Income inequality and social welfare: Implications for the indirect effects of transport policies

Urban and transport policies cause indirect effects such as increases in average income levels. When income inequality changes with average income levels there can be additional indirect inequality costs or benefits. This paper develops tractable marginal social welfare measures that incorporate average income levels and income inequality effects for cases where households compare their income shares or levels to the mean or to all other households. Using neighbourhood data for the years 2006–2019 for the city of Amsterdam, fixed effects regression with temporal and spatial control variables result in an estimated income elasticity of the Gini is of about 0.4, suggesting that income growth is higher for higher income levels. Estimates of marginal social welfare changes vary greatly with model choice and social preferences for income equality. This paper finds that for a one euro increase in average income about 0–98 % of the income benefits can be lost due to increases in income inequality where results strongly depend on model choice. Indirect income benefits of transport policies therefore can be correctly estimated or negligible. • Urban and transport policies can change average income levels and income inequality. • Investigates what is left from a one euro increase in disposable income when income inequality effects are accounted for. • Develops models where households compare their income levels and income shares. • Estimates the average income elasticity of the Gini using fixed effects analysis with time varying covariates for the city of Amsterdam. • The income elasticity of the Gini is estimated at about 0.4. • For every euro increase in average income, inequality costs can be 0–98 % depending on model choice.