The role of education and household composition for transitory and permanent income inequality–evidence from PSID data

Transitory and permanent shocks to income have been shown to be important determinants of household consumption. This paper shows that there are significant differences in the trends of transitory and permanent income inequality between demographic groups since the 1980s. Using data from the Panel Study of Income Dynamics, educational attainment and the composition of a household are found to play a key role. While permanent inequality increases steadily for educated households, it is flat over large parts of the sample period for the less educated households. Transitory inequality increases for all households headed by couples whereas it is constant for single households. Altogether, permanent shocks account for a larger part of the income variance of educated households whereas transitory shocks are relatively more important for the less educated. These results are able to shed light on the transmission of changes in income inequality to consumption inequality.     

DEMOGRAPHIC TRENDS AND CONSUMPTION INEQUALITY IN AUSTRALIA BETWEEN 1975 AND 1993

We examine trends in consumption inequality among Australian households using the Australian Bureau of Statistics Household Expenditure Surveys collected over the period 1975 to 1993. We find that the distribution of consumption is much more equal than that of income and that both income and consumption inequality rose by significant amounts over the period. However, consumption inequality rose by much less (the Gini coefficient for income inequality rose by 17 percent while that for nondurable consumption rose by 9 percent). We then examine the effects of demographic trends, specifically population aging and changing family structures, and find they account for only a minor fraction in the overall growth in economic inequality.     

EVIDENCE ON RELATIONSHIPS AMONG ALTERNATIVE MEASURES OF CONCENTRATION: A TOOL FOR ANALYSIS OF LDC INEQUALITY

The evidence on economic inequality in nearly all developing countries is both seriously incomplete and of moderate to poor quality. In addition, information often corresponds to distributions which appear to be less revealing and useful than other ones; thus it can be argued that the frequently available distribution of income among households ranked by household income is less helpful than the seldom found distribution of consumption among persons ranked by per capita household consumption. Whether one's objective is to assess inequality in some absolute sense or (especially) to make comparisons across countries or evaluate trends over time, it is useful to know whether systematic relationships exist among various measures of inequality, in particular between those most commonly available and those conceptually most interesting. Illustrative comparisons of a variety of inequality indicators are presented. They suggest that in developing countries the concentration of income among persons (assuming equal distribution within the family) does not differ much from the concentration among households. They also suggest that the concentration of consumption is somewhat less unequal than that of income, the ratio of the respective Gini coefficients tending to cluster around 0.85 to 0.90.     

Uncertainty,inequality and consumption preferences in urban China

In this paper we present an uncertainty–inequality–consumption model and empirically investigate the effect of uncertainty on the consumption behaviors of urban households with varying levels of socio-economic status in China. We observe that the condition of households that suffered from socio-economic inequality with respect to total consumption, educational expenditures, medical expenditures, and durable consumption worsened relative to other households when faced with income uncertainty. Income uncertainty did not affect the housing consumption of households that suffered from socio-economic inequality, but it substantially decreased their ability to consume other durables. As a result of the introduction of the modern enterprise system and the reform of the housing distribution system, households with a member employed in a management position suffer larger shocks of income uncertainty in total consumption, educational expenditures, medical expenditures, and housing consumption relative to household with all members employed in worker positions in 2002. Uncertainty with respect to medical and educational expenditures had more substantial effects on the non-durables consumption of low-income households than that of other households in 2002.     

Inequality and volatility moderation in Russia: Evidence from micro-level panel data on consumption and income

We construct key household and individual economic variables using a panel micro data set from the Russia Longitudinal Monitoring Survey (RLMS) for 1994–2005. We analyze cross-sectional income and consumption inequality trends and find that inequality decreased during the 2000–2005 economic recovery. The decrease appears to be driven by falling volatility of transitory income shocks. The response of consumption to permanent and transitory income shocks becomes weaker later in the sample, consistent with greater self-insurance against permanent shocks and greater smoothing of transitory shocks. Finally, expenditure and income inequality in Russia are not far apart.     

