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

Author

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  • John Creedy

    (Department of Economics, The University of Melbourne)

  • Nicolas Hérault

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

Abstract

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.

Suggested Citation

  • John Creedy & Nicolas Hérault, 2011. "Decomposing Inequality and Social Welfare Changes: The Use of Alternative Welfare Metrics," Melbourne Institute Working Paper Series wp2011n08, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2011n08
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Robin Jessen, 2016. "Why Has Income Inequality in Germany Increased from 2002 to 2011? A Behavioral Microsimulation Decomposition," SOEPpapers on Multidisciplinary Panel Data Research 879, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. André Decoster & Peter Haan, 2015. "Empirical welfare analysis with preference heterogeneity," International Tax and Public Finance, Springer;International Institute of Public Finance, pages 224-251.
    3. Halvarsson, Daniel & Korpi, Martin & Wennberg, Karl, 2016. "Entrepreneurship and Income Inequality," Ratio Working Papers 281, The Ratio Institute.
    4. Justin Ven & Nicolas Hérault & Francisco Azpitarte, 2017. "Identifying tax implicit equivalence scales," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 15(3), pages 257-275, September.
    5. John Creedy & Jesse Eedrah, 2014. "The Role of Value Judgements in Measuring Inequality," Treasury Working Paper Series 14/13, New Zealand Treasury.
    6. Thor O. Thoresen & Zhiyang Jia & Peter J. Lambert, 2013. "Distributional benchmarking in tax policy evaluations," Discussion Papers 765, Statistics Norway, Research Department.
    7. John Creedy & Jesse Eedrah, 2016. "Income redistribution and changes in inequality in New Zealand from 2007 to 2011: Alternative distributions and value judgements," New Zealand Economic Papers, Taylor & Francis Journals, pages 129-152.
    8. John Creedy, 2013. "Alternative Distributions for Inequality and Poverty Comparisons," Treasury Working Paper Series 13/11, New Zealand Treasury.
    9. John Creedy & Jesse Eedrah, 2016. "Income redistribution and changes in inequality in New Zealand from 2007 to 2011: Alternative distributions and value judgements," New Zealand Economic Papers, Taylor & Francis Journals, pages 129-152.
    10. John Creedy, 2013. "Alternative Distributions for Inequality and Poverty Comparisons," Treasury Working Paper Series 13/11, New Zealand Treasury.

    More about this item

    Keywords

    Inequality decomposition; social welfare function; behavioural microsimulation; money metric utility;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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