The Weighting Issues in Composite Indicators: The Experience of the Index of Economic Well-Being
Andrew Sharpe
Centre for the Study of Living Standards, Ottawa, ON, Canada

The Index of Economic Well-being (IEWB) is a composite index that captures four dimensions of economic well-being: consumption flows, stocks of wealth, economic equality, and economic security. The IEWB was developed by Lars Osberg from Dalhousie University and Andrew Sharpe of the Centre for the Study of Living Standards in Ottawa, Canada (Osberg and Sharpe, 2002, 2005) and was last updated in 2009 (Osberg and Sharpe, 2009a and 2009b). The four components are currently equally weighted to produce the composite index.

The weighting of the four components, and some of the sub-components, of the Index has been one of the most challenging issues in the construction of the index. The objective of this paper is to discuss the authors' experience with the weighting scheme, which has gone through several phases, and to draw lessons from this experience.

The first weighting scheme was based on the judgments of the authors. It gave weights of 0.4 to consumption, 0.1 to stocks of wealth, and 0.25 each to equality and security. When the Index was criticized for undervaluing the environment, a decision was made to switch to an equal weighting scheme. This weighting appeared balanced and neutral as well as transparent. For users of the index who wished to use different weights, a webtool was developed to allow them to calculate the composite index to reflect their particular values. Data on subjective well-being has also been used to assign weights to certain sub-components, in particular the weights for the unemployment rate and income support for the financial risk from unemployment sub-component.

The authors are currently exploring greater use of survey data to weight the components and also the weighting technique developed by Jones and Klenow (2010) which computes the consumption equivalents for non-income domains to aggregate well-being indicators into a composite index.

Keywords: Composite indicator; Index of economic well-being; Weighting

Biography: Andrew Sharpe is founder and Executive Director of the Ottawa-based Centre for the Study of Living Standards (CSLS). Established in 1995, CSLS is a national, independent, non-profit research organization. Its main objectives are to study trends and determinants of productivity, living standards and economic well-being and to develop policy recommendations to improve the lives of Canadians. He previously worked as Head of Research at the Canadian Labour Market and Productivity Centre and Chief of Business Sector Analysis at the Department of Finance. He is also founder and Editor of the International Productivity Monitor and Executive Director of the International Association for Research in Income and Wealth, an international research association dedicated to the advancement of knowledge relating to income and wealth. He holds a M.A. and Ph.D in economics from McGill University.