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