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Transcript of Discussion of “Has consumption inequality mirrored income inequality?” by Mark Aguiar and Mark...
Discussion of “Has consumption inequality mirrored income
inequality?”by
Mark Aguiar and Mark Bils
NBER Economic Fluctuations and Growth Program MeetingJuly 2011, Cambridge MA
Jonathan A. ParkerKellogg School of Management, Northwestern University
I. Background
Krueger Perri (2003, 2006)
Possible explanations
1. Near-complete consumption insurance
2. Self-insurance • Increase in Var(ln y) due to transitory shocks to income
(Krueger Perri)• Income changes expected (Primiceri van Rens)
3. CEX under-measures increase in consumption inequality• And so do related expenditure datasets
Three possible problems with CEX
1. Decreasing coverage or participation of high-consumption householdsCannot explain
2. Decreasing coverage/measurement of luxury goods
3. Decreasing measurement or coverage of all expenditures of high-consumption households
II. Bils and Aguiar
In the CEX, • There is not increasing under-measurement of
luxuries vs. necessities• But there is increasing under-measuring of the
all expenditures of high-consumption households over time . .
• So consumption inequality has actually increased as much as income inequality
Bottom line: I think this is probably correct
Log budget share of good: ln wi = ln (xi /X )
Log total real expenditure:
X = xLux+xNormal+xNecln X10 ln X90 ln X90
Estimated Engel curve for luxury
Estimated Engel curve for normal good
ln X90
Observed 1980
Observed2006
Inferred2007
The essence of the exercise
Inferred adjustment to ln X90
ln X10
III. Two key assumption in method1. Prices don’t matter
Typical demand system x, X nominal expenditures:wi,t = xi,t / Xi, = αi + γi’ ln pt + βi ln ( Xi,t / a(pt )) + εi,t
+ Restrictions of demand theory– The danger: In AB framework, real shares could vary due to
substitution due to changes in relative prices– Partly an issue of question, partly of restricting data– Dora Costa and James Hamilton infer bias in CPI assuming
well-measured total and shares• Infer pt from parameters and xi,t and Xi,t
• If AB had blamed under-measurement of luxuries, this would be more of a worry
2. Elasticities are well-measuredTypical demand system x,X nominal expenditures:
wi,t = xi,t / Xi, = αi + γi’ ln pt + βi ln ( Xi,t / a(pt)) + εi,t
+ Restrictions of demand theory– The AB framework is nonstandard
a) Usually instrument for X due to noise in x getting into Xb) Observation: slope of late-sample Engels curves should be
steeper
ln X10 ln X90
Estimated Engel curve for luxury 1980
Estimated Engel curve for normal good
ln X90
Observed 1980
Observed2006
2006 estimate of βLux should be larger than 1980 estimate
Observed 1980 and
2006
Estimated Engel curve for luxury 2006
Log budget share of good: ln wi = ln (xi /X )
Log total real expenditure:
X = xLux+xNormal+xNec
But Figure 5: Elasticities are stable
alcbevauto
cashcont
chldrnclothes
clothes
educent
equpmt
foodaway
foodhome
furniture
healthhousingperscare
shoes
svcs
tobacco
trans
tv
utilities
-.5
0.5
11.
52
1992
-19
95 e
last
iciti
es
-.5 0 .5 1 1.5 21972-1973 elasticities
Slope of fitted line = 0.996 (0.108)
But OK: because elasticities have measurement error, reverse regression shows change we expect
alcbevauto
cashcont
chldrnclothes
clothes
educent
equpmt
foodaway
foodhome
furniture
healthhousingperscare
shoes
svcs
tobacco
trans
tv
utilities
-.5
0.5
11.
52
1972
-19
73 e
last
iciti
es
-.5 0 .5 1 1.5 21992-1995 elasticities
Slope of fitted line = 0.828 (0.090)
IV. Corroborating/related evidence
Fact 1: consumption inequality (mostly) tracks income inequality across groups of households
Cutler and Katz (1991)
Fact 2: improved consumption measurement shows slightly more consumption inequality
Attansio, Battistin, Ichimura (2004)
Fact 3: CEX shows increased saving rates and bigger increases for high-income households
Parker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009)
Inconsistent with NIPA & FOF & SCFMaki and Palumbo (2001) use SCF/FOF data• Saving rates by quintiles of income from
changes in wealth, returns, and income– Increase in saving rates for low income– But decrease in saving for high income: 9% to -2%
Parker, Vissing-Jorgensen, Ziebarth: this implies– CEX measures low consumption about right– CEX measures 74% of top consumption in 1980
and this falls to 51% in 1990(problem: assumed homogeneity in returns by class)
Recall: Three possible problems with CEX
1. Decreasing coverage or participation of high-consumption householdsCannot explain
2. Decreasing coverage/measurement of luxury goods
3. Decreasing measurement or coverage of all expenditures of high-consumption households
On 2: measurement of luxuriesParker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009)
On 2: measurement of luxuriesParker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009)
1. Calculate the ratio of aggregate CEX consumption to NIPA consumption for each goods in each year
2. Scale up CEX expenditures by good and time specific factors
3. Recalculate CEX consumption inequality Finding: adjustment makes little difference
=> 0.04 higher increase in 90-10 log expenditure PVZ also estimated group mismeasurement necessary
to generate ratios, but AB method better=> no PVZ paper
Summary
• For high consumption households, the budget share of luxuries has risen more than implied by their rise in total spending and Engel curves
• Implication: their total spending is undermeasured• Consistent with corroborating evidence• Relies on stability of demand system and well-
measured prices
ln X10 ln X90 ln X90
Estimated Engel curve for luxury
Estimated Engel curve for normal good
ln X90
Observed 1980
Observed2006
Inferred2007
The essence of the exercise
Inferred adjustment to ln X90
ln X10
Log budget share of good: ln wk= ln (xk /X )
Log total real expenditure:
X = xLux+xNormal+xNec
Appendix
90-10 Inequality in men’s log wages
Juhn Murphy Pierce (1993)
90-10 Inequality in men’s log income
Gordon (2008)