Forecasting Changes in Income Distribution: an Applied General Equilibrium Approach

Forecasts of changes in income distribution that rely entirely on modelling changes in the personal characteristics of individuals, as is typically the case in microsimulation studies, have a limited capacity to take into account developments that affect individuals only indirectly through the operation of markets. Most individuals receive most of their income in the form of factor payments (i.e., wages and profits). Hence a distributional forecast will be improved if it is ipformed by a well constructed forecast of changes in factor markets and their associated commodity markets. This paper is primarily concerned with the development of techniques for applying an existing set of detailed economic forecasts for the Australian economy to the question of distribution. The centrepiece of the forcasting system is a large dynamic applied general equilibrium model, the MONASH model. Via the markets incorporated in the MONASH model, a range of otherwise intractable information is brought to bear on a forecast of income changes over the period 1990-91 to 1996-97. The range includes detailed scenarios on macroeconomic developments in both the world and domestic economies, changes in the foreign demand for Australia's exports, changes in the world prices of all internationally traded goods, changes in protection, changes in indirect taxes and primary factor saving technical change. To generate the income forecasts, projections of changes in factor prices and factor employment levels from the MONASH model are interfaced with micro data from the 1990 Australian income suvey. The key to the interface is an allocation of the ownership of the relevant factors among the individuals identified in the survey. Results are reported for sixty income groups differentiated by region and size of income.