Would a chain index provide a better guide to change in the quality of life?

A chain index is an index that is constructed from information about changes in a variable from year to year, rather than by measuring absolute levels of the variable. A chain index is likely to be more accurate if we can measure change from year to year more accurately than we can measure absolute levels.

I think there is reason to believe that survey information yields more accurate information on change in quality of life than on absolute quality of life. I have explained why in a previous post (here).

In the following chart I have used information published by the Pew Research Center to construct a chain index of the quality of life from survey data on respondents assessments of their current quality of life and their assessments of their quality of life five years earlier (here). This provided estimated of the change in quality of life over the previous five years. The data on change in quality of life was annualized and converted to percentage changes. After gaps in the data were filled in by interpolation the series was converted into the form of the chain index shown below.

The happiness index shown in the chart is constructed from the Pew Research Center’s survey data on current quality of life.




The quality of life index shown in the chart actually shows a larger increase than the increase in real GDP per capita over this period. I therefore find it difficult to accept that the increase in quality of life was actually as large as is shown. The main point of the exercise is to suggest that the quality of life in the U.S. probably increased over this period by a larger magnitude than indicated by the happiness index shown in the chart.

(Research presented on this blog – as on any other blog - should be viewed with more caution than peer-reviewed research presented in academic journals. For quality assurance purposes I am prepared to make detailed results of research available to anyone who wants them and the data available to anyone who wants to replicate studies.)

Can our quality of life improve without us becoming happier?

Surveys undertaken by the Pew Research Centre enable comparisons to be made between ratings of quality of life at the present time and ratings of quality of life five years ago. The results for the U.S. (here) indicate that while respondent’s average ratings of current quality of life had moved up and down by small amounts when asked at various times over the last 40 years, they consistently reported that their quality of life was substantially worse five years ago - indicating that they perceived that they had experienced ongoing improvements in the quality of their lives.

These results suggest that people can perceive that the quality of their lives is improving even though their reports of quality of life at different points of time indicate that there has been no increase. Some people might suggest that this means that people have faulty memories of the quality of life they enjoyed in the past. I acknowledge that memories can be faulty, but I see no reason why people should systematically view the past as having been worse than the present. On the other hand, I can think of a good reason why current reports of quality of life may not show much change over time in the face of objective evidence of improvements in standard of living.

The use of survey information to measure the current quality of life involves the implicit assumption that when people rate their quality of life they do so relative to absolute standards. Respondents in the Pew survey are prompted to think in terms of a ladder of life in which the top step represents the best possible life and the bottom step represents the worst possible life. The use of successive surveys to measure change in the quality of life entails the assumption that perceptions about what constitutes the best possible life and the worst possible life remain fixed over time.

When you think about this, however, how can it be possible for anyone in a relatively high-income country to know what the best possible life, or the worst possible life, might be like throughout their own life-time? If you asked someone to rate how satisfied they were with life in the 1940s they would not have had much idea of the kind of life they might be able to live in 60 years time. They would not have known that many of the household appliances and communications devices that we now have would be within reach within their own life-time. They might have wished that such things could be invented and made affordable – just as I wished as a child in the 1950s that I could have a 2 way wrist radio like the one Dick Tracey had – but I don’t think such things would have been contemplated as actually attainable.

It is widely accepted among happiness researchers that in high income countries increases in standards of living may not translate to increases in happiness because aspirations tend to rise as incomes rise. I am not sure that many have realized, however, that if this process involves a change in perceptions about the best possible life it is changing the scale against which people are assessing their quality of life. Thus a person who felt that her quality of life had improved over time might report ratings of her quality of life at different points in time which indicated that she had stayed on the same rung of the ladder. The apparent conflict of perceptions has occurred because the ladder has shifted upwards.

If our aim is to use surveys to measure of happiness, as an emotion, it may be appropriate for the ladder (measurement scale) to move upward as perceptions change about the best possible life. If we are attempting to measure quality of life, however, we should recognise that an upward movement of the ladder - which occurs because of a change in perceptions of the best possible life - is itself evidence of improvement in the quality of life. In my view we should accept what people say when they report ongoing improvements in the quality of their lives and also to accept that this will not necessarily make them feel any happier than in the past.

