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

36 Pages Posted: 4 Apr 2011

See all articles by John Creedy

John Creedy

University of Melbourne - Department of Economics

Nicolas Herault

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Date Written: April 1, 2011

Abstract

This paper presents two 'non-welfarist' approaches and one 'welfarist' approach to decompose changes in inequality and social welfare into three components. We distinguish the contributions of population, tax policy and labour supply behavioural effects. As an illustration, we decompose changes in inequality and in values of a social welfare function in Australia between 2001 and 2006. 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.

Keywords: Inequality decomposition, social welfare function, behavioural microsimulation, money metric utility

JEL Classification: D63, H31, I31, J22

Suggested Citation

Creedy, John and Herault, Nicolas, Decomposing Inequality and Social Welfare Changes: The Use of Alternative Welfare Metrics (April 1, 2011). Melbourne Institute Working Paper No. 8/11, Available at SSRN: https://ssrn.com/abstract=1802160 or http://dx.doi.org/10.2139/ssrn.1802160

John Creedy

University of Melbourne - Department of Economics ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia
+61 800 666 300 (Phone)
+61 3 9347 3986 (Fax)

Nicolas Herault (Contact Author)

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

HOME PAGE: http://www.findanexpert.unimelb.edu.au/researcher/person125238.html

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