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Poorest Made Poorer? Decomposing income losses at the bottom of the income distribution during the Great Recession

Michael Savage ()

No WP528, Papers from Economic and Social Research Institute (ESRI)

Abstract: On the basis of anonymous (or cross-sectional) analyses, income losses during the Great Recession in a number of European countries were concentrated among the poorest ten per cent of the population. The anonymous approach however, which simply compares the distribution of income at two different points of time, can omit important information regarding a change in the distribution of income in a country. Non-anonymous (or longitudinal) analysis, tracking individuals rather than income positions through time, can provide a quite contrasting picture of the distribution of income changes. Focusing on the countries with the largest proportional anonymous losses in income in the bottom decile between 2007 and 2010, a decomposition is proposed that separately identifies the proportion of the anonymous income change that is concentrated on the individuals who remain the bottom decile during the period of interest (the “stayers” effect), and the component that is the result of changes in the composition of the bottom decile (the “movers” effect). An additional decomposition of the resulting change in social welfare shows that the net welfare outcome depends largely on the treatment of anonymity in the underlying social welfare function, in particular due to the evaluation of the welfare of individuals transitioning between deciles. The net welfare effect, as well as the contribution of stayers and movers, varies widely depending on whether welfare is measured anonymously or non-anonymously and, if the latter approach is used, whether individuals’ welfare change is based on their initial income, final income, or some combination of the two.

Date: 2016-03
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