The influence of demographics and household-specific price indices on consumption-based inequality and welfare: a comparison of Spain and the United States.

• Author: Garner, Thesia I.

1. Introduction

   Recent international comparisons of economic well-being that have focused on individuals and households have two characteristics. First, perhaps because of the availability of data, household (1) income has been most frequently used as the proxy for household economic well-being. Second, most studies have concentrated on income inequality comparisons. (2) An important finding from these international studies is that, during the late 1980s and early 1990s, the United States had the least equal distribution of household income among all industrialized countries (Atkinson, Rainwater, and Smeeding 1995; Gottschalk and Smeeding 1997, 2000).

   Slesnick (1991, 1993), however, pointed out that, ideally, we should characterize economic wellbeing in terms of commodity consumption. Without entering the discussion of income versus consumption as proxies of economic well-being, it is fair to say that both deserve investigation. The important fact in this respect is that, for the United States, the consequences of using consumption-based measures have been dramatic. First, the level and trend of Slesnick's (1991) series of aggregate total expenditures from 1949-1989 differed substantially from those of before-tax income. Second, the substitution of total expenditures for income usually results in lower estimated poverty rates (Slesnick 1993; Garner, Johnson, and Kokoski 1996). Third, the distribution of household expenditures is substantially more equal than the distribution of income in the United States (Johnson and Shipp 1997). (3)

   To examine whether results of consumption-based studies of household economic well-being provide the same ranking of countries as those based on income, international comparisons are needed. Such studies are not easy to conduct because, unlike for income, (4) there is no data source for which consumption expenditure data have been made comparable across countries. However, when microhousehold expenditure data are available to researchers, such comparisons are possible. This is the case in the present article, where the availability of household expenditure data for Spain and the United States presents us with a rare occasion to deal with the problems that plague international comparisons.

   The comparison between Spain and the United States is also interesting for two additional reasons. First, as far as recent trends are concerned, inequality increased in the United States during the 1980s, regardless of the measure of well-being considered. However, the change in consumption-based inequality was smaller than the change in income inequality when using household expenditure survey data (Cutler and Katz 1992; Johnson and Shipp 1997). In contrast, over a similar period (1973- 1974 to 1990-1991), household expenditure and income inequality fell in Spain (Ruiz-Castillo 1995; Del Rio and Ruiz-Castillo 2001 a, b). However, like for the United States, the change was greater for Income inequality than for expenditure inequality in Spain (Alvarez Aledo et al. 1996).

   Second, using microdata from household budget surveys, it has been found that in Spain, as in Portugal and the United Kingdom, income inequality is less than expenditure inequality. (5) General economic intuition would suggest that the greater prevalence of transitory components in current income, relative to current expenditures, should lead to greater income than expenditure inequality, which was reported earlier for the United States. These conflicting results raise questions about previous international comparisons based on current population survey income data for the United States and income data from household budget surveys for Portugal, Spain, and the United Kingdom. In particular, according to Gottschalk and Smeeding (1997), income inequality was less in Spain than in the United States during the earlier 1990s. Whether this ranking remains the same when expenditure inequalities are compared is one of the questions addressed here.

   We compared inequality and social welfare in Spain and the United States using current household consumption expenditures as the measure of economic well-being. The Spanish data are from the Encuesta de Presupuestos Familiares (EPF), conducted by the Instituto Nacional de Estadistica (INE). Data for the United States are from the Consumer Expenditure Survey (CE), a Bureau of Labor Statistics (BLS) survey. Data from 1990-1991, the latest year for which information was available for Spain, were used for both countries. Although the survey methodologies differ in some respects, expenditures were defined as comparably as possible, and the same research methodology was used to conduct the comparison.

   A focus of the study is the role of demographics and household-specific price indexes for the measurement of economic well-being. Their influence on the economic well-being rankings of the two countries was examined. The present study adds to the emerging basic literature on consumption-based measures of inequality and social welfare and introduces the role of relative price changes in international comparisons of distributional analysis.

   Our results suggest that differences in demographic factors can be very important in international comparisons. For Spain and the United States, consumption-based inequality and social welfare are dramatically different for smaller and larger households. As a consequence, differences in economic well-being in Spain and the United States also strongly depend on the assumptions made about economies of scale within households for consumption and expenditures. There are three main findings of our study. (1) When greater economies of scale are assumed, overall inequality in the United States is less than in Spain. In contrast, fewer economies of scale result in greater overall inequality in the United States compared with Spain (about 15-40% higher, depending on which inequality index is used). However, differences are only statistically significant when economies of scale are assumed to be small or nonexistent. (2) Welfare is always significantly higher in the United States, but the gap between the two countries increased continuously from 12% to 41% as economies of scale decreased. (3) Inflation during the 1980s in both countries has been essentially neutral from a distributional point of view, so all results appear to be robust to the choice of time period.

   The remainder of the article is organized into four sections and an Appendix. Section 2 includes background information, and section 3 presents a description of the methods and data. Section 4 includes the empirical results, and section 5 provides the conclusion. The Appendix is devoted to a brief description of the data for comparative purposes.

2. Background

   Spain and the United States are rather different with respect to their economies, economic systems, and demographic compositions. Such differences are expected to contribute to differences in the economic well-being of the countries' populations and, thus, to their well-being rankings.

   Spain has a smaller economy and has only recently moved to a more market-oriented system. In contrast, the United States has quite a large economy and has been rather open and market-oriented for most of its history. Since the mid-1970s, Spain has been experiencing a strong process of economic modernization and liberalization, including full membership into the European Union (EU) in 1986 and becoming one of the founding states of the European Monetary Union in 1999. This process has resulted in a much more dynamic, open, and market-oriented economy than it was before the Union. For example, the share of the agricultural sector in Spain declined from 38.7% of GDP in the 1960s to 8.3% in 1997. In contrast, the services sector share surged from 31.0% to almost 61.7% of GDP during the same period. Likewise, the degree of openness, measured by the share of exports plus imports in GDP, increased from 8.4% in the 1960s to about 29.5% in 2000. Overall, from 1986 to 1996, Spanish GDP per capita rose from 48.7% to 54. 2% of U.S. GDP per capita. (For a detailed description of the development of the Spanish economy over the past four decades, see Martin 1999 and Myro 2001.)

   Since the mid-1970s, Spain has been taking important steps toward a fully fledged comprehensive social safety net, in the European style, whereas that of the United States is much more limited (see U.S. Dept. of Health and Human Services 1998). Thus, public sector expenditures, as a percentage of GDP, rose from 14.8% in 1960 to 40.7% in 2000 for Spain. In contrast, the percentage for the United States increased from 27.0% to 31.7% during the same time period.

   Tax structures in the two countries are also rather different, and this too can contribute to differences in economic well-being in the two countries. A modem income tax system was not operative in Spain until 1978. However, since then, the minimum and maximum tax rates in the graduated personal income tax system, as well as the number of tax brackets, have been greater in Spain than in the United States (see Gago 2000). Both countries have excise taxes, but Spanish EU membership led to the introduction in 1986 of a tax system that includes a multistage value-added national tax. In contrast, a primarily single-stage sales tax system in the United States exists, with taxes collected at the state and local levels.

   The demographic structures of the two countries are also quite different. In contrast to the United States, Spanish households include more members, on average, and are more likely to include multiple generations. In Spain, many young adults live with their parents, and more elderly people live with their children. Also, single-person and single-parent households are less prevalent in Spain than in the United States.

   Reflecting both the economic and demographic characteristics of Spain and the United States, inequality differs in the two...