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Comparing Welfare Change Measures with Income Change Measures in Behavioural Policy Simulations

Author

Listed:
  • John Creedy

    (Department of Economics, The University of Melbourne)

  • Nicolas Hérault

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

  • Guyonne Kalb

    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

This paper presents a method of computing welfare changes (compensating and equivalent variations) arising from a tax or social security policy change, in the context of behavioural microsimulation modelling where individuals can choose between a limited number of discrete hours of work. The method allows fully for the nonlinearity of the budget constraint facing each individual, the probabilistic nature of the labour supply model and the presence of unobserved heterogeneity in the estimation of preference functions. An advantage of welfare measures, compared with changes in net incomes, is that they take into account the value of leisure and home production. The method is applied to hypothetical income tax policy changes in Australia and comparisons are made at the individual and the aggregate level. At the aggregate level a social welfare function is specified in terms of money metric utility. It is shown that policy evaluations based on welfare changes can be substantially different from those using only individuals' net income changes.

Suggested Citation

  • John Creedy & Nicolas Hérault & Guyonne Kalb, 2007. "Comparing Welfare Change Measures with Income Change Measures in Behavioural Policy Simulations," Melbourne Institute Working Paper Series wp2007n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    • Handle: RePEc:iae:iaewps:wp2007n21
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    References listed on IDEAS

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    Cited by:

    1. Iris Claus & John Creedy & Josh Teng, 2012. "The Elasticity of Taxable Income in New Zealand," Fiscal Studies, Institute for Fiscal Studies, vol. 33(3), pages 287-303, September.
    2. John Creedy & Nicolas Hérault & Guyonne Kalb, 2009. "Abolishing the Tax-Free Threshold in Australia: Simulating Alternative Reforms," Fiscal Studies, Institute for Fiscal Studies, vol. 30(2), pages 219-246, June.

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    More about this item

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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