Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US

Abstract

Following the report of the Stiglitz Commission, measuring and comparing well-being across countries has gained renewed interest. Yet, analyses that go beyond income and incorporate non-market dimensions of welfare most often rely on the assumption of identical preferences to avoid the difficulties related to interpersonal comparisons. In this paper, we suggest an international comparison based on individual welfare rankings that fully retain preference heterogeneity. Focusing on the consumption-leisure trade-off, we estimate discrete choice labor supply models using harmonized microdata for 11 European countries and the US. We retrieve preference heterogeneity within and across countries and analyze several welfare criteria which take into account that differences in income are partly due to differences in tastes. The resulting welfare rankings clearly depend on the normative treatment of preference heterogeneity with alternative metrics. We show that these differences can indeed be explained by estimated preference heterogeneity across countries—rather than demographic composition.

This is a preview of subscription content, access via your institution.

References

  1. Aaberge R, Colombino U (2011) Empirical optimal income taxation: a microeconometric application to Norway. CHILD Working Paper No. 16/2011

  2. Aaberge R, Dagsvik J, Strøm S (1995) Labor supply responses and welfare effects of tax reforms. Scand J Econ 97(4): 635–659

    Article  Google Scholar 

  3. Aaberge R, Colombino U, Strøm S (1999) Labor supply in Italy: an empirical analysis of joint household decisions, with taxes and quantity constraints. J Appl Econom 14(4): 403–422

    Article  Google Scholar 

  4. Aaberge R, Colombino U, Strøm S (2000) Labor supply responses and welfare effects from replacing current tax rules by a flat tax: empirical evidence from Italy, Norway and Sweden. J Popul Econ 13(4): 595–621

    Article  Google Scholar 

  5. Aaberge R, Colombino U, Strøm S (2004) Do more equal slices shrink the cake? An empirical investigation of tax-transfer reform proposals in Italy. J Popul Econ 17: 767–785

    Article  Google Scholar 

  6. Alesina A, Glaeser E, Sacerdote B (2005) Work and leisure in the United States and Europe: why so different?. NBER Macroecon Ann 20: 1–64

    Google Scholar 

  7. Atkinson AB (2011) The restoration of welfare economics. Am Econ Rev Pap Proc 101(3): 157–161

    Article  Google Scholar 

  8. Bargain O, Caliendo M, Haan P, Orsini K (2010) Making work pay’ in a rationed labour market. J Popul Econ 21(1): 323–351

    Article  Google Scholar 

  9. Bargain O, Decoster A, Dolls M, Neumann D, Peichl A, Siegloch S (2011) Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US. IZA Discussion Paper No. 6102

  10. Bargain O, Orsini K, Peichl A (2012) Comparing labor supply elasticities in Europe and the US: new results. IZA Discussion Paper No. 6735

  11. Becker GS, Philipson TJ, Soares RR (2005) The quantity and quality of life and the evolution of world inequality. Am Econ Rev 95: 277–291

    Article  Google Scholar 

  12. Blackorby C, Donaldson D (1988) Money metric utility: a harmless normalization?. J Econ Theory 46: 120–129

    Article  Google Scholar 

  13. Blackorby C, Laisney F, Schmachtenberg R (1993) Reference-price-independent welfare prescriptions. J Public Econ 50: 63–76

    Article  Google Scholar 

  14. Blanchard O (2004) The economic future of Europe. J Econ Perspectives 18: 3–26

    Article  Google Scholar 

  15. Blundell R, MaCurdy T (1999) Labor supply: a review of alternative approaches. In: Ashenfelter O, Card D (eds) Handbook of labor economics, vol 3A. Elsevier, Amsterdam, pp 1559–1695

  16. Blundell R, Shephard A (2012) Employment, hours of work and the optimal taxation of low income families. Rev Econ Stud 79(2): 481–510

    Article  Google Scholar 

  17. Blundell R, Duncan A, McCrae J, Meghir C (2000) The labour market impact of the working families’ tax credit. Fiscal Stud 21(1): 75–104

    Article  Google Scholar 

  18. Brun BC, Tungodden B (2004) Non-welfaristic theories of justice: is “the intersection approach” a solution to the indexing impasse?. Soc Choice Welf 22: 49–60

    Article  Google Scholar 

  19. Clark AE, Oswald AJ (1994) Unhappiness and unemployment. Econ J 104(424): 648–659

    Article  Google Scholar 

  20. Creedy J, Hérault N (2012) Welfare-improving income tax reforms: a microsimulation analysis. Oxford Econ Pap 64(1): 128–150

    Article  Google Scholar 

  21. Dagsvik J (1994) Discrete and continuous choice, max-stable processes, and independence from irrelevant attributes. Econometrica 62(5): 1179–1205

    Article  Google Scholar 

  22. Dagsvik J, Strøm S (2006) Sectoral labor supply, choice restrictions and functional form. J Appl Econom 21(6): 803–826

    Article  Google Scholar 

  23. Dagsvik J, Locatelli M, Strøm S (2009) Tax reform, sector-specific labor supply and welfare effects. Scand J Econ 111(2): 299–321

    Article  Google Scholar 

  24. Decoster A, Haan P (2010) Empirical welfare analysis in random utility models of labour supply. KU Leuven, CES Discussion Paper Series 10.30

