An unfair and unnecessary comparison

A recent study by a renowned Swiss think tank (avenir suisse) showed that during the last 20 years real incomes of the middle class diminished relatively compared to those of people in the high or low income segments in Switzerland. The roots of this phenomena are identified by an increasing supply of workers from emerging markets, changes in technology and the corresponding higher demand for high-skilled workers. All these factors lead to pressure on average wages, namely of those from the middle class.

While still among the highest real incomes worldwide, the study argues that people in the Swiss middle class get increasingly dissatisfied as their opportunities to improve into the high income segment shrink and the differentiation from the lower income segment gets increasingly difficult. Therefore, people are somewhat trapped in the middle class. To counteract this development the study proposes to downsize and simplify the welfare state as all kind of social benefits for people in the lower income segment are primarily financed by the incomes of the middle class. Hence, taxes affecting the incomes of the middle class should be lowered.

In my opinion, this argumentation is problematic in at least two ways. First, a decrease in taxes for average incomes and a reduction of social benefits indeed allows the middle class to differentiate themselves from people in the lower income segment. But at what price? On the one hand, rising inequality by increasing the income of the middle class and making the poor poorer sounds not really fair to me, on the other hand it does not take into account people in the high income segment, who are completely ignored by the study I mentioned above. This brings me to my second point: the reduction of taxes for those having the highest incomes. During the last couple of years there has been a redistribution of income in Switzerland from the bottom to the top induced by various abolitions and reductions in the taxation of incomes in the highest segment. It is then again simply unfair to tell the middle class that their relative decrease in income is caused by social benefits, for example health care insurance or childcare for people in the lower income segment, when at the same time people in the higher income segment enjoy lower taxation.

The one-sided comparison of the middle class with people in the lower income segment is problematic because it diminishes solidarity in the whole society. In the US, for example, the incomes of both middle class and people in the lower income segment stagnated during the last 30 years, compared to those of the people in the higher income segment. Hence, the single comparison of incomes between the middle class and the people in lower income segment is not fair and, in my opinion, unnecessary. It leads to an increased discrimination among people and reduces the cooperative potentials in a society. Or in the words of Stiglitz (2012) “The other vision is of a society where the gap between the haves and the have-nots has been narrowed, where there is a sense of shared destiny, a common commitment to opportunity and fairness, […] which emphasizes the importance not just of civil rights but of economic rights, and not just the right for property but the economic rights of ordinary citizens.” (p.289).

Tom Schneider

Reference: Stiglitz, J.E. (2012). The Price of Inequality. New York: Norton.

How to measure well-being? OECD’s Better Life Index

In recent years increasing concerns emerged regarding the issue of how to measure people’s well-being and, ultimately, how satisfied people are with their life in general. The traditional economic approach to get to grips with this issue is to use statistics related to a country’s Gross Domestic Product (GDP). In this regard, GDP per capita is a widely used indicator to measure people’s actual economic well-being and its change over time. I would like to highlight just two out of many shortcomings regarding this approach of measuring people’s well-being. First, GDP per capita is calculated as a proxy for the average economic well-being of people living in a specific country. This is problematic, because if inequality in a country increases enough relative to GDP per capita, it is possible that most people can be worse off, although the average income is increasing. Second, statistics related to a country’s GDP are a very distal indicator for people’s well-being, as GDP mainly measures market production in monetary units. This is problematic, because on the one hand, many services relevant for people’s well-being do not have a market price, and on the other hand, individuals assess the different aspects of their well-being by drawing on their subjective values and norms.

During the last years, a lot of work has been conducted to face the challenges of measuring people’s well-being. One out of many promising approaches are the recommendations made by the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) set up by Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi. These recommendations include, among others, two important basic principles. First, indices should focus on the well-being of people in each country, rather than on the macro-economic conditions of economies. Second, both objective and subjective aspects of living conditions and their appreciation by individuals should be integrated to understand people’s well-being.

By drawing upon those recommendations of the CMEPSP, the OECD has identified 11 dimensions as being essential to people’s well-being and included them in a first attempt to provide a comparable and comprehensive set of indicators at an international level. These indicators include both the people’s material living conditions but also their quality of life. The OECD Better Life Index is available online (www.oecdbetterlifeindex.org) in a sophisticated and fancy tool to compare the different dimensions across countries but also to create one’s own Better Life Index. Give it a try!

Despite my enthusiasm to complement the GDP-based indices for economic wealth by drawing on objective and subjective indices of well-being, the latter are in an early stage of development. They still need to prove that they are a reliable, but also valid measure for people’s quality of life and, finally, could provide policymakers with the information they need to make improved decisions for people’s well-being.

Tom Schneider