Thursday, December 17, 2009

Does economic security depend on average income levels?

In an earlier post I suggested that there would be widespread agreement that a good society would provide members with a degree of personal economic security against potential threats to individual flourishing, including misfortunes such as accidents, ill-health and unemployment. (See: What are the characteristics of a good society?)

In suggesting that there would be widespread agreement about this I had in mind that nearly everyone would tend to be somewhat risk averse if they had to choose what kind of society to live in without any knowledge of their own personal circumstances. Rather than focusing exclusively on the median (or most likely) outcome of their choice I think nearly everyone would have some regard to what their quality of life might be like in various societies if they were to draw the short straw in terms of parentage, health, intelligence, good looks and good luck. (How people would actually respond to such a thought experiment is an empirical question. I recall reading somewhere that John Rawls’ difference principle has not been supported by empirical research, but this principle seems to assume extreme risk aversion applies to choices made behind a veil of ignorance. If any readers are aware of useful empirical research on this question I would be grateful to be made aware of it.)

It seems to me that the average income of people at the lower end of the income distribution is an appropriate measure of economic security because it relates directly to the quality of life that people are able to lead. This can be estimated for a wide range of countries using survey data on the percentage of national income or consumption of people in the lowest 10 percent of the income distribution. Another relevant indicator is survey data on the proportion of the population that have at times not had enough money to buy food that their family needed in the preceding 12 months.
The following table shows countries ranked by the average income level of people in the lowest 10 percent of the income distribution. Percentages with not enough food are also shown along with a range of other indicators of average well-being and institutional quality. As in similar tables in recent posts, the ratings of countries with performance in the top quartile for each indicator are shown against a green background, those for the second quartile are shown in yellow, the third quartile in orange and the fourth quartile in red. Indicators are defined below the table.
As would be expected, countries which rank highly in terms of average incomes of the bottom 10% tend to have the lowest percentage of people who claim that at times they did not have enough money to buy food. There are some interesting anomalies, however, at both ends of the spectrum. For example, the percentage claiming that they did not always have enough money for food were higher than would be expected in several high-income countries including the UK, Italy, Australia and New Zealand. Low-income countries in which the percentage claiming inadequate money for food was lower than expected included Nepal, Vietnam and India.

The table shows that average incomes of the bottom 10% of the population depend strongly on the goose that lays the golden eggs – i.e. on the institutional factors that determine average income levels of the whole population. I do not intend to imply, however, that democratic institutions and income redistribution policies of governments play no role in supporting incomes of the bottom 10%. A regression analysis suggests that democratic institutions do tend to support average income levels of the bottom 10% of the population. Examples are evident in the table. Countries in which relatively low ratings on ‘Voice and accountability’ may help explain lower than expected incomes of the bottom 10% include Iran, Tunisia and Argentina. Countries in which relatively high ratings on ‘Voice and accountability’ may help explain higher than expected incomes of the bottom 10% include India and Mongolia.

Hint: Click on the table for a clearer picture.

Income index for the poorest 10%: Index expressed as a fraction of estimated average income of the poorest 10% of families in Norway, the country in which the poorest 10% have the highest average income. Estimates based on share of income/expenditure of the poorest 10% of the population from Table M, HDR 2009 Statistical Tables, UNDP.
Not enough food %: The proportion of the population claiming that at times in the preceding 12 months they have not had enough money to buy food that their family needed. Survey data from the Gallup World Poll.
Average income index: Real GDP per capita (rgdpl) for 2007 from the Penn World Table, expressed as a fraction of per capita GDP in the United Arab Emirates, the country with highest per capita GDP. Source: Alan Heston, Robert Summers and Bettina Aten, Penn World Table Version 6.3, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, August 2009.
Voice and accountability: Index compiled by the World Bank capturing perceptions of the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association and a free media.
Economic Freedom (Fraser): According to the Fraser Institute’s definition, individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Data from the 2009 report (for 2007).
Control of corruption: Index compiled by the World Bank capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as ‘capture’ of the state by elites and private interests. Quality of life index: Gallup World Poll data on “life today” (latest available) country averages, expressed as a fraction of the rating for Denmark, the country with the highest rating.
Social capital: A sub-index of the Legatum prosperity index which reflects how well people are engaged in social networks and relationships that are trustworthy and supportive.

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