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

Listed author(s):
  • 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
Handle: RePEc:vuw:vuwcpf:2432
Contact details of provider: Postal:
School of Accounting & Commercial Law, Victoria University of Wellington, PO Box 600, Wellington, New Zealand

Phone: +64 (4) 463 5775
Fax: +64 (4) 463 5076
Web page: http://www.victoria.ac.nz/sacl/about/chair-in-public-finance
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  1. Banks, James & Johnson, Paul, 1994. "Equivalence Scale Relativities Revisited," Economic Journal, Royal Economic Society, vol. 104(425), pages 883-890, July.
  2. Olivier Bargain, 2009. "The Distributional Effects of Tax-benefit Policies under New Labour: A Shapley Decomposition," Working Papers 200918, Geary Institute, University College Dublin.
  3. Blackorby, Charles & Laisney, Francois & Schmachtenberg, Rolf, 1993. "Reference-price-independent welfare prescriptions," Journal of Public Economics, Elsevier, vol. 50(1), pages 63-76, January.
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  8. Peter Ericson & Lennart Flood, 2012. "A Microsimulation Approach to an Optimal Swedish Income Tax," International Journal of Microsimulation, International Microsimulation Association, vol. 2(5), pages 2-21.
  9. Rolf Aaberge & Ugo Colombino, 2005. "Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply," Public Economics 0510013, EconWPA.
  10. 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.
  11. Arthur Charpentier & Stéphane Mussard, 2011. "Income inequality games," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 9(4), pages 529-554, December.
  12. 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. 14, pages 5-34, May.
  13. Olivier Bargain, 2010. "Back to the future - decomposition analysis of distributive policies using behavioural simulations," Working Papers 201032, School of Economics, University College Dublin.
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  16. John Creedy & Cath Sleeman, 2005. "Adult equivalence scales, inequality and poverty," New Zealand Economic Papers, Taylor & Francis Journals, vol. 39(1), pages 51-81.
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  18. repec:adr:anecst:y:2011:i:101-102:p:02 is not listed on IDEAS
  19. John Creedy & Guyonne Kalb & Rosanna Scutella, 2006. "Income distribution in discrete hours behavioural microsimulation models: An illustration," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 4(1), pages 57-76, April.
  20. Suman Seth, 2013. "A class of distribution and association sensitive multidimensional welfare indices," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 11(2), pages 133-162, June.
  21. 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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  24. 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.
  25. Giuseppe Pignataro, 2010. "Measuring equality of opportunity by Shapley value," Economics Bulletin, AccessEcon, vol. 30(1), pages 786-798.
  26. 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.
  27. John Creedy & Guyonne Kalb, 2005. "Measuring Welfare Changes In Labour Supply Models," Manchester School, University of Manchester, vol. 73(6), pages 664-685, December.
  28. John Creedy & Alan S. Duncan & Mark Harris & Rosanna Scutella, 2002. "Microsimulation Modelling of Taxation and the Labour Market," Books, Edward Elgar Publishing, number 2796.
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