather it may lead to a state in which on average everyone is equally less well off. For these reasons, SWF cannot be regarded as an effective measure of human welfare, even if it is found to be an accurate index of income inequality. Moreover, different measures of inequality result in different SWF functions.
For UK, it was 46 larger. Promoting greater political, economic and social equality are valid goals in their own right.
But our objective here is more limited. It is to measure overall economic welfare, rather than income inequality or social equity. Income inequality, like social status and other forms of social differential, plays both a positive and a negative role in development, as a stimulus to social aspirations and as an impediment to the full and effective utilization of national wealth for human welfare.
Higher wages serve to reward the very talented and hardworking, identify the jobs in the economy that need the most skills, and signal to the young the benefits of investing in their own human capital. A forced equalization of wages that disregards the marginal contribution of different workers will deaden incentives and lead to a misallocation of resources and effort.
We cannot assume that a completely equal distribution of income would lead to optimum social benefits, since beyond a certain level greater equality may discourage innovation, initiative and incentives for higher performance. Indeed, differences in level of attainment act as an essential stimulus to economic progress, as they do to progress in all fields of human activity.
We may find, for instance, that the reductions in the income differences between the top and bottom income groups of a population result in higher levels of consumption and employment generation, whereas reduction of inequalities within each subset of total population reduce the motivation for higher performance. Thus, we need to take into account both the negative and positive effects on inequality on human economic welfare.
Cornia and Court address the complex relationship between inequality and growth. They define an efficient inequality range as an inequality range that is most efficient for economic growth as depicted in Figure 4. They postulate that this range probably lies somewhere between a Gini value of 0. Any country that intends to maximize poverty reduction should choose the lowest level of inequality I1 within the efficient inequality range I1-I2. Aiming for the lower end of range is important because one obtains the same level of growth at lower levels of inequality, but it allows the reduction of poverty at a faster rate.
Inequality amp Growth For this reason, we support efforts to define a variant of the efficient inequality range which is most conducive for human economic welfare, rather than growth per se. We recognize that this range may vary widely between different countries and conditions. Although the exact composition of the range is not known, we can readily conceive of a hypothetical balance between income distribution and incentives for income generation which might achieve the goal of optimizing human economic welfare for the society as a whole.
Therefore, we need to adjust SWF for efficiency. We introduce a coefficient of efficiency e. The value of e ranges between 0 and 1. The lower the value of e, the higher the level of inequality required for optimal economic welfare. In addition, it is evident that countries which have already achieved low levels of inequality will have lower values of e than countries presently operating at high levels of inequality.
Our approach differs from Sens SWF and others in one other important respect. The indices of inequality discussed above are typically applied to measure income inequality and take GDP as the base. Our objective here is to measure the impact of inequality on levels of welfare-related household consumption expenditure rather than income. Consumption inequality is typically lower than income inequality, because high income households consume a much lower percentage of their total income than low income households.
For this reason, we cannot apply income inequality metrics to household consumption in their present form. We need to also adjust SWF by a coefficient c representing the difference between income inequality and consumption inequality in the population. In this paper we propose a new index, the Economic Welfare Index EWI , which is a modification of Sens SWF designed to reflect that portion of inequality which negatively impacts on economic welfare as measured by household consumption expenditure.
EWI is derived by converting Gini into Gec according to formula 2 below. Note that Gec increases as Gini rises, reflecting the fact that high Gini countries have a greater potential for reducing inequality without dampening economic incentives that promote human welfare.
G ec is intended to measure income inequality against a standard of optimal welfare inequality, which can be defined as that the lowest level of inequality compatible with the highest level of overall human economic welfare for the society as a whole. Note that HWGE is not adjusted by Gec since the distribution of government services is far more equitable than the distribution of income and consumption expenditure and is skewed in favor of lower income families.
Further research is needed to more precisely determine the value of Gec under different circumstances. Table 2 shows that when adjusted for inequality G ec per capita disposable income col G - col D declines by a minimum of 3 in Sweden and 5 in Korea to a maximum of 17 in Brazil and 23 in South Africa. The difference is reduced when we factor in the government human welfare-related expenditure, which is more equitably distributed among the population.
This illustrates the problem of viewing per capita GDP or even PDI without factoring in both inequality and welfare-related payments by government. This results from the fact that Indias personal disposable income represents 82 of GDP whereas Chinas is only All values are for the year Policy-makers certainly recognize the potential political power of the unemployed, provided this disparate group could ever get organized.
