Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US

Summary

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.