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

  • John Creedy
  • Nicolas Hérault†

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 The University of Melbourne in its series Department of Economics - Working Papers Series with number 1121.

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Length: 34 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:mlb:wpaper:1121
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Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia

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  25. 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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