Does economic growth lead to higher happiness?

March 9, 2023  

Ahead of next week’s budget, Imran Hashmi unpicks the relationship between economic growth and wellbeing, arguing that local people should be at the heart of decisions about economic policy in their area.

The UK narrowly avoided entering a recession in 2022, and hopes have been raised that the same will be true in the first half of this year. But we are not out of the woods just yet. Next week’s budget will reflect the effects of the most severe cost-of-living crisis the country has ever seen. This continues to put the brakes on economic recovery, and gloomy forecasts predict a year of stagnation.

From increased rates of unemployment to rising prices, the repercussions of economic trends are well evidenced. But what do these trends tell us about the wellbeing of our communities?

Wellbeing loosely follows economic growth at a national level

At a national level, wellbeing scores (we’re using two indicators from the Office for National Statistics: life satisfaction and happiness) increase slightly as economic output increases (defined here as Gross Domestic Product). This is followed by significant falls during times of public crises and deep recessions, and steady growth when the national economy recovers. There is a positive but weak relationship between wellbeing and national economic growth. This was stronger though during Covid, suggesting health is a driving factor.

Source: Office for National Statistics, Quality of Life in the UK, February 2023
Office for National Statistics, GDP first quarterly estimate, UK: October to December 2022

This relationship breaks down at the local level

Plotting the change in life satisfaction and happiness against economic growth (defined as gross value added) for each local authority in the UK between 2011 and 2020, I expected to see a similar pattern to the national picture. An authority with high economic growth would also have high wellbeing growth, leading to a neat upward trend. However, all I found was a ‘pink puddle’. The data suggest no significant relationship between these personal wellbeing measures and local economic growth.

Source: Office for National Statistics, Quality of Life in the UK, February 2023
Office for National Statistics, Regional gross domestic product: local authorities, May 2022

To delve a little deeper, I looked at the growth rates of the 15 local authorities that scored highest on these wellbeing measures. Again, one might expect these areas to have high economic growth rates but it’s a real mixed bag:

  • For those 15 local authorities with the highest happiness score in 2020/21, six had negative economic growth (economic contraction) and eight had growth rates lower than the national average.
  • For those 15 authorities with the highest life satisfaction score, seven had experienced economic contraction and ten had growth rates lower than the national average.
Source: Office for National Statistics, Quality of Life in the UK, February 2023
Office for National Statistics, Regional gross domestic product: local authorities, May 2022
Note: Local authorities are ranked by order of happiness/life satisfaction respectively.

One possible explanation for this could be travel to work patterns – people that work and live in different authorities, and so their wellbeing score is in one authority and economic growth is reflected in another. However, the latest census data indicates that around 70% of people work and live in the same local authority, so wouldn’t change the overall trend by much.

Could time lags in the data be another explanation? We don’t believe so, given that we looked at the trend over a 9-year period, and reviewed the analysis taking out Covid year data in case this skews the results, which it does not.

The local productivity puzzle

The economist in me then linked these findings to productivity. We’ve defined this as gross value added per head, so rather than looking at overall economic performance, this now looks at economic performance relative to an area’s population.

The UK’s sluggish productivity growth compared to other major economies is a well-documented puzzle. How does this play out at the local level and what does it mean for wellbeing?

  • For those local authorities with the highest happiness score, only one had a productivity rate higher than the national average.
  • For those with the highest satisfaction score, just three had a rate higher than the national average.

So, in the high wellbeing scoring authorities, neither economic growth nor productivity are especially high. These economic trends therefore appear to tell us very little about the wellbeing of our communities.

We urgently need to shift our focus on what’s important and what we measure

Nationally, we know that to a small degree, the aspects that determine economic growth also determine people’s wellbeing. But this initial analysis suggests that at the local level, that influence is much weaker. This has important implications for how and what we measure.

There is growing recognition that whilst GDP has its place as an indicator of economic progress, we shouldn’t rely on it too much. It’s much like buying a car and judging it solely by how fast it goes, overlooking other factors like efficiency and safety. We need to cast our net wider and measure what actually matters to people.

There are promising signs that some politicians and governments are already moving in this direction. The UK Labour Party will change their measure of success of the nation from GDP to a framework that more suitably captures what matters in society (although this is alongside a target of having the highest GDP growth in the G7). Wales has enshrined into legislation its Wellbeing of Future Generations Act and created the world’s first Future Generations Commissioner. New Zealand has a Wellbeing Outlook, which recognises that human capability, the natural environment, and social cohesion should be incorporated into measurement. At the local level, many of our network members are adopting wellbeing measures into council plans and strategies.

Communities at the heart

If economic measures do not fully capture what matters to communities, then new measures are needed that place an emphasis on wellbeing. Whilst we may not fully know what drives a sense of wellbeing in a place, it is certainly more complex than just GDP growth, involving things like sense of agency, pride in place and social capital. More research is needed but until then, this is one more argument for communities to drive this change. Councils should have the policy and financial autonomy to then reflect what people want for their area.

Communities know the local context, understand what’s needed to help places thrive and have the most at stake. And our research shows that they have a deep appetite for more local control. Ensuring local people are at the heart of decisions about economic policy in their area is vital to ensure we measure what really matters to them.

Over the coming months we’ll be delving into community power and the economy in more depth. We look forward to keeping you updated and involved in our work.

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