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Decomposing Inequality and Social Welfare Changes: The Use of Alternative Welfare Metrics

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  • John Creedy

    (Department of Economics, The University of Melbourne)

  • Nicolas Hérault

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

This paper presents two 'non-welfarist' approaches and one 'welfarist' approach to decompose changes in inequality and social welfare into three components. We distinguish the contributions of population, tax policy and labour supply behavioural effects. As an illustration, we decompose changes in inequality and in values of a social welfare function in Australia between 2001 and 2006. Inequality is first defined in non-welfarist terms as a function of disposable income: the independent judge places no value on leisure. Then this is modified to allow for evaluations using a weighted geometric mean of disposable income and leisure. This is seen to modify the evaluation of changes in important ways. Furthermore, the results are shown to be quite different from those obtained using a 'welfarist' evaluation in terms of money metric utility, where separate behavioural effects cannot be isolated.

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Bibliographic Info

Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2011n08.

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Length: 36 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:iae:iaewps:wp2011n08

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Keywords: Inequality decomposition; social welfare function; behavioural microsimulation; money metric utility;

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Citations

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Cited by:
  1. Creedy, John, 2013. "Alternative Distributions for Inequality and Poverty Comparisons," Working Paper Series 2851, Victoria University of Wellington, Chair in Public Finance.
  2. Nicolas Herault & Francisco Azpitarte, 2014. "Recent Trends in Income Redistribution in Australia: Can Changes in the Tax-Transfer System Account for the Decline in Redistribution?," Melbourne Institute Working Paper Series, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne wp2014n02, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  3. Thor O. Thoresen & Zhiyang Jia & Peter J. Lambert, 2013. "Distributional benchmarking in tax policy evaluations," Discussion Papers, Research Department of Statistics Norway 765, Research Department of Statistics Norway.
  4. Haan, Peter & Decoster, Andre, 2013. "Empirical welfare analysis with preference heterogeneity," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79815, Verein für Socialpolitik / German Economic Association.

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