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A non-parametric microsimulation approach to assess changes in inequality and poverty

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  • Rob Vos

    ()
    (United Nations Department of Economic and Social Affairs, New York, NY 10017, USA;)

  • Marco V. Sánchez

    ()
    (United Nations Department of Economic and Social Affairs, New York, NY 10017, USA;)

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    Abstract

    This paper presents a non-parametric microsimulation methodology for assessing the impact of labour market changes and government transfers on income inequality and poverty at the household level. The approach assumes that labour markets are segmented and determines (as part of a randomized process) which individuals are expected to move in or out of employment and which move from one employment segment to another based on either known or counterfactual information of aggregate labour market changes. The methodology assumes that the distribution of earnings of those who become employed in a particular segment resembles that of the individuals observed to be employed in that segment. The approach can be effectively combined in top-down fashion with static or dynamic computable general equilibrium (CGE) models, which typically provide insufficient information about household income distribution. The paper discusses the virtues and limitations of applying this methodology and further explains to practitioners how to implement it as a stand-alone methodology or in combination with a CGE model. It also shows how the methodology can be generalized to also capture the poverty and inequality effects of changes in non-labour incomes, such as government transfers. One great advantage of this method is that it is not very demanding in terms of modelling labour supply and household behaviour as compared with alternative parametric approaches, while at the same time providing a plausible link between changes in overall labour market conditions and the full household income distribution.

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    File URL: http://ima.natsem.canberra.edu.au/IJM/V3_1/IJM_25.pdf
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    Bibliographic Info

    Article provided by Interational Microsimulation Association in its journal International Journal of Microsimulation.

    Volume (Year): 3 (2010)
    Issue (Month): 1 ()
    Pages: 8-23

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    Handle: RePEc:ijm:journl:v:3:y:2010:i:1:p:8-23

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    Web page: http://ima.natsem.canberra.edu.au/index.htm

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    1. Sherman, Robinson & Robilliard, Anne-Sophie & Bourguignon, François, 2005. "Representative versus real households in the macro-economic modelling of inequality," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/4535, Paris Dauphine University.
    2. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, National Bureau of Economic Research, Inc, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
    3. Luc Savard, 2003. "Poverty and Income Distribution in a CGE-Household Micro-Simulation Model: Top-Down/Bottom Up Approach," Cahiers de recherche, CIRPEE 0343, CIRPEE.
    4. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number minc74-1.
    5. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 31(2), pages 831-80, June.
    6. Almeida dos Reis, Jose Guilherme & Paes de Barros, Ricardo, 1991. "Wage inequality and the distribution of education : A study of the evolution of regional differences in inequality in metropolitan Brazil," Journal of Development Economics, Elsevier, Elsevier, vol. 36(1), pages 117-143, July.
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