Double or nothing: Charities may be more than twice as valuable as first thought

Jamie O’Halloran, PBE Economist 

Charities and non-profits play a vital role in our society. Yet the way the sector is currently valued in official national accounts has a number of weaknesses. These weaknesses mean that the national accounts may be capturing less than half of the sector’s total value. New research by Josh Martin and Jon Franklin estimates that improvements to the approach taken to measure the non-profit sector increase its value by 60-80% compared to the previous approach.
This blog summarises the findings of that paper, looks at which parts of the sector are being most seriously undervalued, and at how the measurement approach can be improved.

There are problems with the current way the value of the charity sector is measured

The value of goods and services produced by a sector in our economy is typically measured by gross value added (GVA). GVA is calculated by taking the total value of output (what an organisation produces) as measured by the revenue generated by companies, minus the cost of ‘intermediate consumption’ – the goods and services used to create that product or service, such as raw materials, rent and utilities. This intermediate consumption is excluded to avoid double counting.

However, the charity and non-profit sector provides most of its services for free. When no price is charged for final services, there is no revenue that can act as a measure of the value of ‘output’. As a proxy, the value of input into the sector, primarily wages of employed staff, has typically been used as a measure of the value of output.

But that approach fails to capture the full value of the charity sector.

Staff and volunteers are undervalued or not valued at all

One strength of the charity and non-profit sector is the number of volunteers who work tirelessly to help millions of people. Last year, an estimated 14 million people volunteered in the UK.  These volunteers play a vital role in the sector, but they are currently not included in estimates of its value because they are not paid.

So how should the value of volunteering be included? A classic approach is incorporating a ‘shadow’ wage, meaning the wage that would have been paid to the volunteers if they were employees. While this approach is undoubtedly imperfect, it is likely to be a closer proxy of the value that these volunteers provide than the assumption that they are not ‘valuable’.

It is estimated that including volunteers’ hours in the GVA estimate increases the value of the sector by nearly £20 billion per year. This is a substantial increase as the ‘raw’ GVA of the sector is estimated to be £16bn. The inclusion of volunteering hours accounts for 90% of the difference between the ‘old’ and ‘new’ GVA estimates, demonstrating just how important volunteers are to the sector.

In addition to overlooking volunteering, using staff pay as a proxy for the value created by the work of charity employees also underestimates the sector’s value.  Many people in the sector accept lower wages than they might receive in other parts of the economy, as they are motivated more by the purpose of their work. Recent analysis found that charity sector workers are paid 7% less per hour than similar employees working elsewhere in the economy, after accounting for characteristics that may predict wages, such as age, gender, and education. In addition to posing challenges for the sector’s recruitment, retention and diversity, this pay gap also contributes to its undervaluing within the national accounts, as wages are the key component of GVA measurement.  After accounting for this, the value of the sector increases by another £1.3bn.

Inconsistencies compared to other sectors mean that value is further underestimated

When businesses are valued in the national accounts, the return on capital, or profit, of the business is included in the measure of their value. Currently, charities and non-profits are simply recorded as making zero profit. This is a simplification that is justified on the basis that the non-profit sector does not aim to make a profit, instead it seeks to maximise its outcomes and the extent to which these achieve its charitable goals.

However, a different approach is taken when measuring the value of companies that are majority-controlled by the government, including, for example, many housing associations, Transport for London and specialist scientific institutions, such as the UK Hydrographic Office. Such organisations share many features with the non-profit sector – a mixture of market and non-market activities often combined with social objectives that go beyond simple profit-making. Organisations in this sector are typically assumed to generate generally low levels of profit. This is predominantly for two reasons. Firstly, their commercial arms are unlikely to generate huge profits. Secondly, due to the forgone returns on investment. By this, we mean that if the capital in these companies had been invested elsewhere, it could have generated far larger profits.

If the charity and non-profit sector were treated in the same way as these government-controlled companies then it would increase the value of the sector by an additional £1bn.

With these small tweaks we see drastic changes in how the sector is valued.

Figure 1 shows estimates of GVA for the non-profit sector – i.e. its value (excluding education sector organisations such as universities). The blue line represents the value of GVA using the current measurement approach, which only incorporates salaries of paid staff and consumption of fixed capital (such as depreciation of capital assets like buildings and computers).

The new method of estimating the value of the sector includes volunteer hours, an increase to account for staff being underpaid compared to their peers and an estimated return on capital reflecting the opportunity cost of using capital for other potential investments. This leads to a huge jump in the value of GVA for the sector, represented by the brown line. These changes to the calculation of GVA lead to an increase of 60-80% of the previous value.

Yet there is still more to value

Most notably, positive ‘spillovers’ have been excluded from this work. There are two reasons as to why there are likely to be such positive spillovers created by charities in the non-profit sector. Firstly, the sector relies heavily upon donations from the public. These donors in effect ‘buy’ the service provided by the non-profit for its beneficiaries. The value that the donors place on this output may be different to the value that the direct beneficiaries place on it.

Secondly, the services provided by charities often bring benefits to wider society, as well as to direct service users. Evaluations of these services find that many charities deliver services with high ‘social-benefit-to-cost ratios’, meaning that the money spent on these services yield a great return for society. Recent evaluations by Pro Bono Economics find large benefit-cost ratios for charities working at improving children’s mental health , lowering reoffending rates and  improving the quality of life of homeless young people .

There is currently insufficient data to be able to quantify these benefits created by the sector and include them in the estimates of value for the sector as a whole, meaning that even improved estimates are likely to undervalue it.

More and better data is required to enable a true estimate of the sector’s value

This research paper highlights the scale of the challenge in trying to estimate the true value of the sector and it demonstrates the urgent need for better and more timely data about the sector.

The Law Family Commission on Civil Society report ‘Better data, bigger impact: A review of social sector data’ set out a number of recommendations to improve data about the sector. The UK government has started work on one of the most significant of these – developing a new civil society satellite account. This is hugely welcomed and would represent a very important step forward in understanding and valuing this vital sector more accurately. However, the work by Martin and Franklin highlights that the benefits of a satellite account will be limited unless it is also accompanied by additional investment in underlying data.