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

  • Creedy, John
  • Hérault, Nicolas

This paper presents two ‘non-welfarist’ approaches and one ‘welfarist’ approach to decompose changes in inequality and social welfare into three components: population, tax policy and labour supply effects. As an illustration, changes in inequality and in values of a social welfare function in Australia between 2001 and 2006 are examined. 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://researcharchive.vuw.ac.nz/handle/10063/2432
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Paper provided by Victoria University of Wellington, Chair in Public Finance in its series Working Paper Series with number 2432.

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Date of creation: 2012
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Handle: RePEc:vuw:vuwcpf:2432
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  18. 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.
  19. John Creedy & Catherine Sleeman, 2005. "Adult Equivalence Scales, Inequality and Poverty," Department of Economics - Working Papers Series 938, The University of Melbourne.
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  27. 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.
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