Economic Resilience Index

What is a Relevant Poverty Index for Decision Makers?

Indices in general, and the poverty index specifically, affect the design and implementation of policy by:

1. Identifying arenas of action – Indices can identify population groups, geographical areas, institutions, or sectors of the economy that need to be addressed through policy.3

2. Evaluating previous policy – The success and progress of existing government programs can be evaluated through relevant indices.4

3. Highlighting long-term trends – Evaluating the evolution of index values over time can reveal trends and point to their underlying causes.5

4. Making international comparisons – Indices reveal a country’s relative performance in the world, its region, or in comparison to a relevant selection of competitor countries.6

5. Affecting the national discourse – Indices and their media exposure guide the public’s reaction to economic changes and, indirectly, generate incentives for politicians.7

Any index that measures the extent and depth of poverty must meet accepted standards and serve decision makers in the long-term. The index should be:

1. Statistically valid – reliably and consistently measures the concept it investigates;

2. Matched to the socioeconomic environment – considers the unique characteristics of the target population and the trends and environment in which it lives;

3. Practicable – based on measurable components and available data;

4. Clear and accessible to the public;

5. Able to make predictions – includes components that suggest future outcomes from evolving trends;

6. Systemic – reflects the combination of issues that affect the central question from the decision maker’s point-of-view.

So that the poverty index can serve as a tool for designing policy, it must be based on:

*
o A relevant definition of the concept ‘poverty’ – Defining poverty is an age old problem argued by philosophers, social scientists, economists, and politicians.8 The current effort to redefine poverty in Israel will not put the issue to rest. Regardless, a relevant definition is one that reflects the issues that need to be addressed by the government. From this standpoint, the definition’s relevancy is more important than its rightness.

o A relevant segmentation of the poor – Data regarding distinct groups among the poor will provide decision makers with the necessary tools to evaluate the effectiveness of existing programs, to tailor policy to each group’s unique needs, and to estimate budgetary needs.

The Starting Point for a New Poverty Index: Economic Resilience

Two Strategic Goals: Growth and improving quality of life – The goals of the Top 15 Vision are significant and continuous growth of the Israeli economy in parallel with an improvement in the quality of life of all citizens.

Cultivating human capital9 is critical for achieving this goal.

Human capital is the key to growth – Human capital is Israel’s main resource. Economic growth depends on Israel’s ability to increase labor-force participation and productivity in both innovative and traditional industries. Continuous improvement of Israel’s human capital is a necessary precursor for this goal.10

Human capital is the key to improving quality of life – An individual’s quality of life is influenced by material wellbeing and employment security.11 An individual’s ability to guarantee wellbeing hinges on the demand for his ability and skills in the labor market. Therefore, an individual’s chances of improving his quality of life increase with additional human capital.

Inverse relationship between poverty and human capital – A clear correlation between poverty and lack of education has been found in Israel and the world.12 Technological innovation, free trade, and labor flexibility have increased demand for skilled labor and depressed demand for unskilled labor.

Moreover, Israeli growth is “education biased”13 in the sense that education represents a minimum standard for improving quality of life. Those with education manage to improve their situation in tandem with economic growth, those without education experience a relative decline.

The path to poverty relief goes through utilization and improvement of human capital – To encourage growth and reduce poverty, it is incumbent that the skills and abilities of the whole population, and weak groups in particular, be utilized and nurtured.

The current labor market, affected by changes in the structure of the economy’s key sectors, is characterized by increasing demand for human capital. Effective care for the poor in Israel requires continuous improvement and updating of human capital. Therefore, resources should be allocated to areas in which human capital is not utilized or developed appropriately, or where there is danger of deterioration.

Identifying appropriate targets for government intervention requires a definition of poverty that reflects the status of human capital in the present and the ability to develop it in the future.

Disposable income is neither sufficient evidence of a person’s present ability to live comfortably nor indicative of future wellbeing.14

Poverty is an absence of Economic Resilience – The Reut Institute defines ‘Economic Fortitude’ as an individual’s ability to utilize the resources at his disposal to live in comfort, to improve his wellbeing, and to cope with unexpected changes in his personal, family, or employment situation.

This definition serves two purposes. It permits policy design that contributes to improving the economic standing of individuals by improving their human capital and it identifies those groups whose human capital is at risk.
Guidelines for the Economic Resilience Index

This section will discuss the issues entailed in measuring a society’s Economic Resilience and by extension, identifying the poor, those with low Economic Resilience.

Unit of Analysis: Household – An individual’s Economic Resilience is intertwined with the characteristics of his household. Therefore, as in other indicators used to measure poverty, the household is the appropriate unit of analysis.15

“Pre-Post” measurement of taxes, transfer payments, and public services – The resources and services provided by the state influence an individual’s Economic Resilience. To evaluate the relevancy and effectiveness of government policy, it is important to understand Economic Resilience both before and after government intervention.16

Forward looking measurement – To properly reflect the society’s Economic Resilience, predictive variables that measure both the individual and the economy need to be included.

