Counterfactual Income Research Articles

Poverty decompositions with counterfactual income and inequality dynamics

AbstractTraditional poverty accounting decomposes changes in a country's poverty headcount ratio into changes in income and inequality. We argue that this approach is unsatisfactory from the perspective of policy analysis because it compares a country in two points of time without taking the country's initial situation, and hence its potential for poverty reduction, into account. We thus suggest comparing traditional poverty decompositions with a counterfactual situation. This counterfactual indicates what a country starting from its initial situation could be expected to achieve in terms of income, inequality, and, hence, poverty developments. We construct those counterfactuals by modeling income and inequality trends characterized by convergence and a “Kuznets” relationship between inequality and development. Parameters in those relationships are estimated using PovcalNet survey data from 144 countries and we construct our counterfactual poverty predictions for 71 developing countries. While there is overall a tight relationship between actual developments and counterfactuals, we identify several cases, where both deviate from each other and discuss the policy implications. We also check for commonalities in differently performing countries and find that those who fell particularly short of expectations often underwent political transition and state fragility.

Remittance and its Effect on Poverty and Inequality: A Case of Nepal

This paper examines the impact of remittance on poverty and income inequality in the context of Nepal using cross-sectional national survey- Nepal Living Standard Survey, third edition (NLSS3) of 2010-11. We employ a Heckman two-step estimation model with instrumental variables and constructed counterfactual income to investigate the real impact of remittances. We find that remittance has helped in the reduction of poverty ratio by 5.3% but deepened the poverty gap by 7.37% and severity by 9.25%. In terms of inequality, remittance has helped to reduce inequality within the remittance receiving group, however, it also contributed to rising income inequality when compared to non- remittance receiving group.

The poverty impacts of improved soybean technologies in Malawi

ABSTRACT Improved soybean varieties and agronomic practices have been widely disseminated to smallholder farmers in Malawi over the last 15 years. However, there is no empirical evidence on the welfare impacts of adopting improved soybean technologies. This paper estimated the poverty impacts of adopting improved soybean technologies using data from 1,234 households in six soybean growing districts accounting for over 80% of the total soybean production in the country. The results from an endogenous switching regression model showed that 32% of the sample households adopted improved soybean varieties and agronomic practices. The adoption benefits were higher for female-headed households and increased with the household head’s education and cultivated land areas. A comparison of the observed and counterfactual incomes for adopters based on the international poverty line of US$1.90 per capita per day showed a 4.16 percentage-point reduction in poverty among the sample households, translating to over 150,000 people lifted out of poverty. The household head’s education level, household size, cultivated land area, livestock size, and asset ownership are associated with the daily per capita income. The results point to the need for scaling up of improved soybean varieties and agronomic practices for greater impacts on poverty reduction among smallholders in Malawi.

Are we all in this together? Alleviating the childcare constraint for women in economic crises

PurposeThe purpose of the paper is to advocates the use of gendered economic policies to stimulate a post-COVID-19 recovery. It alerts on the risk of ignoring the female dimension of the current crisis and of resorting again to austerity programs that, like the ones enacted after the 2008 crisis, would hit women and mothers disproportionally harder than other groups.Design/methodology/approachThe authors use data from the British Household Panel Survey on female participation and account for gendered constraints and enablers missed by mainstream economics. Using a sequential empirical approach, the authors simulate various welfare policy scenarios that address factors, such as childcare costs, personal and social nudges, that could help women back into the labor market in the aftermath of a crisis.Findings The authors found that incentive-type interventions, such as subsidies, promote female labor market participation more effectively than punishment-austerity type interventions, such as benefits' cuts. Policies oriented to alleviate childcare constraints can be sustainable and effective in encouraging women back to work. Considering factors wider than the standard economic variables when designing labor market policies may provide fruitful returns.Originality/valueThe sequential methodology enables to estimate current and counterfactual incomes for each female in the sample and to calculate their prospective financial gains and losses in changing their labor market status quo, from not employed into employed or vice-versa. Welfare policies affect these prospective gains and losses and, by interacting with other factors, such as education, number and age of children and social capital, prompt changes in women's labor market choices and decision.

