Ethics at Work: How to improve the criteria for assessing quality of life

'The Economist' magazine touts consumption-based inequality measurement.

asher meir 88 (photo credit:)
asher meir 88
(photo credit: )
For a number of years I've been writing about the inadequacy of generally used inequality measures, in particular the poverty line. Among other improvements, I have suggested using consumption rather than income as a measure of well-being. I even gave a presentation at the Central Bureau of Statistics (CBS) showing how this measure would have looked in Israel over past years and decades. So I was more than a bit gratified (not to say gloating) when The Economist, a prestigious magazine, just published an article basically echoing all the different considerations I have been discussing in this column over the years. My two main claims have been: 1. Consumption equality measures substantive difference in standard of living, and so is a better measure of inequality than income; 2. Even consumption inequality when measured by expenditure exaggerates differences in lifestyles, because a car that costs 10 times as much doesn't do 10 times as good a job at getting you around in relative ease and comfort. The Economist article (anonymous, like all Economist articles) states: "Because we can save, draw down savings, or run up debt, our income may tell us little about how we're faring. Consumption surveys, which track what people actually spend, sketch a more lifelike portrait of the material quality of life. According to one 2006 study, by Dirk Krueger of the University of Pennsylvania and Fabrizio Perri of New York University, consumption inequality has barely budged for several decades, despite a sharp upswing in income inequality." The article then adds: "The distance between driving a used Hyundai Elantra and a new Jaguar XJ is well nigh undetectable compared with the difference between motoring and hiking through the muck. The vast spread of prices often distracts from a narrowing range of experience." Against the backdrop of rising income inequality, which remains a worrisome phenomenon, here are some examples of rising substantive well-being in Israel's poorest families. In 1995, almost 10 percent of four-person Jewish households lived in less than three rooms. By 2006, it was less than 4%. For Arabs, the improvement was even more impressive: from 18% to just over 8%. In 1980, 55 children out of every 1,000 were placed in institutions by the welfare authorities; by 2007 this was reduced to 31 out of 1,000. In fact, the total number of such cases declined despite a vast increase in the population. The CBS measures ownership of certain goods and services - such as refrigerators, TVs and cars - by income level. If we measure the inequality in ownership of these goods, for example, by using quintile ratios (ownership of the top fifth of the population divided by that of the lowest fifth), we find that from 1997 to 2005 inequality decreased notably for virtually all categories. A very few show increasing inequality, but the change seems spurious. There is a notable decline in the number of poor families with one or two land-lines, but this was more than compensated for by a huge increase in the number with cellphones. There is a decrease in the number of televisions, which is almost certainly due to the increasing number of haredi families who shun them. Why do I only cite figures for these goods and services from 1997? The answer is that the Statistical Abstract only cites them from then. Before that they displayed differences in nutrition in differing income levels, but by the 1990s these differences ceased to be meaningful. This brings us to another narrowing mentioned in the Economist article: "a dramatic narrowing of other inequalities between rich and poor, such as the inequalities in height, life expectancy and leisure." (In fact, as we pointed out in another column, the inequality between rich and poor in leisure has not only narrowed but has in fact reversed, so that the rich now work far more hours than the poor.) So it is important to remember that if the figures show growing inequality between 1987 and 2007, that is not inequality among those goods and services that existed in 1987. For any particular good you can point at, equality is constantly increasing. The increase in inequality is coming from new goods, which at first accrue to the rich. For example, Americans complain that a generation ago many more people in the US had company health insurance. But we should also remember that the uninsured of 2008 get better medical care than the insured of 1988. All the expensive medicines that you needed insurance for a generation ago are now off patent and cost little; the same goes for many treatments. So when we talk about rising inequality, it doesn't mean the rich are getting richer and the poor are getting poorer. The rich are getting richer and the poor are getting richer too, such that in 1988 terms there is more, rather than less, equality now than there was then. Studies of inequality are important and revealing, but they should be focused on substantive inequalities in actual standards of living. When we examine these, we find that the gaps are not really so impressive. ethics-at-work@besr.org The author is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.