Government officials recognize the linkage between rising levels of unemployment and other social ills such as crime, violence, drug use and social unrest. Wray observes that the direct social costs of unemployment in the USA are equal or greater in value to the financial cost of guaranteeing them employment. Like other perishable goods, unutilized human capacities tend to degenerate over time, both from want of usage and because of the increasing social alienation and loss of self-esteem associated with unemployment.
The remarkable decision of the Government of India to guarantee a minimum of days per year of employment to the 45 million poorest households is testament to the growing recognition of the essential role of employment in human welfare. Yet in spite of these facts, the plight of the unemployed is largely ignored by traditional income measures of human welfare and by many broader indices of social progress.
Eurostat includes six individual measures of employment and unemployment in the list of Sustainable Development Indicators which it monitors. But of the composite indices discussed in Section 6, only WISP incorporates a direct measure of unemployment. The Calvert-Henderson Quality of Life indicators include 10 different measures of employment and unemployment, but it relies on data that is available in the USA and only a few other countries.
One obvious reason for the omission of unemployment in aggregate measures of human welfare is the difficulty that arises in assigning a market value to unemployment.
Reliable measures of unemployment are themselves difficult to obtain. Even in OECD countries, the official figures mask the fact that large numbers of people have dropped out of the job market in discouragement and resignation.
When underemployment is taken into account, actual levels may be considerably higher than official figures. In most developing countries where the informal sector predominates, official figures are even less reliable. In India, for example, the informal sector accounts for about 90 of total employment. Government is simply unable to monitor what is happening to huge numbers of new entrants to the workforce, although rising wage levels and increasing shortages of labor suggest that job growth equals or may even exceed growth of the labour force.
To illustrate the magnitude of the problem, while ILO figures report an average unemployment rate in India of 2 during the period , an Indian government expert task force concluded the actual figure was 7. It may be argued that the impact of unemployment on human welfare is already reflected in per capita GDP and measures of inequality, making inclusion of a separate index redundant.
However, a recent ILO study confirms that this is not the case. No clear link emerges between overall changes in employment and inequality. Some countries have created many jobs and at the same time income inequality increased significantly. Other good employment performers saw stable or even declining income inequality.
The ILO report attributes this finding to changes in the structure of employment, including an increase in part-time, temporary and informal employment. Furthermore, in recent years there is a growing prevalence of jobless growth, a condition in which GDP rises but unemployment remains high. For these reasons, we argue that separate indices of employment and unemployment need to be incorporated in a composite index of economic welfare.
The task of accounting for the economic impact of unemployment is complicated by the fact that there are different types of unemployment and not all types have equal impact on economic welfare. Workers aged 15 to 24 represent about a quarter of the worlds labour force, ranging from 8 to 16 in Europe and North America to 18 in China, 23 in India and 28 to 30 in most parts of Africa.
Youth employment is of crucial importance since it reflects on the capacity of the society to generate sufficient job opportunities for the next generation and to prepare them adequately to avail of the opportunities.
In marked contrast to previous recessions, rising levels of long term unemployment is a striking characteristic of the current economic downturn in the USA and other OECD countries. In the USA, 46 of the unemployed have been out of work for more than six months and their jobs are unlikely to come back. The problem of long term unemployment is compounded by high levels of unemployment among those 55 years of age or older, as a result of age discrimination when jobs are scarce, increasing obsolescence of skills as a by-product of rapid technological advancement, and the economic dislocation experienced by transition economies.
In addition to differences in levels of unemployment, countries also vary enormously in the overall employment-to-working-age-population-ratio EPR. EPR is an important index of the utilization of human resources. From to the employment-to-population ratio EPR for those 65 years and above fell dramatically in OECD countries but it has since begun to rise again in many countries, with the exception of Europe.
In an effort to raise 20 million people out of poverty, the European Union has committed to raising EPR for the age group by 6 by Low EPR in OECD countries usually reflects a low level of participation by women in the workforce as the result of cultural tradition and gender discrimination. Low EPR for age group can also results from high levels of tertiary education.
EPR for many developing countries is higher than OECD rates, usually because of the large percentage of the workforce engaged in agricultural operations. Therefore measures of EPR for the age group 25 may be considered more reliable. ILO is the only source of EPR data for all countries and they use an open ended measure for population aged 15 and One advantage is that it does not place an arbitrary limit on retirement age. Data for both employment and unemployment rates for most developing countries are based on rough estimates or sample surveys, which are inherently unreliable.
