Labour supply, welfare rankings and the measurement of inequality

Abstract

This paper presents an analysis of inequality using utility-based measures of welfare derived from different approaches to modelling household labour supplies. The almost Ideal Demand System specification of preferences is selected for the estimation of a neoclassical household model and of individual decision models which incorporate different assumptions concerning the intra-household distribution of income using the Rosen (1976) tax perception methodology. The study also explores the implications of a model which does not constrain time at home to leisure. Welfare rankings and inequality measures defined on equivalent income are compared for each type of model. The analysis uses Australian unit record data on 3,352 households drawn from the Australian Bureau of Statistics 1981-82 Income and Housing Sample Survey file. The results indicate the sensitivity of welfare orderings and inequality measures to the choice of decision model and to the specification of lump-sum transfers between family members. A comparative study of equivalent incomes and selected money income variables also illustrates the limitations of observed household and individual incomes as welfare indicators for the analysis of inequality and for policy design.