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IZA
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Income Satisfaction Inequality and its Causes
by
Ada Ferrer-i-Carbonell, Bernard M. S. van Praag
(August 2003)
published in: Journal of Economic Inequality, 2003, 1 (2), 107-127
Abstract:
In this paper, the concept of Income Satisfaction Inequality is operationalized on the basis of
individual responses to an Income Satisfaction question posed in the German Socio-
Economic Panel (GSOEP). Income satisfaction is the subjective analogue of the objective
income concept and includes objective income inequality as a special case. The paper
introduces a method to decompose Income Satisfaction Inequality according to the
contributions from variables such as income, education, and the number of children. Given
the panel structure of the data, inequality may be attributed partly to permanent individual
circumstances and partly to transitory changes. The paper shows that by far the largest part
of the satisfaction inequality has to be ascribed to unobserved heterogeneity. Distinguishing
between a structural and an unexplained part of inequality we find that income explains the
largest part of structural Income Satisfaction Inequality together with household membership;
for non-working individuals, the age distribution is very relevant as well.
Text: See Discussion Paper No. 854
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