A Microsimulation/Applied General Equilibrium Approach to Analysing Income Distribution in Australia: Plans and Preliminary Illustration

Microsimulation (MS) is distinguished from other approaches to distributional analysis in that it relies primarily on a theoretical framework built up from the characteristics - economic, social and demographic - of individuals. However, changes in the incomes of individuals generally depend not only on changes which apply to them directly (such as a change in income tax rates) but also on changes which are mediated by the operation of markets (such as a change in the terms of trade). Applied general equilibrium (AGE) models can be characterised as economy-wide models which include disaggregated commodity and factor markets. For distributional modelling, the disaggregated treatment of factor markets is especially relevant because most individuals receive most of their income in the form of factor payments. Moreover, particular individuals derive their factor incomes from particular industries and occupations, and the implications of a change in the economic environment for different industries and occupations may deviate quite widely from the implications for the economy as a whole. In this paper we present a research program for integrating MS and AGE approaches to distributional analysis and report results for a preliminary application. In particular, we employ the MONASH dynamic AGE model of the Australian economy to investigate the likely impact of a raft of microeconomic reforms on (inter alia) output and employment in more than 100 industries over the period 1994-95 to 2004-05. By applying the forecast average annual rates of growth for selected variables to income data from the 1990 Income and Housing Survey, an estimate is obtained of the effect of the reforms on the distribution of income between nine groups of persons differentiated by family type.