Abstract
This paper proposes a methodology to incorporate bivariate models in numerical computations of counterfactual distributions. The proposal is to extend the works of Machado and Mata (2005) and Melly (2005) using the grid method to generate pairs of random variables. This contribution allows incorporating the effect of intra-household decision making in counterfactual decompositions of changes in income distribution. An application using data from five latin american countries shows that this approach substantially improves the goodness of fit to the empirical distribution. However, the exercise of decomposition is less conclusive about the performance of the method, which essentially depends on the sample size and the accuracy of the regression model.
Highlights
Most empirical studies analyze the effects of income distribution determinants through decomposition methodologies based on Oaxaca-Blinder (1973) [2,3]
To incorporate non-labor income on a microsimulation exercise is not a simple task and depends mainly on the social policies applied in each country under analysis
This paper proposes a method to incorporate the intra-household relationship between the labor incomes of the head and the spouse in decomposition studies
Summary
Most empirical studies analyze the effects of income distribution determinants through decomposition methodologies based on Oaxaca-Blinder (1973) [2,3]. This assumption may be too simple, but it is a starting point used in the literature to understand the complex mechanisms interacting in the labor decisions made within the household Both the reservation wages and bargaining power depend on observable and unobservable characteristics of household members such as age, education status, persuasion, etc. Modeling both earnings equations to analyze household income distribution while taking into account their interactions requires a methodology that generates counterfactual distributions of hypothetical changes on their determinants.
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