Preferences and equivalent income in the UK

The use of multidimensional wellbeing has emerged from a shift of the main focus of policies from income to the consideration of other non-income dimensions. Using the ordered logit fixed effects modelling technique in a life satisfaction regression to estimate coefficients related to income and non-income life domains, the study has examined the computation of a preference-based single index measure of wellbeing called equivalent income. It is noted that one contribution from this study is that the analysis takes into account hedonic adaptation when computing of equivalent income. This aspect is new in the literature and none of the previous studies included adaptation in the estimation of equivalent income.

The coefficients related to income and non-income life domains estimated from the life satisfaction regressions are used to calculate equivalent income at the individual level. The results confirm low degree of overlap between individuals with the lowest equivalent income and those worst-off identified by equivalised income and by life satisfaction. The estimated willingness to pay (WTP) for perfect health accounts for a large proportion of equivalised income, while WTP for being employed is quite low.

In addition, the findings conclude that across wellbeing measures, women aged 40-50 with lower education, living with other people in an urban area, childless and do not own a home outright are often identified as the worst-off. Regarding adaptation, the results confirm no adaptation to impairment after more than three years since onset.