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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
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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  10. John Creedy & Catherine Sleeman, 2005. "Adult Equivalence Scales, Inequality and Poverty," Department of Economics - Working Papers Series 938, The University of Melbourne.
  11. André DECOSTER & Peter HAAN, 2010. "Empirical welfare analysis in random utility models of labour supply," Center for Economic Studies - Discussion papers ces10.30, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
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  14. 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.
  15. 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.
  16. 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.
  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.
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  19. 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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  21. Olivier Bargain, 2010. "Back to the Future - Decomposition Analysis of Distributive Policies using Behavioural Simulations," Working Papers 201032, School of Economics, University College Dublin.
  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.
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  26. 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.
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