Consumption Inequality in China: Theory and Evidence from the China Health and Nutrition Survey

We investigate consumption inequality in China both theoretically by constructing a theoretical model that delineates the transmission channels by which income shocks affect consumption and empirically through an Unequally Spaced Dynamic Panel Data model estimation. We find that China is experiencing consumption inequality with the full partial insurance of consumption against both permanent and transitory income shocks, although the impact of both types of shock are larger than the case of the United States. The results are due to precautionary savings motives of the Chinese. We further document how income becomes more dispersed in China and show how the family background of a child affects his outcome to a large extent. Policy implications based on our findings are proposed.     

Russian Roller Coaster: Expenditure Inequality and Instability in Russia, 1994–98

This paper uses the second phase of the Russian Longitudinal Monitoring Survey to investigate the changes in expenditure inequality and instability in Russia between the autumn of 1994 and the autumn of 1998. The expenditure distribution is stable in spite of the economic and political turmoil Russia is going through. However, that does not imply much stability. Households experienced considerable fluctuations in their expenditure, with over 60 percent of the population's expenditure either more than doubling or falling to less than half their previous levels. Only about 6 percent of all households experienced an expenditure shock of less than 10 percent. The inquiry in expenditure mobility suggests high levels of transitory variation in the expenditure and high levels of instability.     

Estimating the marginal propensity to consume using the distributions of income,consumption, and wealth

Studies of economic inequality almost always separately examine income, consumption, and wealth inequality, and hence, miss the important synergy amongst the three measures explicit in the life-cycle budget constraint. These joint distributions, however, are important in evaluating macroeconomic impacts of changes in income because the response may differ across the wealth distribution. This heterogeneity in the response to income changes can have significant impact on the effectiveness of government fiscal policy. Using the Panel Study of Income Dynamics from 1999–2013, we examine how the marginal propensity to consume (MPC) differs across the wealth distribution. We find that the MPC is lower at higher wealth quintiles, indicating that low wealth households cannot smooth consumption as much as other households. This implies that increasing wealth inequality likely reduces aggregate consumption, which, in turn, could limit economic growth.     

CAN HOUSEHOLDS AND WELFARE STATES MITIGATE RISING EARNINGS INSTABILITY?

We compare the evolution of earnings instability in Germany and the United Kingdom, two countries which stand for different types of welfare states. Deploying data from the German Socio‐Economic Panel (SOEP) and the British Household Panel Survey (BHPS), we estimate permanent and transitory variances of male income over the period 1984–2009 and 1991–2006, respectively. Studies in this literature generally use individual labor earnings. To uncover the role of welfare state and households in smoothening earnings shocks, we compute different income concepts ranging from gross earnings to net equivalent household income. We find evidence that the overall inequality of earnings in Germany and the United Kingdom has been rising throughout the period due to both higher permanent earnings inequality and higher earnings volatility. However, taking institutions of the welfare state and risk‐sharing households into account, we find that the volatility of net household income has remained fairly stable. Furthermore, redistribution and risk insurance provided by the welfare state is more pronounced in Germany than in the United Kingdom.     

Income Mobility and Income Inequality in Rural China

The economic literature has argued for a long time that income mobility could attenuate the degree of cross-sectional inequality by offering people opportunities to improve their socio-economic position. Using the longitudinal data from the China Health and Nutrition Survey (CHNS) from 1989 to 2011, we measure income mobility as the degree to which longer-term incomes are distributed more or less equally than yearly income. Five main results are emphasized. First, there is strong income mobility in rural China that partly offsets yearly income inequality. Second, income mobility has decreased since the 2000s, indicating that income distribution is becoming more rigid. Third, mobility is mainly associated with transitory income fluctuations, particularly in the two tails of the distribution. Fourth, income mobility has an equalizing effect on income distribution. Fifth, we show that non-agricultural income mobility has substantially increased over the period and that its equalizing nature has also recently increased. While the development of the non-agriculture sector in rural China was a crucial factor in explaining the increase in rural inequality until the mid-2000s, we suggest that the large-scale generalisation of such non-agricultural opportunities partly accounts for the decline in rural inequality observed since the mid-2000s.     

