Methodology paper draft v27.pdf (1.04 MB)
Download fileUnderstanding changes in the distribution and redistribution of income: A unifying decomposition framework
journal contribution
posted on 2019-01-08, 14:57 authored by Nicolas Herault, Fran AzpitarteFran AzpitarteOver recent decades income inequality has increased in many developed countries. Although the tax
and transfer system is the main institutional tool through which income is redistributed, the role it
played in these changes is often poorly understood. By building a bridge between existing
approaches, we propose a method allowing for the decomposition of historical changes in various
income distribution and redistribution measures into (i) the immediate effect of tax-transfer policy
reforms in the absence of labour supply responses, (ii) the effect of labour supply changes induced
by these reforms, (iii) the impact of changes in the distribution of other determinants, including the
effect of employment changes not induced by policy reforms. We illustrate the use of our
decomposition method by analysing the case of Australia between 1999 and 2007. We find that the
direct effect of tax-transfer policy reforms accounts for about half of the observed increase in
income inequality over the period. About one fifth of this direct effect was offset by labour supply
responses to these policy reforms. Although ageing, increased educational attainments and changes
in income unit structures played a limited role, we find evidence that the increased dispersion of
wages and capital incomes substantially increased income inequality.