In my next post I explore the possibility of using perceptions about changes in quality of life to construct a chain index showing how the perceived quality of life has changed over time.

Why does Rudd persist in misrepresenting Hayek?

In “The Australian” today (4 August 2008) Australia’s prime minister, Kevin Rudd again misrepresents the views of Friedrich Hayek. He also did it before becoming elected (here).

After stating that he believes in a compassionate society, Rudd writes:

“That is why we explicitly reject Hayek’s view that society has no obligation to others who are unknown to us and his preparedness to allow fundamental social institutions such as the family to fend entirely for themselves against unrestrained market forces”.

I have read enough of what Hayek wrote to know that he would never write anything like: “society has no obligation to others who are unknown to us”. That statement makes no sense. It seems to suggest that “society” exists apart from the people who comprise it. Rudd might believe this, but Hayek was certainly opposed to that view.

Hayek recognised explicitly that in “a highly mobile open society, an increasing number of people are no longer closely associated with particular groups whose help and support they can count on in the case of misfortune”. He states:

“The assurance of a certain minimum income for everyone ... appears not only to be a wholly legitimate protection against a common risk to all, but a necessary part of the Great Society in which the individual no longer has specific claims on the members of the particular small group into which he was born” (Law, Legislation and Liberty, V 3, 55).

So, why does Rudd persist in misrepresenting Hayek? I don’t know. Perhaps he is suffering from a learning disability.

How did changes in attitudes to inequality affect happiness in Poland?

This post continues my ruminations about the effect that beliefs about income inequality may have on the happiness of people who hold those beliefs. Previous posts can be found here.

In order to study this it would be nice to have a natural experiment in which the population of a country began with fairly positive beliefs about inequality and then changed those beliefs radically over a couple of years. In order to draw conclusions we would need survey information to document the change in beliefs that occurred, together with information on happiness levels, income inequality and per capita income levels.

It just so happens that such information is available for Poland. A study by Irena Grosfeld and Claudia Senik shows that a change in attitudes toward inequality, which occurred around 1997, was associated with a sharp decline in satisfaction with the current economic situation and some decline in satisfaction with personal living standards despite continued economic growth (‘The emerging aversion to inequality: evidence from Poland 1992-2005’, Discussion Paper 3484, IZA, 2008, here).

Around 1997 there was a sharp drop in the proportion of people agreeing with the statement that inequalities of income are necessary for economic progress and a rise in the proportion agreeing that inequalities of income are too large in Poland.

The statistical analysis actually suggests that income inequality (as measured by the Gini coefficient) had a positive effect on satisfaction with the economic situation and satisfaction with personal living standards in the period from 1992 to 1996. The authors argue that inequality was initially interpreted as “an opening of new opportunities” following the fall of communism. It is somewhat easier to understand how this might occur in the light of the results of other research by Claudia Senik (discussed here) which suggests that in transition countries (Russia, Hungary, Poland and three Baltic countries) the life satisfaction of individuals tends to rise, rather than fall, when the income of their reference group -people with the same skills and occupation - increases. Her explanation is that in these countries people consider that their own future prospects to be better when the income of their professional peers rises.

Why did the change in attitudes toward inequality occur? Grosfeld and Senik suggest that “the turning point in tolerance for income inequality seems to come with the increasingly wide perception that the process that generates income distribution is itself unfair” (p17).

That suggests to me that a change occurred from a situation where the economic system was commonly viewed as a positive-sum game – potentially providing benefits to all participants - to one in which it was viewed as a zero-sum game – where the enrichment of some was perceived as being at the expense of others. Interestingly, the perception of an economy as a zero sum game can be an accurate perception when the distribution of income is influenced to a large extent by political favouritism.

All this leads me to wonder whether there is any survey evidence that people who perceive life as a positive sum game are generally happier that those who view it as a zero-sum game.