Analyzing the returns to entrepreneurship by a modified Lazear model

A modified version of Lazear’s model (in American Economic Review, 94, 208-211, 2004, Journal of Labor Economics, 23, 649–680, 2005) for occupational choice is formulated. It includes a utility adjustment factor that captures the combined effect of nonpecuniary benefits and uncertainty associated with entrepreneurship. We show that the counterfactual income returns to entrepreneurship are lower than the market value of entrepreneurial talent and higher than the inverse of the utility adjustment factor. Moreover, if the skill profiles in the population are Fréchet-distributed, the ratio between the expected incomes of entrepreneurs and observationally similar wage employees is lower than the inverse of the utility adjustment factor. Thus, entrepreneurs will on average earn less than wage employees if the utility adjustment factor is greater than or equal to one. It is also shown that the self-selection bias related to this income ratio or returns measure increases with the observed percentage of entrepreneurs. Swedish employment data are used to calibrate the modified Lazear model. The empirical results indicate that uncertainty considerations might be more important for the occupational choices than nonpecuniary benefits.

Modelling the Distributional Impact of the COVID-19 Crisis.

The COVID‐19 emergency has had a dramatic impact on market incomes and income‐support policies. The lack of timely available data constrains the estimation of the scale and direction of recent changes in the income distribution, which in turn constrains policymakers seeking to monitor such developments. We overcome the lack of data by proposing a dynamic calibrated microsimulation approach to generate counterfactual income distributions as a function of more timely external data than are available in dated income surveys. We combine nowcasting methods using publicly available data and a household income generation model to perform the first calibrated simulation based upon actual data, aiming to assess the distributional implications of the COVID‐19 crisis in Ireland. Overall, we find that the crisis had an equalizing real‐time effect for both gross and disposable incomes, notwithstanding the significant hardship experienced by many households.

A data-driven procedure to determine the bunching window: an application to the Netherlands

We extend the bunching approach introduced by Saez (Am Econ J Econ Policy 2:180–212, 2010) by proposing an intuitive, data-driven procedure to determine the bunching window. By choosing the bunching window ad hoc, researchers throw away informative data points for estimating the counterfactual income distribution in the absence of the kink. Assuming a descending bunching mass to both sides of the threshold, the proposed algorithm produces a distribution of lower and upper bounds for the bunching window. In each iteration, the bunching window is defined as all contiguous bin midpoints around the threshold that lie outside of the confidence band resulting from running a local regression through all data points outside of the excluded region. Monte Carlo simulations provide evidence that our data-driven procedure outperforms larger bunching windows in terms of bias and efficiency. In our application for the Netherlands, we find clear evidence of bunching behaviour at all three thresholds of the Dutch tax schedule with a precisely estimated elasticity of 0.023 at the upper threshold, which is driven by self-employed, women and joint tax filers.

The poverty impacts of improved cowpea varieties in Nigeria: A counterfactual analysis.

Adoption of improved agricultural technologies has long been recognized as critical for reducing poverty through increased productivity, incomes, and asset accumulation. Using a nationally representative survey data from a sample of over 1500 households in Nigeria, this paper evaluates the impacts of adoption of improved cowpea varieties on income and asset poverty reduction using an endogenous switching regression model. The results showed that adoption of improved cowpea varieties increased per capita household income and asset ownership by 17 and 24 percentage points, respectively. The results based on the observed and counterfactual income and asset distributions further showed that adoption reduced both income poverty and asset poverty by 5 percentage points. The paper concludes with a discussion of the policy options for increasing adoption and impacts of improved cowpea varieties in Nigeria.

Assessing Minimum Wage Policy Implications upon Income Inequalities. The Case of Romania

Starting from the consideration that excessive income inequalities could hamper sustainable growth, our paper aims to evaluate the impact of the minimum wage policy upon wage and income distributions. Using the European Union Survey on Income and Living Conditions (EU-SILC) database with national representative sample of households, an income distribution analysis was conducted for the case of Romania based on two microsimulation approaches. The first one assumed building a counterfactual income distribution under the hypothesis of no change in minimum wage, while the second one implied a decomposition of the Gini coefficient of income inequalities based on main income determinants, including the minimum wage level and the share of minimum wage earners in the total number of employees. Both approaches pointed to similar findings, indicating a positive effect of the minimum wage on wage inequalities reduction for both genders, although higher for women, as they are more present among lower paid employees. The minimum wage policy can reshape the wage distribution, by enlarging the share of minimum income earners and narrowing the middle. Moreover, the household disposable income becomes less unequal when minimum wage increases, meaning that the income gain spreads over the entire household as most minimum wage earners come from poor households with numerous children.