CHANGES IN CANADIAN FAMILY INCOME AND FAMILY CONSUMPTION INEQUALITY BETWEEN 1978 AND 1992

This paper uses Canadian cross-sectional income and expenditure data to examine changes in the distribution of family income and family consumption during the period 1978 to 1992. Family consumption data are analyzed because in the presence of intertemporal consumption smoothing, the cross-sectional distribution of consumption may characterize the distribution of lifetime wealth. I find that both Canadian family income inequality and Canadian family consumption inequality moved countercyclically. In addition, both Canadian family income inequality and Canadian family consumption inequality trended upward over the period; however, the change in family consumption inequality was much smaller than the change in family income inequality, suggesting that inequality in the distribution of lifetime wealth may have changed much less than is suggested by changes in the distribution of income.     

PRICE SEARCH,CONSUMPTION INEQUALITY AND EXPENDITURE INEQUALITY OVER THE LIFE ‐CYCLE

We differentiate consumption from expenditure by incorporating price search decision into an otherwise standard life‐cycle model. We first analytically show that, under very general conditions, poorer households search more and pay lower prices compared to wealthier ones. As a result, consumption inequality is smaller than expenditure inequality, and the gap between them increases over the life‐cycle. Next, using a plausibly calibrated model, we find that life‐cycle increase in consumption inequality is about 30% lower than the increase in expenditure inequality. Price search provides an insurance mechanism against income shocks and increases the welfare of a newborn by 3.9%.     

Imperfect capital markets and life-cycle consumption

This paper develops a long-range consumption planning model which, unlike conventional life-cycle theory, admits a disparity between borrowing and lending rates of interest. It is shown that, when capital markets are imperfect, optimal consumption depends not only upon an arithmetic average of the household's intertemporal income distribution, the traditional life-cycle income variable, but also upon current income and higher-order moments of that income distribution. The consumption function is estimated using the 1967–1968 CEDE budget survey of four major Colombian cities. A test is made to determine whether the assumption of perfect capital markets is acceptable for empirical approximation. The results strongly indicate that, for households in middle and lower income classes, the explanatory power of the consumption function can be raised by introducing a more flexible life- time budget constraint. The model is then estimated and used to compute the marginal consumption responses of Colombian households to transitory and permanent income changes.     

Spain is different: Falling trends of inequality

In this article we characterize the evolution of inequality in hourly wages, hours of work, labor earnings, household disposable income and household consumption for Spain between 1985 and 2000. We look at both the Encuesta Continua de Presupuestos Familiares and the European Household Community Panel. Our analysis shows that inequality in individual net labor earnings and household net disposable income has decreased substantially. The decreases in the tertiary education premium and in the unemployment rate have been key ingredients to understand this falling trend. Public transfers have played a crucial role in smoothing out the inequality arising in the labor market, but instead the Spanish family does not seem to have been an important insurance mechanism. Regarding household consumption, inequality has fallen much less than inequality in household net disposable income, with the decrease mostly concentrated in the second half of the eighties. This suggests that the reduction in income inequality has affected the sources of permanent differences between households only during the second half of the eighties. Our estimates of the earnings process for the period are consistent with this view.     

Do the Rich Save More? Evidence from Canada

This paper provides new evidence on the long‐standing question of whether more affluent households save a larger fraction of their income. The major difficulty in empirically assessing the relationship between incomes and saving rates is to construct a credible proxy for long‐run income—purged of transitory fluctuations and measurement error. The Canadian Family Expenditure Survey provides us with both unusually good data on savings rates and potential predictors with which we can construct reliable long‐run income proxies. Our empirical analysis suggests that the estimated relationship between saving rates and long‐run incomes is sensitive to the predictor used to proxy long‐run income. Nevertheless, our preferred estimates indicate that, except for poorest households (who simply do not save), saving rates do not differ substantially across predicted long‐run income groups.     

