Increase In Consumption Inequality Research Articles

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

AbstractWe 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%.

Conspicuous consumption and peer-group inequality: the role of preferences

We develop a model that predicts changes in household consumption following a mean preserving increase in consumption inequality. The model allows for multiple peer-groups (a high-consumption (HC) group and a low-consumption (LC) group) as well different degrees of conspicuousness between the goods. We find that following a mean preserving increase in consumption inequality, a household with a constant level of income will increase its consumption of the more conspicuous good when it has preferences consistent with (i) ‘keeping up with the Joneses’ and a relatively stronger HC effect or (ii) ‘running away from the Joneses’ and a relatively stronger LC effect. Using U.S. consumer expenditure data from 1986 to 2002, we find tremendous heterogeneity in household preferences. While U.S. households consistently demonstrate ‘keeping up with the Joneses’, the relative strengths of HC and LC effects vary across racial sub-groups as well as across goods. Likewise, while expenditure on clothing, jewelry, personal care, etc., is generally more conspicuous than expenditure on healthcare, home furnishings, vehicle maintenance, etc., among the LC group, it is less conspicuous among the HC group with some heterogeneity by race. We conclude that heterogeneity in preferences is a likely explanation for the differences in the observed relationship between conspicuous spending and peer group inequality.

The Income and Consumption Effects of Covid-19 and the Role of Public Policy

This paper provides empirical evidence on how the labour market impacts of the COVID-19 pandemic vary across workers’ incomes, assets, characteristics and household structures in the UK. Using data from the UK Household Longitudinal Study, we find that less educated and young workers are most likely to be laid-off. This is particularly the case for females. Moreover, less educated workers tend to have low income and low assets, limiting their ability to maintain consumption in the face of reduced income. This is compounded at the household level by assortative partnering between workers with similar education levels. We analyse the source of these inequalities by relating employment outcomes to factors related occupational and industrial characteristics. We then conduct a quantitative assessment of the likely impact of covid-19 on households’ consumption and find that, because the adverse labour market impacts are concentrated on workers with low income and low assets, 70 percent of households in the bottom fifth of the income distribution cannot maintain their usual expenditure for even one week. Finally, we consider the effectiveness and distributional implications of two different policy interventions: the Coronavirus Job Retention Scheme in the UK and Economic Impact Payments in the US. Our findings suggest that both policies can alleviate the increase in consumption inequality that would have otherwise arisen during the pandemic. In the short term, the US-style one-off payment is most effective at providing affected households with the means to smooth consumption. However, the CJRS provides better insurance against prolonged disruption as the program provides continuous income support.

Credit and Ethnic Consumption Inequality in the Central Highlands of Vietnam

Credit is commonly considered an important instrument to relieve financial capital constraints of poor households and subsequently to improve their welfare. However, the empirical impact of credit on consumption inequality remains ambiguous. We use a 2-year panel dataset collected in Daklak, a province in the Central Highlands of Vietnam, to investigate the differences in access to credit and its impact on household consumption and consumption inequality between ethnic groups. Our results show that the differences in access to credit and in its impacts on household consumption between the ethnic majority and the migrant ethnic minority groups are insignificant. However, households from the indigenous ethnic minority group face more disadvantages in accessing formal credit and rely more on informal credit than those from the ethnic majority. They also face a higher collateral ratio and the amount of formal loans they could access is lower. The impact of formal credit on consumption of the majority is also higher than that of the indigenous minority, consequently causing a significant increase in consumption inequality between the ethnic groups. Our findings call for assistance programs to support indigenous households to improve their access to formal credit as well as to enhance the effectiveness of these loans.

Effects of patents versus R&D subsidies on income inequality

This study explores the effects of patent protection and R&D subsidies on innovation and income inequality using a Schumpeterian growth model with heterogeneous households. We find that although strengthening patent protection and raising R&D subsidies have the same macroeconomic effects of stimulating innovation and economic growth, they have drastically different microeconomic implications on income inequality. Specifically, strengthening patent protection increases income inequality whereas raising R&D subsidies decreases (increases) it if the quality step size is sufficiently small (large). An empirically realistic quality step size is smaller than the threshold, implying a negative effect of R&D subsidies on income inequality. We also calibrate the model to provide a quantitative analysis and find that strengthening patent protection causes a moderate increase in income inequality and a negligible increase in consumption inequality whereas raising R&D subsidies causes a relatively large decrease in both income inequality and consumption inequality.

Income Shocks or Insurance - What Determines Consumption Inequality?

Contrary to the implications of economic theory, consumption inequality in the US did not react to the increases in income inequality during the last three decades. This paper investigates if a change in the type of income inequality - from permanent to transitory - or a change in the ability to insure income shocks is responsible for this. A measure of household consumption is imputed into the Panel Study of Income Dynamics to create panel data on income and consumption for the period 1980-2010. The minimum distance investigation of covariance relationships shows that both explanations work together: the share of transitory shocks increases over time, but the capability to insure permanent and transitory shocks to income also improves. Together, these phenomena can explain the lack of an increase in consumption inequality.

Theory and Empirics of Economic Inequality Influencing Economic Growth: A Study of Major Indian States

Unlike the conventional approach, this paper theoretically shows that when median voter’s income is much below the mean level, higher inequality of income increases redistribution in favor of median voter, and thereby influencing higher economic growth provided that major share of tax-financed capital is allocated in public education which benefits all. In the empirical findings this study suggests that despite continuous increase in consumption inequality in major Indian states, redistribution in real social expenditure by Centre and States continues to increase in real per capita terms including median voter during post-reform period. Although inequality of consumption expenditure induces an increase in economic growth for about 50 per cent of major Indian states and the regression coefficients are almost insignificant, such tax-financed public education might act as externality to everybody if major tax financed resources are allocated on education. This might lead to a positive and significant impact into the growth process provided that the large proportion of working population of major Indian states get employment in the service sector. However the empirics of Indian states during the current years also show that service sector of Indian economy, which depends completely on stepping up of educational level to the working population, acts as the major contributor to growth.

Consumption Mobility in the United States: Evidence from Two Panel Data Sets

Abstract This paper examines inequality and mobility using measures of income and consumption. Consumption is claimed to be a better measure of permanent income and thus well-being, but most studies of inequality and mobility using U.S. data use income.This paper uses cohort data from the Consumer Expenditure Surveys on total consumption to impute consumption in the Panel Study of Income Dynamics. Then, we use this imputed consumption and actual income from the PSID to examine changes in inequality and mobility. Similar to earlier findings, we show that there has been a large increase in income inequality but no concurrent increase in consumption inequality in the 1990s. Conversely, income mobility and consumption mobility are similar during this time period.Finally, we link the concepts of inequality and mobility using a social welfare function. The results suggest that income mobility and consumption mobility more than offset the increases in inequality.

Using Home Maintenance and Repairs to Smooth Variable Earnings

Recent research indicates that the marked increase in U.S. income inequality over the last twenty-five years has not been matched by a similar increase in consumption inequality. This paper examines the role of saving/dissaving in a house as a vehicle for consumption smoothing. Data from the American Housing Survey show that expenditures on home maintenance and repair are economically significant, amounting to roughly $1,750 per household each year. This figure is comparable to the labor literature estimates that put households' average annual transitory income variance at about $2,200. Our calculations show a significant elasticity of maintenance and repair expenditures to transitory income shocks. The elasticities are higher for less well educated households, which are more likely to be liquidity constrained than their better educated counterparts.