The Cost of Well-Being

It is by now common knowledge that in switching from GDP to alternative, multidimensional, measures of collective well-being one can provide a better account of a country’s socio-economic conditions. Such a gain, however, comes at the price of losing output-to-input type of link between well-being and the resources necessary to make it available. Since well-being measures are not meant to be only an exercise in documentation, but also to inform policies and priorities, we propose a method to build a measure of well-being in the form of a single index, as for GDP, which takes into account: (1) the social and environmental costs, not considered in the GDP, and (2) the use of conventional resources (capital and labour), not considered in the currently available multidimensional measures of well-being. We use a Data Envelopment Analysis type of model, integrated with Principal Component Analysis, to evaluate OECD countries’ relative efficiency in providing well-being. Our results show that the costs of producing well-being have a large and significant impact on the resulting index of well-being. Therefore, high efficiency in providing well-being and high income cannot be considered a proxy to each other. In addition, it is shown that countries react differently to the different costs of well-being: poor countries are, on average, more efficient in terms of conventional inputs (labour and capital), while rich countries have higher efficiency indices relative to social and environmental costs. The close to zero correlation between GDP and well-being indices for rich countries provides new support to the “Easterlin paradox”.