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

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  • Creedy, John
  • Hérault, Nicolas

Abstract

This paper presents two ‘non-welfarist’ approaches and one ‘welfarist’ approach to decompose changes in inequality and social welfare into three components: population, tax policy and labour supply effects. As an illustration, changes in inequality and in values of a social welfare function in Australia between 2001 and 2006 are examined. 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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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2432
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Bibliographic Info

Paper provided by Victoria University of Wellington, Chair in Public Finance in its series Working Paper Series with number 2432.

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Date of creation: 2012
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Handle: RePEc:vuw:vuwcpf:2432

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Postal: School of Accounting & Commercial Law, Victoria University of Wellington, PO Box 600, Wellington, New Zealand
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Web page: http://www.victoria.ac.nz/sacl/about/chair-in-public-finance
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Keywords: Social Welfare; Inequality; Alternative Welfare Metrics;

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  1. John Creedy & Guyonne Kalb & Rosanna Scutella, 2006. "Income distribution in discrete hours behavioural microsimulation models: An illustration," Journal of Economic Inequality, Springer, vol. 4(1), pages 57-76, April.
  2. Rolf Aaberge & Ugo Colombino, 2005. "Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply," Public Economics 0510013, EconWPA.
  3. Richard Blundell & Andrew Shephard, 2008. "Employment, hours of work and the optimal taxation of low income families," IFS Working Papers W08/01, Institute for Fiscal Studies.
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  5. John Creedy & Guyonne Kalb, 2005. "Measuring Welfare Changes In Labour Supply Models," Manchester School, University of Manchester, vol. 73(6), pages 664-685, December.
  6. Robin Boadway & Maurice Marchand & Pierre Pestieau & María del Mar Racionero, 2002. "Optimal Redistribution with Heterogeneous Preferences for Leisure," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(4), pages 475-498, October.
  7. Olivier Bargain, 2009. "The Distributional Effects of Tax-benefit Policies under New Labour - A Shapley Decomposition," Working Papers 200907, School Of Economics, University College Dublin.
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  9. John Creedy & Nicolas Hérault & Guyonne Kalb, 2011. "Measuring welfare changes in behavioural microsimulation modelling: Accounting for the random utility component," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 5-34, May.
  10. Louis Kaplow & Steven Shavell, 2001. "Any Non-welfarist Method of Policy Assessment Violates the Pareto Principle," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 281-286, April.
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  18. Frédéric CHANTREUIL & Alain TRANNOY, 2011. "Inequality Decomposition Values," Annales d'Economie et de Statistique, ENSAE, issue 101-102, pages 13-36.
  19. Olivier Bargain, 2010. "Back to the Future - Decomposition Analysis of Distributive Policies using Behavioural Simulations," Working Papers 201032, School Of Economics, University College Dublin.
  20. Ramani Gunatilaka & Duangkamon Chotikapanich, 2006. "Inequality Trends and Determinants in Sri Lanka 1980-2002: A Shapley Approach to Decomposition," Monash Econometrics and Business Statistics Working Papers 6/06, Monash University, Department of Econometrics and Business Statistics.
  21. Arthur Charpentier & Stéphane Mussard, 2010. "Income Inequality Games," Working Papers 10-01, LAMETA, Universtiy of Montpellier, revised Jan 2010.
  22. FLEURBAEY, Marc & MANIQUET, François, 1998. "Optimal income taxation: and ordinal approach," CORE Discussion Papers 1998065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  23. Suman Seth, 2013. "A class of distribution and association sensitive multidimensional welfare indices," Journal of Economic Inequality, Springer, vol. 11(2), pages 133-162, June.
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Cited by:
  1. Thor O. Thoresen & Zhiyang Jia & Peter J. Lambert, 2013. "Distributional benchmarking in tax policy evaluations," Discussion Papers 765, Research Department of Statistics Norway.
  2. John Creedy, 2013. "Alternative Distributions for Inequality and Poverty Comparisons," Treasury Working Paper Series 13/11, New Zealand Treasury.
  3. 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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