Education expansion, assortative marriage, and income inequality in China

In this paper, we study the pattern of assortative marriage in China since 1990 and its impact on income inequality. The results indicate that men in China are increasingly likely to marry women of similar education levels. We calculate the counterfactual income inequality that would prevail if marriages were randomly matched in terms of education. In 2005, China's overall Gini coefficient of household income per capita would decline from 0.512 to 0.476 if marriages were randomly matched. In urban areas, assortative marriage in education increased the Gini coefficients from 0.321 to 0.338 in 2009. The decomposition exercise shows that the rising returns to education contribute most to the increase in income inequality in urban areas between 1990 and 2009, while the change in marriage assortativeness plays a minor role.

Ex post impacts of improved maize varieties on poverty in rural Ethiopia

AbstractPublic agricultural research has been conducted in Africa for decades. While many studies have examined its aggregate impacts, few have investigated how it affects the poor. This paper helps fill this gap by applying a new procedure to explore the ex post impacts of improved maize varieties on poverty in rural Ethiopia. Plot‐level yield and cost changes due to adoption are first estimated using instrumental variable and marginal treatment effect techniques where possible heterogeneity is carefully accounted for. A backward derivation procedure is then developed to link treatment effect estimates with an economic surplus model to identify the counterfactual household income that would have existed without improved maize varieties. Poverty impacts are finally estimated by exploiting the differences between observed and counterfactual income distributions. Improved maize varieties have led to a 0.8–1.3 percentage drop of poverty headcount ratio and relative reductions of poverty depth and severity. However, poor producers benefit the least from adoption due to the smallness of their land holdings.

Taxation and the International Mobility of Inventors

This paper studies the effect of top tax rates on inventors' mobility since 1977. We put special emphasis on inventors, those with the most and most valuable patents. We use panel data on inventors from the United States and European Patent Offices to track inventors' locations over time and combine it with international effective top tax rate data. We construct a detailed set of proxies for inventors' counterfactual incomes in each possible destination country including, among others, measures of patent quality and technological fit with each potential destination. We find that superstar top 1% inventors are significantly affected by top tax rates when deciding where to locate. The elasticity of the number of domestic inventors to the net-of-tax rate is relatively small, between 0.04 and 0.06, while the elasticity of the number of foreign inventors is much larger, around 1.3. The elasticities to top net-of-tax rates decline as one moves down the quality distribution of inventors. Inventors who work in multinational companies are more likely to take advantage of tax differentials. On the other hand, if the company of an inventor has a higher share of its research activity in a given country, the inventor is less sensitive to the tax rate in that country.

Decomposing the rich dad effect on income inequality using instrumental variable quantile regression

In this paper we evaluate the relative importance of the two main channels, namely the composition effect and the income structure effect, through which the paternal income affects children's income inequality. Using data on 2677 pairs of father and children from China Health and Nutrition Survey (CHNS), we construct the counterfactual income of children from poor families if they had the same characteristics as children from rich families. We propose an instrumental variable quantile regression-based method to solve the endogeneity problem and decompose the rich dad effect on income inequality into the composition effect and the income structure effect. We find that the composition effect explains at least 80% of the income difference at any quantile, and it explains all the income difference at the top four deciles. Income structure effect has a significant impact only at quantiles between 20% and 40%, where it explains about 20% of the income difference.

Assessing the Poverty Impacts of Migrants’ Remittances Using Propensity Score Matching: The Case of Tonga*

We estimate the impacts of remittances on poverty in Tonga, a poor Pacific island country highly dependent on migrants’ remittances. Using household survey data, we apply Propensity Score Matching (PSM) to estimate without‐remittances incomes of migrant households from which counterfactual poverty rates are derived. We compare these with poverty rates from observed income including remittances to gauge their effects on poverty. We find that remittances reduce the incidence of poverty by 31 per cent and depth of poverty by 49 per cent. The results are robust both to alternative specifications of the PSM model and to use of an alternative counterfactual income estimation method.

