Download The Great Recession and the Distribution of Household Income

The Great Recession and the
Distribution of Household Income
Andrea Brandolini
Department for Structural Economic Analysis
Bank of Italy
“Inequality, Labor Market and Growth”
XXV Villa Mondragone International Economic Seminar
University of Rome Tor Vergata, 25-27 June 2013
Stephen Jenkins
Andrea Brandolini
John Micklewright
Brian Nolan
with
G. Basso, A. Björklund, T. Callan,
F. D’Amuri, I. Faiella, J. Frick,
M. Grabka, M. Jäntti, R. Joyce,
B. Maître, L. Sibieta,
T. Smeeding, and J. Thompson
Part-funded by the Fondazione
Rodolfo de Benedetti, Milan.
The Great Recession and
the Distribution of Household Income
The subject: impact on household incomes of the major
economic downturn that began at the end of 2007 (the ‘Great
Recession’, GR)
 focus on real income levels, poverty rates, and income
inequality
Headline findings: for most of the countries we study,
in the two years following the downturn, little change in
household income distributions, but …
… in the medium- to longer-term, much greater change
likely due to fiscal consolidation and slow pace of economic
recovery
Analytical predictions
1. Lower real income levels throughout the income range
2. Absolute poverty rate rises

Incomes fall relative to poverty line fixed in real income terms
3. Relative poverty rate need not rise


Poverty line as fraction of median/mean income changes over time
EU social exclusion indicator: poverty line = 60% median income
4. Impact on income inequality is not clear cut

Depends precisely on who is affected and where located in the
distribution
5. Differences in effects across subgroups of people within the
population

Some predictions with knowledge of who is to be found in the
bottom, middle and top ranges to start with, and their income
sources
‘Past’ evidence confirms ‘predictions’
• Time-series econometric studies (Blinder-Esaki, etc.)

regress inequality on macro variables, but typically short time series
• ‘Top incomes’ studies (Atkinson-Piketty-Saez, etc.)

share of top x% tracked over very long periods of time
• ‘Rising tides’ studies of particular episodes

most evidence is about the USA; there is much less about the EU
• Tax-benefit microsimulation ‘stress tests’

‘what if’ exercises; ‘if’ refers to a characterisation of a recession
• Case studies





