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For Leaders, Mastering Traditional Economics Isn't Enough
Business Journal

For Leaders, Mastering Traditional Economics Isn't Enough

Leaders must know things like the relationship between GDP and well-being -- and even how what happens in families affects the way people make economic decisions

A Q&A with economists Justin Wolfers, Ph.D., and Betsey Stevenson, Ph.D.

For leaders of businesses, cities, and countries who want to understand their constituencies -- and ultimately to know whether those constituencies are thriving -- using traditional economic measures just isn't sufficient. Those leaders should also know their constituencies' well-being. In fact, economists are starting to care more about well-being and to study it, as Justin Wolfers, Ph.D., and Betsey Stevenson, Ph.D., would attest.

Richer countries have higher average well-being. But it's not clear that it is directly due to consumption.

Both Harvard-trained economists with a library of published work between them, Dr. Wolfers and Dr. Stevenson are on the faculty of the Business, Economics, and Public Policy Department at the University of Pennsylvania's Wharton School. Dr. Stevenson just ended a stint as chief economist at the U.S. Department of Labor, and Dr. Wolfers is a Gallup senior scientist.

Leaders looking to make a positive impact should hear what these two economists have to say about the importance of measuring societal well-being, the relationship between GDP and well-being, and the problem of global inequality. Leaders should take note of the connections Drs. Wolfers and Stevenson make between what happens in families and the effect that has on businesses and the economy -- because what happens in families affects the way people make economic decisions.

Gallup Business Journal: You both are economists. Why are you researching well-being?

Betsey Stevenson, Ph.D.: Ultimately, what all economists care about is the welfare of citizens and society. Historically, economists have emphasized measures like Gross Domestic Product [GDP], but why do they care about it? It's because we want to improve human welfare. We've learned that GDP, while useful, is an imperfect measure, and so we're turning to surveys asking people about their well-being. All economic issues ultimately boil down to assessing whether people are better or worse off, and well-being research can help answer those questions.

And can you do that by just asking people how well they're doing?

Dr. Stevenson: We used to think that it wasn't useful to simply ask people to tell us how they were doing overall. But over decades of research, we've learned that we can get really reliable answers from people's subjective assessments of their lives. And more recently, we have learned that people's self-reported well-being grows with growth in GDP per capita, so economists' focus on economic growth has been good for their ultimate goal of making people better off.

Is it fair to say that dollars are one way of keeping score, but so are points on a scale of well-being?

Dr. Stevenson: Absolutely -- and it turns out that those things aren't as different as some people would like to claim they are, and that's one of the things that Gallup data has shown. If you look at the correlation between GDP per capita across countries and the average score on the well-being scale, we see that those two things have a correlation of 0.82. That's just about as correlated as any two things I've ever seen.

Are consumption and well-being related?

Dr. Stevenson: We do find that richer countries have higher average well-being. But it's not clear that it is directly due to consumption. In fact, the Gallup data lets us look at other very specific metrics of well-being. What you see is that in richer countries, people are less likely to experience pain in their day. That may be because of consumption; they may be consuming more aspirin. But it may also be because they have a choice as to whether to do more or less backbreaking work, and economic progress gives them a greater ability to pursue lives that will incur less pain.

You also see that in richer countries, people are more likely to have choice over how they spend their day. They're more likely to say that they're treated with respect in their day. Also, the likelihood of people saying that they had good-tasting food to eat rises steeply with income in the country. So the basics of everyday life seem also to be correlated -- it isn't just "the richer I am, the more shoes I own." That kind of consumption doesn't necessarily correlate with well-being. It may, but it's not the whole story.

What role does income inequality play in well-being?

There are many parallels between the family and labor markets.

Justin Wolfers, Ph.D.: We just started a project at Gallup on income inequality. One of the amazing things the Gallup World Poll does is give us a snapshot of the world's population with a degree of precision and depth that is just unheard of ever before for social scientists. We're looking to see whether countries with high income inequality have lower levels of well-being.

First, we need to understand what levels of income inequality are in every country around the world, and the World Poll allows us to do that. Then we can figure out how much of the globe's inequality of income is differences between rich people and poor people within a country versus differences between rich countries and poor countries. Nearly all the income inequality on planet Earth is due to differences between rich and poor countries. This is one of those findings that's obvious the moment you figure it out, but it wasn't obvious 10 minutes before we ran the numbers. Only a tiny proportion of global inequality is due to differences between rich and poor people within a given country.

So if you're the sort of person who cares a lot about inequality, you should be most interested in developing the world's poorest nations -- countries like Burundi. That has an enormously bigger effect in reducing inequality than, for instance, trying to lift up the poor people in rich countries because the poor in rich countries are -- relative to the rest of the globe -- reasonably well-off. If you're without work in the United States, you still may get to eat three meals a day, you still can afford shelter, you're very unlikely to lose a baby during childbirth. It's also true that if you look at well-being, most of the world's misery is concentrated in poor countries, not among relatively poor people in rich countries.

Your other areas of research focus include marriage, divorce, and family. Why would these areas interest economists? Or business leaders?