O impacto da escolaridade sobre a distribuição de renda

Este trabalho investiga o impacto da escolaridade sobre a distribuição de renda do trabalho de Estados/ regiões do Brasil, usando um método semiparamétrico, seguindo DiNardo, Fortin e Lemieux (1996) e informações da PNAD de 1999. Foram construídas densidades contrafactuais, reponderando a distribuição da região/Estado mais pobre (Nordeste/Ceará) pelo perfil de escolaridade da mais rica (Sudeste/São Paulo). Resultados: entre 12% e 36% do diferencial de renda é explicado pelo diferencial de escolaridade; a reponderação pela escolaridade aumentou em cerca de 55% a renda média nos contrafactuais; a renda do contrafactual do Nordeste equivale a 93% da renda média brasileira; quanto mais elevado for o percentil de renda considerado, maior é a contribuição da diferença de escolaridade para a diferença de renda; a dispersão de renda das regiões mais pobres aumenta quando fornecemos a elas o nível de escolaridade das regiões mais ricas, mantendo-se o perfil salarial da região.

Transferts de fonds des migrants, pauvreté et inégalités au Mali

Résumé Cet article examine l’impact distributif des transferts des migrants au Mali, à partir de l’enquête sur les niveaux de vie elim 2006. Nous construisons différents scénarios contrefactuels qui corrigent du biais de sélection des ménages avec migrants. Nous montrons que les transferts des migrants internationaux réduisent la pauvreté de 5 à 11 % au niveau national et l’indice de Gini d’environ 5 %. Les ménages appartenant aux quintiles les plus pauvres apparaissent plus dépendants des transferts pour assurer leur consommation du fait de dotations en capital physique et humain insuffisantes pour leur permettre d’accéder à d’autres sources de revenu.

Beyond Oaxaca-Blinder: Accounting for Differences in Household Income Distributions Across Countries

This paper develops a micro-econometric method to account for differences across distributions of household income. Going beyond the determination of earnings in labor markets, we also estimate statistical models for occupational choice and for the conditional distributions of education, fertility and non-labor incomes. We import combinations of estimated parameters from these models to simulate counterfactual income distributions. This allows us to decompose differences between functionals of two income distributions (such as inequality or poverty measures) into shares due to differences in the structure of labor market returns (price effects); differences in the occupational structure; and differences in the underlying distribution of assets (endowment effects). We apply the method to the differences between the Brazilian income distribution and those of the United States and Mexico, and find that most of Brazil's excess income inequality is due to underlying inequalities in the distribution of two key endowments: access to education and to sources of non-labor income, mainly pensions.

The Distribution of Household Income in Brazil: Unequal and Immutable?

Summary After a period of rapid growth in the 1970s, a macroeconomically turbulent decade of the 1980s, the achievement of price stability during the 1990s, and an impressive expansion of educational opportunities, long term trends do not show an unambiguous increase or decline in Brazilian household income inequality. However, behind the apparently invariable state of affairs one finds a marked decline in the proportion of households with incomes below 1.5 times the poverty line. The use of a semi-parametric procedure for constructing counterfactual income densities establishes that while advances in education were almost wholly associated with growth in absolute incomes, they had little impact on their dispersion.

Estimating the net effects of migration and remittances on poverty and inequality: comparison of Fiji and Tonga

AbstractWe use original 2005 household survey data from Fiji and Tonga to estimate the impact of migration and remittances on income distribution and measures of poverty. Measures of inequality and poverty based on observed, with‐migration income and remittances are then compared with those based on two without‐migration and remittances scenarios; one in which remittances are treated simplistically as an exogenous addition to household income, and another in which counterfactual household incomes are estimated, taking account of what the migrant members would have earned had they not migrated. The estimated effects of remittances on poverty alleviation were found to be stronger when the more rigorous, counterfactual income estimates are used, but their effect on income inequality was found to be ambiguous. The extent to which migration and remittances alleviate poverty was also found to be more substantial in Tonga, the country with a much longer migration history and higher remittance dependence. Copyright © 2008 John Wiley & Sons, Ltd.

The fiscal impact of high-skilled emigration: Flows of Indians to the U.S.

What are the fiscal consequences of high-skilled emigration for source countries? This paper develops methodologies for inferring these consequences and applies them to the recent sizable emigration of high-skilled workers from India to the U.S. This wave of emigration from India to the U.S. is shown to be unusually concentrated amongst the prime-age work force, the highly educated and high earners. In order to calculate the fiscal losses associated with these emigrants, estimates of their counterfactual earnings distributions are generated using two distinct methods and integrated with a model of the Indian fiscal system to calculate fiscal consequences. Conservative estimates indicate that the annual net fiscal impact to India of high-skilled emigration to the U.S. is one-half of 1% of gross national income (or 2.5% of total fiscal revenues). The sensitivity of these results to the method of predicting counterfactual incomes and the implications of these estimates for other developing countries is discussed in detail.