Six Pillars of Economic Resilience:17

1. Disposable Income – Disposable income is the main variable used to measure the extent of poverty in Israel today.18 An individual’s disposable income – reported and non-reported – influences his ability to guarantee his standard of living, investment, and savings.19

2. Asset Depth – The concept ‘Asset Depth’ refers to a household’s present and future net-worth, including savings, real estate, pension accounts, and debt.

3. Consumption – In general, consumption is considered a better estimator of standard-of-living20 than income and permits measurement of several aspects of Economic Resilience:

* Severity of Poverty – Low consumption is an indicator of deep and continuing poverty. It indicates the amount of time a household has suffered from low income and the household’s potential to increase its fortunes.21

* Continuing Standard of Living – Consumption reflects the needs and abilities of the household economy. The ability to preserve a stable level of consumption despite fluctuations in income is a sign of Economic Resilience.22

Consumption can be measured by calculating the total consumption of a household or by measuring the consumption of specific types of goods and services (consumer goods, vacation, higher education, etc.).23

4. Employment Security – Continuous employment is an important pillar of an individual’s Economic Resilience.24 A valid measurement of employment security must include aspects of both the household’s human capital and the trends and changes in the employment market. Employment Security is influenced by two components:

* The likelihood of finding employment – This component evaluates the household’s ability to find gainful employment. Key factors include: demand for the household’s skills in the labor market,25 level of education, work experience, and knowledge of Hebrew or foreign languages.26

Measuring this variable post-State intervention can include access to training and placement services and the public expenditure on these services.27

* The likelihood of losing one’s job – This component evaluates the likelihood of losing the current source of income. Labor law and agreements within the specific industry that employs the household influence this component (salaried vs. self-employed, temporary vs. full-time, collective-bargaining vs. individual contracts).28

5. Health – The health of an individual in a household, whether a bread-winner or a dependent, impacts Economic Resilience. Among the important variables worth considering are: total health costs, age, chronic ailments,29 and environment (pollution and health hazards in office and living conditions).

6. Spare/Free Time – The amount of time that an individual is able to dedicate to needs other than earning income is an important component of Economic Resilience. It is indicative of the ability to nurture human and social capital and to cope with unexpected difficulties. Spare/Free Time can be measured by the time spent at work weekly.30

An individual’s and household’s Economic Resilience deteriorates as a result of weakness in a combination of the six pillars. Weakness in any one of the components need not necessarily mean low Economic Resilience.

The Economic Resilience Index will give decision makers a forward-looking indication of society’s ability to live in comfort, to improve its wellbeing, and to cope with changes. The Index will encompass a systemic understanding of poverty that will provide a meaningful identification of the poor.
Segmentation of the Poor

Dealing with poverty requires direct policies that include support and training31 and indirect policies that remove social and cultural obstacles, grant incentives, and solve structural problems in the public sector and labor market.32 Developing policy requires segmenting the poor in a way that serves policy goals.

Relevant segmentation for human capital development policy – Because an effective strategy for utilizing and developing human capital depends on appropriate policies, the suggested segmentation divides the poor by their specific needs regarding utilization and development of human capital.33

The segmentation is as follows:

1. Labor Force Participants – This group includes those with low Economic Resilience despite willingness and ability to work.

In general, this group’s ability to utilize and develop its human capital is influenced by policies aimed at increasing productivity, at removing structural obstacles to participation, and at increasing access to the job market.34

Labor force participants can be divided into two groups:

* The Employed (the working poor) – Those, who despite employment, suffer weak Economic Resilience are the working poor. A firm connection exists between human capital and income potential. Therefore the working poor are typically those with incomplete schooling or inadequate skills.35

Improving this group’s Economic Resilience can be done financially (through income support or negative income taxes) or investment in on-the-job training programs.
* The Unemployed – The unemployed are unable to find employment despite actively searching for work.

Financial support during the job-hunt and investment in training and placement programs are examples of policies that can improve this group’s Economic Resilience.

2. Non-Participants in the Labor Force – are divided into two groups:

* Youth (the population below working age) – The Economic Resilience of this group is dependent on the household in which it lives. It is important to relate to this group as future human capital.

The future human capital of this group is dependent on its access to suitable education that will permit it to join the labor market when it comes of age.

* Adult Non-Participants – This group includes people whose human capital falls on a spectrum. Policy baskets tailored to individual needs are the appropriate response. Nonetheless, it is important to draw the following distinction:

o Those without potential to integrate into the job market – This group includes the elderly and some of the physically and mentally disabled. The social welfare services are responsible for identifying these individuals. Since developing this group’s human capital is limited by their status, their Economic Resilience must be fortified by support and welfare.

o Those with potential human capital – This group includes those who could apparently work but do not participate.36 They are a reservoir of potential human capital that is not utilized.

Utilizing and developing this group’s human capital and guaranteeing its Economic Resilience requires a combination of incentives to work37 and individual programs aimed at social and cultural impediments to participation.38
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