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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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File URL: http://www.economics.unimelb.edu.au/downloads/wp/wp11/1121.pdf
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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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Web page: http://fbe.unimelb.edu.au/economics
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  1. Stéphane Mussard, 2006. "Une réconciliation entre la décomposition en sous-groupes et la décomposition en sources de revenu de l'indice de Gini. La multi-décomposition de l'indicateur de Gini," Annals of Economics and Statistics, GENES, issue 81, pages 169-193.
  2. André Decoster & Peter Haan, 2010. "Empirical Welfare Analysis in Random Utility Models of Labour Supply," Discussion Papers of DIW Berlin 1074, DIW Berlin, German Institute for Economic Research.
  3. Rolf Aaberge & Ugo Colombino, 2006. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," ICER Working Papers 37-2006, ICER - International Centre for Economic Research.
  4. Ericson, Peter & Flood, Lennart, 2009. "A Microsimulation Approach to an Optimal Swedish Income Tax," Working Papers in Economics 375, University of Gothenburg, Department of Economics.
  5. BOADWAY, R. & MARCHAND, M. & PESTIEAU, P. & del MAR RACIONERO, M., 2001. "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers 2001025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Richard Blundell & Andrew Shephard, 2012. "Employment, Hours of Work and the Optimal Taxation of Low-Income Families," Review of Economic Studies, Oxford University Press, vol. 79(2), pages 481-510.
  7. Arthur Charpentier & Stephane Mussard, 2010. "Income Inequality Games," Cahiers de recherche 10-03, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  8. Ramani Gunatilaka & Duangkamon Chotikapanich, 2006. "Inequality Trends and Determinants in Sri Lanka 1980-2002: A Shapley Approach to Decomposition," Monash Econometrics and Business Statistics Working Papers 6/06, Monash University, Department of Econometrics and Business Statistics.
  9. Frank A Cowell & Carlo V. Fiorio, 2009. "Inequality Decomposition - A Reconciliation," STICERD - Distributional Analysis Research Programme Papers 100, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  10. F. Chantreuil & A. Trannoy, 1999. "Inequality decomposition values : the trade-off between marginality and consistency," THEMA Working Papers 99-24, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  11. Bargain, Olivier, 2009. "The Distributional Effects of Tax-Benefit Policies under New Labour: A Shapley Decomposition," IZA Discussion Papers 4296, Institute for the Study of Labor (IZA).
  12. Blackorby, Charles & Laisney, François & Schmachtenberg, Rolf, 1991. "Reference-price-independent welfare prescriptions," ZEW Discussion Papers 91-04, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  13. Stanislav Kolenikov & Anthony Shorrocks, 2005. "A Decomposition Analysis of Regional Poverty in Russia," Review of Development Economics, Wiley Blackwell, vol. 9(1), pages 25-46, 02.
  14. Bargain, Olivier, 2010. "Back to the Future: Decomposition Analysis of Distributive Policies Using Behavioural Simulations," IZA Discussion Papers 5226, Institute for the Study of Labor (IZA).
  15. FLEURBAEY, Marc & MANIQUET, François, 1998. "Optimal income taxation: and ordinal approach," CORE Discussion Papers 1998065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. John Creedy & Guyonne Kalb & Rosanna Scutella, 2006. "Income distribution in discrete hours behavioural microsimulation models: An illustration," Journal of Economic Inequality, Springer, vol. 4(1), pages 57-76, April.
  17. Suman Seth, 2013. "A class of distribution and association sensitive multidimensional welfare indices," Journal of Economic Inequality, Springer, vol. 11(2), pages 133-162, June.
  18. John Creedy & Catherine Sleeman, 2005. "Adult Equivalence Scales, Inequality and Poverty," Department of Economics - Working Papers Series 938, The University of Melbourne.
  19. 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.
  20. 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.
  21. repec:adr:anecst:y:2011:i:101-102:p:02 is not listed on IDEAS
  22. John Creedy & Guyonne Kalb, 2005. "Measuring Welfare Changes In Labour Supply Models," Manchester School, University of Manchester, vol. 73(6), pages 664-685, December.
  23. Banks, James & Johnson, Paul, 1994. "Equivalence Scale Relativities Revisited," Economic Journal, Royal Economic Society, vol. 104(425), pages 883-90, July.
  24. John Creedy & Alan S. Duncan & Mark Harris & Rosanna Scutella, 2002. "Microsimulation Modelling of Taxation and the Labour Market," Books, Edward Elgar Publishing, number 2796.
  25. Giuseppe Pignataro, 2010. "Measuring equality of opportunity by Shapley value," Economics Bulletin, AccessEcon, vol. 30(1), pages 786-798.
  26. Mercedes Sastre & Alain Trannoy, 2002. "Shapley inequality decomposition by factor components: Some methodological issues," Journal of Economics, Springer, vol. 77(1), pages 51-89, December.
  27. John Creedy & Nicolas Hérault & Guyonne Kalb, 2011. "Measuring welfare changes in behavioural microsimulation modelling: Accounting for the random utility component," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 5-34, May.
  28. Donaldson, David, 1992. "On The Aggregation Of Money Measures Of Well-Being In Applied Welfare Economics," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
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