The Distributional Impact of Public Services When Needs Differ

40 Pages Posted: 22 Mar 2010

See all articles by Rolf Aaberge

Rolf Aaberge

Statistics Norway; Institute for the Study of Labor (IZA); Deaprtment of Economics

Manudeep Bhuller

University of Oslo - Department of Economics; Statistics Norway

Audun Langørgen

Statistics Norway

Magne Mogstad

Statistics Norway; IZA Institute of Labor Economics

Abstract

Despite a broad consensus on the need to take into account the value of public services in distributional analysis, there is little reliable evidence on how the inclusion of such non-cash income actually affects poverty and inequality estimates. In particular, the equivalence scales applied to cash income are not necessarily appropriate when including non-cash income, because the receipt of public services is likely to be associated with particular needs. In this paper, we propose a theory-based framework designed to provide a coherent evaluation of the distributional impact of local public services. The valuation of public services, identification of target groups, allocation of expenditures to target groups, and adjustment for differences in needs are derived from a model of local government spending behaviour. Using Norwegian data from municipal accounts and administrative registers we find that the inclusion of non-cash income reduces income inequality by about 15 percent and poverty rates by almost one-third. However, adjusting for differences in needs for public services across population subgroups offsets about half the inequality reduction and some of the poverty decrease.

Keywords: income distribution, poverty, public services, non-cash income, needs adjustment, equivalence scales

JEL Classification: D31, H72, I30

Suggested Citation

Aaberge, Rolf and Bhuller, Manudeep and Langørgen, Audun and Mogstad, Magne, The Distributional Impact of Public Services When Needs Differ. IZA Discussion Paper No. 4826. Available at SSRN: https://ssrn.com/abstract=1575859

Rolf Aaberge (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Deaprtment of Economics ( email )

Norway

Manudeep Bhuller

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

HOME PAGE: http://sites.google.com/site/manudeepbhuller

Statistics Norway ( email )

N-0033 Oslo
Norway

HOME PAGE: http://sites.google.com/site/manudeepbhuller

Audun Langørgen

Statistics Norway ( email )

N-0033 Oslo
Norway

Magne Mogstad

Statistics Norway ( email )

N-0033 Oslo
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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