Dr. Stevenson: Economics is about how people make decisions optimally, given that they're facing constraints. That framework can be applied anywhere, not just to things that are about dollars and cents and the economy. Families and labor markets are intimately connected, and to understand one, it's helpful to understand the other. That's because decisions about labor force participation and about what kinds of jobs to take and what kind of hours to keep are made within the context of family lives. What happens in families affects the way people make those kinds of decisions. And what happens in labor markets affects the decisions people make about families. Economists are also interested in families because we have come to realize that there are many parallels between family and labor markets.

Dr. Wolfers: The first place that people notice the similarities between family and economics is in what some have called the marriage market, which looks a whole lot like the labor market. People search for partners the same way they search for jobs. When you find a spouse or a job that looks like a good fit, you take it. And you must make a decision about how much time to spend searching for the perfect spouse or the perfect job before accepting a job or a spouse.

Is that part of the reason why people who wait until they're older to get married have a lower divorce rate? Because, being better experienced, they have more insight into the marriage market?

Dr. Stevenson: That's a great question. And it's a fact that the divorce rate is much lower among people who marry when they're older. What is harder to know is whether the types of people who wait are the types of people who are less likely to divorce or whether the act of waiting reduces your chance of divorce. But the differences in divorce rates of people who marry in their early 20s versus people who marry in their early 30s is quite large. These are much bigger differences than the differences in the divorce rate across generations.

One reason might be that those people who marry later have spent a longer time searching, which means that they're not willing to settle until they have a higher quality match in the marriage market, which in turn means that marriage is less likely to dissolve. The other possibility is that we're not static; when we're in our 20s, we're not good at projecting what we'll want in our 30s and 40s and 50s. It may be that we have better information when we're older than when we're younger about what we're looking for in a partner. You do see some data that suggests that what people in their 20s say are important qualities in a mate are different from what people in their 30s look for.

By the same token, you look for different skills and attitudes in an entry-level employee than you do in an executive employee.

If you're trying to recruit somebody who needs to move locations, they're most likely to have a spouse who works.

Dr. Stevenson: Yes. And just like most entry-level employees will not become the CEO or a senior executive, I can tell you I was pretty certain most of my boyfriends weren't going to make the cut. Not all dating is about trying to find a spouse. There is a difference between what you might want in a date on a Saturday night when you're 19 and what you might be looking for in someone to spend the rest of your life with.

Has anything in your research into family structures or the marriage market surprised you?

Dr. Wolfers: Yes. Betsey, think about the first paper we wrote together.

Dr. Stevenson: It was a paper that looked at whether unilateral divorce laws, which sometimes people call no-fault divorce laws, had an effect on the likelihood that you would commit suicide, murder your spouse, or be a victim of domestic violence.

Dr. Wolfers: The reason we wrote the paper is we were having an argument one night over dinner about what we thought the effects would be. I thought that as states moved to no-fault divorce, people would be more likely to become violent within their relationships because the courts would no longer force your spouse to stay with you. So people would use violence as a way of enforcing what they thought of as their property rights -- their right to keep their spouse around. Betsey was of the view that once women could leave a bad marriage and get on with their lives, being able to escape would reduce the amount of violence.

So we did what any nerdy economist couple would do: We collected the data on homicide by spouse and crunched the numbers. It turned out that Betsey was right: Unilateral divorce laws led to a large decrease in violence against women and a large decrease in the number of women committing suicide as well.

Dr. Stevenson: Justin was surprised by the results, but I wasn't. I'm more surprised by a different fact about families -- that marriage rates in the last few decades have increased so significantly for highly-educated women. This is something you must think through carefully. If you go back to the 1960s, women who went to college weren't very likely to get married compared with women who didn't go to college. That was because marriage was largely about women staying home and taking care of the family, while men were in the labor market bringing home the cash. Women who were trained with skills that would be useful in the labor market were not necessarily better spouses. In many ways they were worse spouses because they were spending four years in college instead of learning how to cook. So these women were the least likely of all women to marry.

In the ensuing decades, that has completely reversed; now college-educated women are becoming the most likely to marry. We've also seen marriages shift from that 1950s model -- where the man specializes in labor market production and the wife specializes in home production and the household is more efficient because of that specialization -- to marriages where the benefits come from shared consumption rather than that shared production. We've seen a shift from the old model of opposites attract to one in which couples thrive when they have similar tastes and similar preferences in leisure activities, consumption, and how they divide their time between work and play.

Doctors used to marry nurses and now doctors marry doctors.

Dr. Stevenson: Exactly. That's a real example of that. In fact, you see that in the data -- there's an increase in couples marrying who have similar educational backgrounds.

I can see how this finding might be especially relevant to businesses, especially in recruiting. If you're looking for a new CFO, for example, you should carefully consider what the candidates' spouses do, because an executive is more likely to be married to another executive than to a gardener.

Dr. Stevenson: Yes, that's an important issue. If you're trying to recruit somebody who needs to move locations, they're most likely to have a spouse who works. The majority of people in marriages have spouses who work. So that couple must decide whether or not the opportunity for the wife, for example, is worth the husband leaving his current job. The more a firm can do to lessen the cost, the more likely they are to successfully recruit the person. It's something that must become an increasing concern to firms that want to recruit people across locations.

-- Interviewed by Jennifer Robison

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