The Wellbeing Framework needs a better measure of living standards

by Greg Jericho and Jack Thrower

Share

..

The Wellbeing Framework suggests Australia’s prosperity is linked with company profits, but it wrongly suggests this also measures people’s living standards.

The release of the government’s Wellbeing Framework is a welcome development. For too long focus has been on narrow measurements of the economy such as the budget balance or GDP growth. However, the Wellbeing Framework is only as good as the measures it uses, and when it comes to living standards, the standard used is rather poor.

Rather than examine traditional economic measures such as GDP, the Wellbeing Framework sets up a number of metrics in order to measure “Prosperity”. Importantly the Framework acknowledges the need to reference the distribution of income and as such measure inequality.

However, its measurement of living standards sets the Wellbeing Framework on a potentially dangerous path. The Framework has used the measure of “Net National Disposable Income per capita” because, the Framework argues, it “broadly captures living standards”

This measure has long been included in the quarterly national accounts but was largely ignored until September 2009 when the Bureau of Statistics began referring to it as “a broader measure of change in national economic well-being”.

And while it certainly is a better measure of living standards or national economic well-being than GDP per capita it still leaves much to be desired.

While the Framework describes it as “measuring the amount of real income per person earned domestically and overseas” this suggests a definition of “individual” that is much broader than most people would expect. While it does include incomes earned by individuals it also includes income earned by companies. Because Australia’s company profits are dominated by mining companies whose income is mostly determined by changes in world prices of iron ore, coal and gas, this means that Net national disposable income per capita is greatly affected by export prices (and the terms of trade which is a ratio of export and import prices).

Ideally strong export prices of key Australian minerals would lead to greater prosperity of households, but for much of the past decade, this has not been the case.

From the middle of 2105 until the end of 2019 (ie before the pandemic), iron ore mining companies began shifting from production of mine to exporting the iron ore. This was extremely profitable because exporting minerals requires much less labour than does construction of a mine. During this period the terms of trade rose 15%, and the net national disposable income per capita rose 8.2%. This would suggest that the living standards of Australian households were growing very well. Australia, this measure would suggest, was becoming more prosperous.

And yet during this period wage growth plummeted reaching an annual low of 1.9% and averaging just 2.1% – barely above inflation, and even worse in real terms when taking into account taxation. This was a period in which corporate profits rose 52% while wages in private-sector industries rose just 15%.

The measure of net household disposable income per capita reflects the reality felt by Australians rather than by Australian companies.

From the start of 2015 to just prior to the pandemic the real living standards of Australian households rose just 1.3%.

Since the pandemic the disparity has remained. Australian households saw their living standards grown because of massive government intervention through JobKeeper and the doubling of Jobseeker, however since the end of those and other stimulus households have seen their living standards plunge as wages have failed to keep up with quickly rising inflation.

Since December 2020 net national disposable income per capita has risen 3.3% while real net household disposable income per capita has gone up just .03%.

It would be a brave person to suggest the past two year in which wages have risen by around half that of inflation has been a period in which Australian living standards have grown. And yet that is what the Government’s Wellbeing Framework would have you believe.

This is the major problem with this measure. If the government is to take net national disposable income per capita as its measure of living standards then policies which drive company profits are much more likely to be given precedence, while those that drive household incomes are relegated.

The Wellbeing Framework does include a measure of household income, but it uses “Median equivalised weekly disposable household income” which is only released once every two years in the Survey of Income and Housing. Far better to use a measure that comes out every 3 months and lets the government and its policy makers know exactly how household living standards are rising, or (has been the case of late) falling, than caring about a measure that is more about company profits.

Between the Lines Newsletter

The biggest stories and the best analysis from the team at the Australia Institute, delivered to your inbox every fortnight.

You might also like

Stage 3 Better – Revenue Summit 2023

by Greg Jericho

Presented to the Australia Institute’s Revenue Summit 2023, Greg Jericho’s address, “Stage 3 Better” outlines an exciting opportunity for the government to gain electoral ground and deliver better, fairer tax cuts for more Australians.