A natural experiment of the effect of advertising on sales: the SASOL case

China's so-called ‘reform and opening up’ policy (Gai Ge Kai Fang), implemented nearly 30 years ago, has led to tremendous economic development. China's nominal Gross Domestic Product (GDP) was 3.25 trillion US dollars in 2007, making it the fourth largest economy in the world. At the same time, income inequality has become quite skewed in China, inviting considerable criticism. Moreover, the trend towards greater income inequality persists. Of particular public policy relevance is the effect of income inequality on health disparities in China, particularly for low-income households. This study addresses this issue using a longitudinal dataset from the China Health and Nutrition Survey (CHNS) over the period 1997 to 2006. Our central finding is that income inequality affects health differently by socioeconomic status: income inequality harms individual health among low income households by more than it does among high income households. More specifically, health is more adversely affected by greater income inequality for households with low incomes. China's central government is committed to making further investments in the health care system. As part of that effort, attention should be directed at low income households to reduce health inequality, possibly providing them with a health insurance safety net similar to Medicaid in USA.     

From income to consumption: measuring households partial insurance

This article computes the degree of consumption insurance with respect to transitory and permanent income shocks. The lack of income–consumption data in the US surveys forces researchers to use an empirical strategy to impute consumption. This procedure is avoided by using the Spanish Household Budget Continuous Survey, which contains true panel data on consumption and income information in the same survey. We find full insurance for transitory income shocks and partial insurance for permanent shocks for some sub-groups. For the full sample, a 10% permanent income shock induces a 4.8% permanent change in consumption, with higher insurance capacity for college, home-owner and high-wealth households. We also compute the role of durables and family income transfers as smoothing devices. The comparison of insurance level when based on true consumption data versus imputed consumption data shows that the use of imputed consumption underestimates permanent insurance.     

中国农户的收入风险应对机制与消费波动:来自陕西的经验证据

在正规风险应对机制缺失的背景下,中国农户很大程度上依靠社会网络内的风险统筹和跨时期消费平滑等自发机制来应对收入风险,缓解消费波动。本文运用logistic回归方法,对来自陕西1 151户农户的问卷调查数据进行了计量分析,检验了两类风险应对机制对消费波动的影响。经验分析结果表明:在农户缓解收入风险所带来的消费波动的过程中,社会网络内的风险统筹仍然发挥着较大的作用;跨时期消费平滑机制也发挥着重要作用,但从内部结构来看,通过储蓄实现的自我保险的作用最为重要,信贷市场借款的作用较为有限。     

INCOME,CONSUMPTION AND SAVING IN URBAN AND RURAL INDIA*

The main purpose of the study is to determine the savings potential of urban and rural households in India and in the process determine the possible savings and consumption functions separately for urban and rural areas. Four different possible functions have been used for determining the savings behaviour of the households both at the aggregate level and at the per capita level. The rural households, according to the results, have an extremely low rate of saving with income elasticity of saving of less than unity. For the urban households on the other hand, the income elasticity of saving is high enough to suggest the possibilities of considerably high savings potential. To understand the consumption behaviour of these households, the long-run and the short-run marginal propensities to consume and the marginal propensities to consume out of‘permanent’ or ‘normal’ income and ‘transitory’ income have been worked out. For the urban sector none of these give encouraging enough results and the analysis has been extended to examine whether other factors like prices and household assets are of any significance. Whereas for the rural sector, Milton Friedman's theory of ‘permanent’ or ‘normal’ income is somewhat substantiated, other factors like ‘transitory’ income, prices and assets appear to inthence urban consumption behaviour though no single one of them substantially enough. A negligible effect of ‘permanent’ income on urban consumption behaviour is, on the other hand, very clearly suggested by the results. Household consumption and savings have next been projected using the above results to determine the possible levels for the next three years. The results suggest that the rate of domestic savings likely to be achieved by the end of the Third Five Year Plan (1965–66) falls short of the targets laid down.     

Household income mobility in rural China: 1989–2006

This article analyzes household income mobility in rural China between 1989 and 2006. The results indicate that incomes in rural China are highly mobile. The high degree of rank and quantity mobility implies re-ranking and mean convergence in income distribution, but the disparity between them also enlarged with leveling-up and Gini divergence brought about by economic growth. In addition, there exists considerable transitorily poor and rich in positional mobility. Though, transitory movement provides an opportunity for both poor and rich and decreases long-term inequality, it also causes considerable income fluctuations and economic insecurity. Moreover, the equalizing effect of income mobility on income inequality is weakening.