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

  • John Creedy

    (Department of Economics, The University of Melbourne)

  • Nicolas Hérault

    ()

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

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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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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Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia

Phone: +61 3 8344 2100
Fax: +61 3 8344 2111
Web page: http://www.melbourneinstitute.com/
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  7. John Creedy & Cath Sleeman, 2005. "Adult equivalence scales, inequality and poverty," New Zealand Economic Papers, Taylor & Francis Journals, vol. 39(1), pages 51-81.
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  10. Frank Cowell & Carlo Fiorio, 2011. "Inequality decompositions—a reconciliation," Journal of Economic Inequality, Springer, vol. 9(4), pages 509-528, December.
  11. John Creedy & Guyonne Kalb, 2005. "Measuring Welfare Changes In Labour Supply Models," Manchester School, University of Manchester, vol. 73(6), pages 664-685, December.
  12. John Creedy & Alan S. Duncan & Mark Harris & Rosanna Scutella, 2002. "Microsimulation Modelling of Taxation and the Labour Market," Books, Edward Elgar, number 2796.
  13. Jenkins, Stephen P & Cowell, Frank A, 1994. "Parametric Equivalence Scales and Scale Relativities," Economic Journal, Royal Economic Society, vol. 104(425), pages 891-900, July.
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  27. Giuseppe Pignataro, 2010. "Measuring equality of opportunity by Shapley value," Economics Bulletin, AccessEcon, vol. 30(1), pages 786-798.
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