Measuring Well-being: A Multidimensional Index Integrating Subjective Well-being and Preferences

Abstract

Policymakers have begun looking for multidimensional alternatives to income-based measures for assessing well-being in societies. The Human Development Index (HDI) and related composite indices have been widely criticized in the welfare economic literature, yet are still some of the most influential income-alternatives in the research and policy arena. What are the theoretical links that bridge the gap between these composite indices and the criticisms levelled at them? This paper introduces the “preference index approach,” a multidimensional measure bringing together the “equivalence approach” and the “distance function” in welfare economic theory. It retains convenient similarities with HDI-type composite indices, but assesses well-being in a way that reflects interpersonal differences in preferences between dimensions of well-being, whilst retaining comparability of well-being levels between individuals. The approach is applied empirically with data from the British Household Panel Survey (BHPS) to estimate different preference types between well-being dimensions. The empirical application finds that preferences differ by age, education level and unemployment status, and finds a weaker preference for the health and income dimension within older groups. Across all groups, health is strongly prioritized over income. When preference heterogeneities are taken into account, the picture of well-being looks quite different than that painted by standard welfare measures.