  25. Eissa N, Hoynes HW (2004) Taxes and the labor market participation of married couples: the earned income tax credit. J Public Econ 88(9–10): 1931–1958

    Article  Google Scholar 

  26. Eissa N, Kleven HJ, Kreiner C (2008) Evaluation of four tax reforms in the United States: labor supply and welfare effects for single mothers. J Public Econ 92: 795–816

    Article  Google Scholar 

  27. Ericson P, Flood L (2009) A microsimulation approach to an optimal swedish income tax. IZA Discussion Paper No. 4379

  28. Feenberg DR, Coutts E (1993) An introduction to the TAXSIM model. J Policy Anal Manag 12(1): 189–194

    Article  Google Scholar 

  29. Fleurbaey M (2006) Social welfare, priority to the worst-off and the dimensions of individual well-being. In: Farina F, Savaglio E (eds) Inequality and economic integration. Routledge, London

  30. Fleurbaey M (2007) Social choice and the indexing dilemma. Soc Choice Welf 29: 633–648

    Article  Google Scholar 

  31. Fleurbaey M (2008) Fairness, responsibility and welfare. Oxford University Press, Oxford

    Google Scholar 

  32. Fleurbaey M (2009) Beyond GDP: the quest for a measure of social welfare. J Econ Lit 47: 1029–1075

    Article  Google Scholar 

  33. Fleurbaey M (2011) Willingness-to-pay and the equivalence approach. Revue d’conomie politique 121(1): 35–58

    Google Scholar 

  34. Fleurbaey M, Gaulier G (2009) International comparisons of living standards by equivalent incomes. Scand J Econ 111: 597–624

    Article  Google Scholar 

  35. Fleurbaey M, Maniquet F (2006) Fair income tax. Rev Econ Stud 73(1): 55–83

    Article  Google Scholar 

  36. Fleurbaey M, Tadenuma K (2009) Universal social orderings. CCES Discussion Paper Series, No.9

  37. Fleurbaey M, Trannoy A (2003) The impossibility of a paretian egalitarian. Soc Choice Welf 21: 243–263

    Article  Google Scholar 

  38. Fuest C, Peichl A, Schaefer T (2008) Is a flat tax reform feasible in a grown-up democracy of Western Europe? A simulation study for Germany. Int Tax Public Financ 15(5): 620–636

    Article  Google Scholar 

  39. Hodler R (2009) Redistribution and inequality in a heterogeneous society. Economica 76: 704–718

    Article  Google Scholar 

  40. Immervoll H, Kleven H, Kreiner C, Saez E (2007) Welfare reform in European countries: a micro-simulation analysis. Econ J 117(516): 1–44

    Article  Google Scholar 

  41. Jones CI, Klenow PJ (2010) Beyond GDP? Welfare across countries and time. NBER Working Paper 16352

  42. Kassenboehmer SC, Schmidt CM (2011) Beyond GDP and back: what is the value-added by additional components of welfare measurement? IZA Discussion Paper No. 5453

  43. King M (1983) Welfare effects of tax reforms using household data. J Public Econ 21: 183–214

    Article  Google Scholar 

  44. McFadden D (1974) Conditional logit analysis of qualitative choice behavior. In: Zarembka P (ed) Frontiers in econometrics. Academic Press, New York, pp 105–142

    Google Scholar 

  45. Ooghe E, Peichl A (2011) Fair and efficient taxation under partial control: theory and evidence. CESifo Working Paper No. 3518

  46. Peichl A, Siegloch S (2012) Accounting for labor demand effects in structural labor supply models. Labour Econ 19(1): 129–138

    Article  Google Scholar 

  47. Pencavel J (1977) Constant-utility index numbers of real wages. Am Econ Rev 67(2): 91–100

    Google Scholar 

  48. Prescott EC (2004) Why do Americans work so much more than Europeans?. Federal Reserv Bank Minneap Q Rev 28(1): 2–13

    Google Scholar 

  49. Preston I, Walker I (1999) Welfare measurement in labour supply models with nonlinear budget constraints. J Popul Econ 12(3): 343–361

    Article  Google Scholar 

  50. Roberts K (1980) Price-independent welfare prescriptions. J Public Econ 13(3): 277–298

    Article  Google Scholar 

  51. Slesnick DT (1991) Aggregate deadweight loss and money metric social welfare. Int Econ Rev 32: 132–146

    Article  Google Scholar 

  52. Stiglitz J, Sen A, Fitoussi JP (2009) Report by the comission on the measurement of economic performance and social progress. Technical Report

  53. Sutherland H (2007) Euromod: the tax-benefit microsimulation model for the European Union. In: Gupta A, Harding A (eds) Modelling our future: population ageing, health and aged care, international symposia in economic theory and econometrics, vol 16, Elsevier, pp 483–488

  54. Van Soest A (1995) Structural models of family labor supply: a discrete choice approach. J Human Resour 30(1): 63–88

    Article  Google Scholar 

  55. Van Soest A, Das M, Gong X (2002) A structural labour supply model with flexible preferences. J Econom 107: 345–374

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Dirk Neumann.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Bargain, O., Decoster, A., Dolls, M. et al. Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US. Soc Choice Welf 41, 789–817 (2013). https://doi.org/10.1007/s00355-012-0707-x

Download citation

Keywords

  • Indifference Curve
  • Preference Heterogeneity
  • Equivalent Income
  • Interpersonal Comparison
  • Welfare Ranking