Note that these problems are not confined to developing countries. This month the Government of Japan reported that more than , Japanese centenarians listed on government records cannot be located.
Many are believed to be dead, some for decades. An adequate index of employment should also reflect the capacity of the economy to create new jobs. Net employment generation tells us whether the economy is creating more job opportunities and whether or not their number is sufficient to compensate for the increasing number of new entrants to the workforce. Two countries with the same unemployment rates may differ significantly in their capacity for job creation.
For example, Argentina and Germany both reported unemployment rates of 11 in , but the total number of new jobs in Argentina grew by 4. The present economic theory accords greater importance to production and efficiency than it does to the value of human beings and ignore employment. Is this value system essential or inevitable Granted that there are real obstacles to effective measurement, efforts to take into account this crucial aspect of economic welfare are essential for the development of more reliable measures.
Unemployment is both an economic and a social problem. Gender or racial discrimination in employment, rising rates of crime and violence, loss of self-esteem and alienation arising from absence of social status and identity are important social aspects of the issue.
Obviously, there is a need to develop a new economic theory Here we attempt to develop an index that focuses more narrowly on the impact of employment on the economic welfare of the population.
We know that rising levels of unemployment reduce disposable income, increase inequality and stimulate transfer payments to some extent. More difficult to measure is the impact of under-employment, which may be many times higher than the actual unemployment rate, and part-time work, which can be the result of either personal preference or lack of opportunities.
Changes in demography, social attitudes and living standards also powerfully influence long term employment trends. An index that partially reflects the impact of unemployment on economic welfare can provide useful insights and guidance to policy-makers when viewed as a complement to monitoring of incomes, inequality and education.
Taking into account the paucity of reliable data on some dimensions of the issue, we propose a composite index for Full Employment FEI which includes four sub-indices. Employment-Population Index EPI is arrived at by taking the Employment-Population ratio for those aged 25 and converting it into a scale from 0. Adult Employment Index AEI measures the rate of employment among members of the labour force aged The adult unemployment rate is derived by deducting from total employment and unemployment data, those under 25 years of age.
Our justification for doubling the unemployment rate is to take into account hidden underemployment and unemployment of discouraged workers who have dropped out of the labour market. Youth Employment Index YEI measures the rate of employment among members of the labour force aged It is derived by taking 1 minus the youth unemployment rate YUR. In recognition of the great importance of providing employment opportunities to the young generation, we have assigned a weight to YEI equal to that of AEI, even in cases where the actual proportion of youth in the work force is far less than JCR measures the net change in the total number of jobs from year to year, which serves as the basis for the index JCI.
A value less than one for JCI signifies a decline in total employment from the previous year. A value of more than one signifies an increase in employment. Thus, a grow rate of employment of 10 would be indicated by a value of 1. Im Dezember gibt es 13 Tage Niederschlag mit insgesamt 71 mm und es gibt 18 trockene Tage in Florida.
Sehen Sie sich hier alle Wetterstatistiken von Florida pro Monat an. In unserer Grafik sehen Sie Temperaturen und die Niederschlagsmenge, die durchschnittlich in einem bestimmten Monat fällt. Wir bieten auch einen Vergleich der durchschnittlichen Temperaturen und Niederschläge zwischen Florida und Deutschland.
Florida liegt in Vereinigte Staaten. Florida liegt auf einer geraden Linie 7. Vom Frankfurter Flughafen beträgt die Flugzeit ca. Die Koordinaten von Florida, Vereinigte Staaten sind latitude: In Florida ist es jetzt freitag 25 Januar , Das entspricht 6 Uhr früher als in Deutschland. Es ist schwierig selbst den Kurs umzurechnen. In welchen Ländern Ihre Bankkarte noch aktiviert werden muss, variiert je nach Bank.
Wenn Sie mit Ihrer Bankkarte bezahlen, ist dies günstiger als mit einer Kreditkarte. Und ist es auch günstiger als Bargeld abzuheben. Nehmen Sie zusätzlich zu Ihrer Bankkarte noch eine Kreditkarte mit. Nehmen Sie diesen mit, damit Sie problemlos Geld überweisen können.
It may be justifiable as a temporary expediency, but as a long term strategy it can be used to subordinate human welfare to national economic and political power. Valuation errors led to bad policy and bad business decisions on an inconceivable scale.
This illustrates the problem of viewing per capita GDP or even PDI without factoring in both inequality and welfare-related payments by government.