Multi-country time-series (e.g. Rev. Econ. Dyn. 2010 special issue)
USA in the 1930s
NZ at end of 1980s (and IE from the mid-1990s)
Nordic countries at the end of the 1980s
UK since 1970s
The Great Recession – how big?
OECD area
• GDP fell by 5%, 2008q1–2009q2
 cf. the Great Depression: GDP in W. Europe, USA,
Canada, Australia, and NZ fell by c. 17%
Among our 21 countries, 2008–9,
• Heterogeneity in GDP fall:
 no fall in Australia, only 2% in NZ, but …
 falls of 9% in Finland and 13% in Ireland
 median change is fall of 5%, with USA fall of 4%
• Speed of recovery has varied greatly too
• Heterogeneity in labour market changes too
Total household income cushioned
over the GR in Euro area
105
100
95
90
85
GDP
GHDI
GHADI
80
2000q1
2002q1
2004q1
2006q1
2008q1
Similar picture for USA
2010q1
2012q1
In most nations, total household sector
income rose though GDP fell
% changes in real Gross Household Disposable Income (GHDI) and real GDP, 2008-09
10
NO
8
6
CA
BE
SE
4
ES
PT
FI
2
UK
0
FR
CH
US
DE
IE
DK
AT NL
-2
GR
-4
IT
-10
-8
-6
-4
-2
0
Percentage change in real GDP, 2007-9
2
Total household sector income lower, but
for offsetting tax and benefit changes
Ireland
Greece
USA
Italy
Denmark
UK
Sweden
Spain
Austria
Finland
Netherlands
France
Germany
Portugal
Canada
Switzerland
Belgium
Norway
-10
-8
-6
-4
-2
0
2
Percentage change
4
6
GHDI
GHDI holding social benefits at 2007 values
GHDI holding social benefits and taxes at 2007 values
8
10
Changes in household distributions
during the GR
• Heterogeneity in distributional changes across countries
• Marked declines at the bottom of the income distribution relative to
historical trend are unlikely to appear
• Total household sector income did not fall 2007–9
• Rise in state support to households – by design higher at bottom
• Rise in average earnings among workers increases income gap
between working and non-working households …
… but earnings inequality did not change markedly
• Equalising impact from changes in capital income
 Share of capital income in GHDI, especially distributed income
from corporations, declined
 Capital income receipt is concentrated among richer households
Changes in household distributions
in medium- and longer-term (2010 onwards)
• Many countries are now making fiscal adjustments
 Nature and size depends on financial health at time of GR onset
• Changes in government benefits and taxation have important
effects on living standards
 Not all are revealed in our measure of household income
• Hard to make precise predictions about fiscal consolidations
 Cuts in cash social security benefits decrease incomes towards
the bottom more than those towards the top, and so likely to
raise absolute poverty rates
 Impact on relative poverty rates and inequality not clear cut –
e.g. public sector wage freeze impact and distributional location
of public sector workers (IE)
12
Addendum
(April 2013)
Real GDP (2008:1=100)
106
Sweden
104
US
102
Germany
100
France
98
UK
96
Spain
94
92
Italy
90
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2008
2013
2009
2010
2011
2012
Source: elaboration on OECD data.
% change in per capita household incomes in
selected OECD countries, 2008-09 and 2008-11
12
2008-09
2008-11
8
4
0
-4
Norway
Portugal
Belgium
Finland
Sweden
Spain
Ireland
Germany
United Kingdom
France
Austria
Denmark
Netherlands
Italy
-8
Source: elaborations on Eurostat data. Gross disposable income at 2005 prices.
4
4
Relative poverty
4
3
3
3
2
2
2
1
1
1
0
0
0
-1
-1
-1
-2
-2
-2
-3
-3
-3
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
United
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Gini index
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
United
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
United
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Great recession and income distribution
(% point changes in 2008-09)
Anchored poverty
Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.
4
4
Relative poverty
4
3
3
3
2
2
2
1
1
1
0
0
0
-1
-1
-1
-2
-2
-2
-3
-3
-3
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
United
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Gini index
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
United
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Ireland
Switzerland
Netherlands
Portugal
Norway
Finland
Belgium
Germany
Greece
United
Austria
France
Sweden
Italy
Luxembourg
Denmark
Spain
Great recession and income distribution
(% point changes in 2008-09 and 2008-10)
Anchored poverty
Source: elaborations on EU-SILC data. Countries are ranked by absolute change in Gini index.
Austerity packages and household income
(micro-simulated percentage point changes)
0
0
0
-2
-2
-4
-6
-2
-4
-8
-10
-6
-12
-14
-4
-8
1 2 3 4 5 6 7 8 9 10
income decile group
IT
LT
UK
1 2 3 4 5 6 7 8 9 10
income decile group
EE
ES
RO
1 2 3 4 5 6 7 8 9 10
income decile group
EL
LV
Source: Euromod estimates from Figari, Tandullia and Taddei 2012.
PT
Summary
• Short-term (2008-09) impact of GR modest (and elderly did
relatively well) – largely thanks to public redistribution
• Analysis of period during and immediately after the GR;
distributional impacts will differ between short-, medium-, and
longer-term
 Medium-term consequences depend on the policy mixes
adopted, and on future economic growth rates
• Our household income measure misses ‘non-cash’ income received
from government services and reductions in purchasing power
arising from increases in indirect taxation
 But cuts in spending on services, and changes in indirect taxes,
are features of many countries’ fiscal consolidation packages
Five lessons
1. Consider cross-country heterogeneity
2. Stabilisation of the household income distribution in the face of
macroeconomic turbulence is an achievable policy goal, at least in
the short-term (cf. 1930s)
3. Stronger welfare states provide greater ‘automatic stabilisation’
4. Timely monitoring of distributional outcomes essential
 Maintain micro databases, integrate national accounts and
micro sources, use microsimulation modelling
5. Substantial cut-backs in welfare states as part of fiscal
consolidation packages likely to produce greater instability in
household distributional outcomes
 From era with broad consensus to era of sharp distributional
conflicts (cf. Greece, UK): rich vs. poor; old vs. young
Thank you for your attention!