INEQUALITY COMPARISONS IN A MULTI-PERIOD FRAMEWORK: THE ROLE OF ALTERNATIVE WELFARE METRICS

This paper considers the use of alternative welfare metrics in evaluations of income inequality in a multi‐period context. Using Norwegian longitudinal income data, it is found, as in many studies, that inequality is lower when each individual's annual average income is used as welfare metric,...

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Bibliographic Details
Published in:The Review of income and wealth 2013-06, Vol.59 (2), p.235-249
Main Authors: CREEDY, JOHN, HALVORSEN, ELIN, THORESEN, THOR O.
Format: Article
Language:English
Subjects:
Accounting
C23
D31
Economic fluctuations
Equality
I31
Income
Income distribution
Income inequality
income mobility
Inequality
Longitudinal studies
Norway
Personal income
Regression analysis
relative mobility process
Risk aversion
Welfare
Welfare economics
welfare evaluation
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Summary:This paper considers the use of alternative welfare metrics in evaluations of income inequality in a multi‐period context. Using Norwegian longitudinal income data, it is found, as in many studies, that inequality is lower when each individual's annual average income is used as welfare metric, compared with the use of a single‐period accounting framework. However, this result does not necessarily hold when aversion to income fluctuations is introduced. Furthermore, when actual incomes are replaced by expected incomes (conditional on an initial period), using a model of income dynamics, higher values of inequality over longer periods are typically found, although comparisons depend on inequality and variability aversion parameters. The results are strongly influenced by the observed high degree of systematic regression toward the (geometric) mean, combined with a large extent of individual unexpected effects.
ISSN:0034-6586
1475-4991
DOI:10.1111/j.1475-4991.2012.00512.x