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Understanding changes in the distribution and redistribution of income: A unifying decomposition framework

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journal contribution
posted on 08.01.2019, 14:57 authored by Nicolas Herault, Fran AzpitarteFran Azpitarte
Over 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.

Funding

We acknowledge the support of a Faculty Research Grant from the Faculty of Business and Economics, University of Melbourne. Francisco Azpitarte would also like to acknowledge the financial support from the Spanish Ministerio de Ciencia e Innovación (grant ECO2008-03484- C0201/ECON and ECO2010-21668-C03-03) and the Xunta de Galicia (10SEC300023PR).

History

Published in

Review of Income and Wealth

Volume

62

Issue

2

Pages

266 - 282

Citation

HERAULT, N. and AZPITARTE, F., 2016. Understanding changes in the distribution and redistribution of income: A unifying decomposition framework. Review of Income and Wealth, 62(2), pp. 266 - 282.

Publisher

© International Association for Research in Income and Wealth. Published by Wiley

Version

AM (Accepted Manuscript)

Publisher statement

This work is made available according to the conditions of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. Full details of this licence are available at: https://creativecommons.org/licenses/by-nc-nd/4.0/

Publication date

2014-12-12

Notes

This is the peer reviewed version of the following article: HERAULT, N. and AZPITARTE, F., 2016. Understanding changes in the distribution and redistribution of income: A unifying decomposition framework. Review of Income and Wealth, 62(2), pp. 266 - 282., which has been published in final form at https://doi.org/10.1111/roiw.12160. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.

ISSN

0034-6586

Language

en