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Back to the Future - Decomposition Analysis of Distributive Policies using Behavioural Simulations

  • Olivier Bargain

    (University College Dublin)

For policy makers and analysts, it is important to isolate the redistributive im- pact of tax-benefit policy changes from changes in the environment in which policies operate. When actual reforms are motivated by work incentives, it is also crucial to evaluate behavioural responses and the distributional consequences thereof. For that purpose, we embed counterfactual simulations in a formal framework based on the Shapley value decomposition and quantify the relative roles of (i) tax-benefit policy changes (direct policy effect), (ii) labour supply responses to the policy reforms (in- direct effect) and (iii) all other factors affecting income distribution over time. An application to the UK shows that the redistributive reforms of the 1998-2001 period have offset the increase in inequality that would have occurred otherwise. They also contribute to a strong decline in child poverty and poverty amongst single parent households. In the latter group, a third of the headcount poverty reduction (and half of the reduction in the depth of poverty) is on account of the very large incentive effect of policy changes.

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File URL: http://www.ucd.ie/t4cms/wp10_32.pdf
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Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 201032.

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Length: 20 pages
Date of creation: 06 Oct 2010
Date of revision:
Handle: RePEc:ucn:wpaper:201032
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Web page: http://www.ucd.ie/economics

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  1. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
  2. Philippe Van Kerm, 2004. "What Lies Behind Income Mobility? Reranking and Distributional Change in Belgium, Western Germany and the USA," Economica, London School of Economics and Political Science, vol. 71(281), pages 223-239, 05.
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