A living standards approach to public policy making

Abstract

Increasingly, government and international organisations are broadening the way they define and measure the ‘progress’, wellbeing or living standards of a country. In May 2011 the New Zealand Treasury published a Living Standards Framework which was developed to guide the objectives and formulation of public policy in the organisation. This paper outlines the key developments in thinking about living standards which underpin the conceptual Framework, and presents the Framework, including a discussion of the factors that are important for living standards. The paper also discusses a subsequent development in Treasury's work in this area, the development of a policy tool to assist analysts in applying the Framework in policy advice.

Keywords:

• living standards
• wellbeing
• progress
• public policy
• New Zealand Treasury

Notes

 1. The Framework can be found in the publication Working Towards Higher Living Standards for New Zealanders (2011), available at http://www.treasury.govt.nz/publications/research-policy/tp/higherlivingstandards

 2. For example, the Australian Treasury (2004, p. 3) recognises that ‘analyses of economic development or progress that only take income into account neglect other important determinants of wellbeing’. The OECD (2010a–2010d, 2011a, 2011b), the United States Department of the Treasury (2011), and the IMF (2011), among others, have also undertaken similar thinking.

 3. For example, The Human Development Index, developed in 1990 by the United Nations Development Programme, combines GDP per capita with three dimensions of human wellbeing: life expectancy; adult literacy rate and educational enrolment. The Genuine Progress Indicator (GPI) adapts the common metric of GDP, e.g. by removing the negative aspects of output such as crime and pollution.

 4. Welfare-based theories are a subset of consequentialist theories, which hold that the morality of one’s conduct should be judged by the consequences of that conduct. This is in contrast to deontological theories, which hold that the morality of conduct is determined by the nature of the behaviour itself, rather that its outcomes (Spielthenner, 2005).

 5. Nozick, in his most prominent work Anarchy, state and utopia (Nozick, 1974), employs a thought experiment (‘the experience machine’) to argue that people would prefer to live a real life rather than a machine-induced experience of a wonderful life, and therefore ethical hedonism must be false. Sen also rejects the idea that utility is the only value. In his words, ‘we do not necessarily want to be happy slaves or delirious vassals’ (Nozick, 1974, p. 62).

 6. Subjective measures are generally considered meaningful and reasonably comparable among groups of individuals, although biases can occur (Veenhoven, 2007). The responses are highly correlated with physiological and medical measures of happiness, such as how often a person smiles (Layard, 2005).

 7. The classic evidence for the influence of genes comes from studies of twins that were raised together and apart where the correlation of subjective wellbeing was almost 50% for identical twins versus less than 10% for non-identical twins (Tellegen et al., 1988).

 8. Common explanations for this divergence are the powerful effects of adaptation and social comparisons, a tendency for happiness to vary around a set point, and the omission of factors that have offset the beneficial effect of economic growth (Layard, 2005).

 9. Such as http://www.stuff.co.nz/dominion-post/news/politics/5056148/Treasury-into-science-of-happiness; http://www.mentalhealth.org.nz/page/882-news+2011; http://win tonbates.blogspot.co.nz/2011/06/will-nz-treasurys-living-standards.html.

10. The Welfare Working Group references included reforms in Australia, in ACC, to the Job Search Service in New Zealand, and reforms to delivery in Australia and New Zealand.

11. Whiteford and Adema (2007) find that if New Zealand could lower the share of jobless households to that experienced in the top performing countries then New Zealand’s child poverty would drop by a quarter.

12. Keane and Wolpin (2007) develop a model where the incentives created by the welfare system may have negative effects on skill acquisition by changing the incentives to acquire higher qualifications.

13. Blanchard and Wolfers (1999) find that labour market institutions that shorten the duration of unemployment (such as active labour market policies) decrease the unemployment rate.