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Income Satisfaction Inequality and its Causes

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  • Ferrer-i-Carbonell, Ada

    ()
    (IAE Barcelona (CSIC))

  • van Praag, Bernard M. S.

    ()
    (University of Amsterdam)

Abstract

In this paper, the concept of Income Satisfaction Inequality is operationalized on the basis of individual responses to an Income Satisfaction question posed in the German Socio- Economic Panel (GSOEP). Income satisfaction is the subjective analogue of the objective income concept and includes objective income inequality as a special case. The paper introduces a method to decompose Income Satisfaction Inequality according to the contributions from variables such as income, education, and the number of children. Given the panel structure of the data, inequality may be attributed partly to permanent individual circumstances and partly to transitory changes. The paper shows that by far the largest part of the satisfaction inequality has to be ascribed to unobserved heterogeneity. Distinguishing between a structural and an unexplained part of inequality we find that income explains the largest part of structural Income Satisfaction Inequality together with household membership; for non-working individuals, the age distribution is very relevant as well.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 854.

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Length: 29 pages
Date of creation: Aug 2003
Date of revision:
Publication status: published in: Journal of Economic Inequality, 2003, 1 (2), 107-127
Handle: RePEc:iza:izadps:dp854

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Keywords: income inequality; income satisfaction; financial satisfaction; equivalent income; variance decomposition;

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  1. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-75, April.
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  4. Theil, Henri, 1979. "The measurement of inequality by components of income," Economics Letters, Elsevier, vol. 2(2), pages 197-199.
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  6. Hunt, Jennifer, 1999. "Determinants of Non-Employment and Unemployment Durations in East Germany," CEPR Discussion Papers 2182, C.E.P.R. Discussion Papers.
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  13. Van Praag, Bernard, 1971. "The welfare function of income in Belgium: An empirical investigation," European Economic Review, Elsevier, vol. 11(3), pages 337-369.
  14. van Praag, Bernard M. S., 1991. "Ordinal and cardinal utility : An integration of the two dimensions of the welfare concept," Journal of Econometrics, Elsevier, vol. 50(1-2), pages 69-89, October.
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  18. Ng, Yew-Kwang, 1997. "A Case for Happiness, Cardinalism, and Interpersonal Comparability," Economic Journal, Royal Economic Society, vol. 107(445), pages 1848-58, November.
  19. Ada Ferrer-i-Carbonell & Bernard M.S. van Praag, 2002. "The Subjective Costs of Health Losses due to Chronic Diseases," Tinbergen Institute Discussion Papers 02-023/3, Tinbergen Institute.
  20. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
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  23. Amartya Sen, 1999. "The Possibility of Social Choice," American Economic Review, American Economic Association, vol. 89(3), pages 349-378, June.
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