Category: Uncategorized

Distributional Effects of Latest CPI Figures

A lot of the recent analysis of the CPI figures on this blog has examined  which households (in terms of poor versus rich) have benefitted most from deflation.  The latest CPI figures released today  (http://www.cso.ie/releasespublications/documents/services/current/rsi.pdf) has prompted me to publish some preliminary results from some work I have been doing which looks at this from a slightly different (though complementary) angle to that taken by Jennings, Lyons and Tol in their recent ESRI working paper.  I have mentioned before on this blog the idea of what is known as the distributional characteristic of a good (or aggregate of goods), which essentially summarises the extent to which consumption of the good is concentrated amongst lower income households.  By calculating this measure we can then see which price changes will have the most impact upon poor (or rich) households.  Calculation of the measure requires detailed knowledge of expenditure patterns across households and this data is available in the Household Budget Survey (and thus unfortunately only be calculated for the years the HBS is carried out).  Some analysis I have done looking at the 2004/2005 HBS suggests the following ranking of goods in terms of their distributional characteristic (a high ranking indicates a good whose consumption is more concentrated amongst poorer households):

1.  Tobacco and Fuel/Light (their values are practically identical)

3.  Food

4.  Non-durable Household Goods

5. Miscellaneous Household Goods

6.  Housing (including mortgage interest)

7.  Durable Household Goods

8. Alcohol

9.  Clothing and Footwear

10. Transport

11.  Services

Unfortunately the classification of goods into aggregates in the HBS tables (http://www.cso.ie/releasespublications/documents/housing/hbs.pdf) does not correspond exactly with that in the published CPI but for many goods it is very close, if not exact.

So, taking this approach, what have been the relative distributional effects of recent changes in the CPI (bearing in mind that all households will benefit from price falls)?  The July fall in clothing and footwear will give greater benefit to richer households relative to poorer ones, given that this consumption of this good is relatively more concentrated amongst richer households (this is true for the broad aggregate though of course may not be so for some individual clothing items).  The fall in fuel prices is definitely very good news for poorer households as this category consistently has the highest distributional characteristic (along with tobacco).  Housing is pretty much bang in the middle in the ranking so the effect of falls in mortgage interest payments is fairly neutral.

It should also be borne in mind that these figures are based upon the HBS from about five years ago but having looked at previous HBS the rankings don’t seem to change much.  I will publish the detailed results in a UCD working paper with more information about the methodology etc in the next couple of weeks.

July Live Register Figures

The CSO released the Live Register figures for July today.

Optimists can point to the fact that the month-on-month increase (s.a.) for July was 10,500, slightly down from 12,000 in June, and only one third the January increase of 31,400.

However, the composition of the total is changing towards longer-term unemployment, as may be seen in the shift among males aged 25 and over from Jobseeker’s Benefit, which actually fell in July, to Jobseeker’s Allowance, which rose steeply. (You may get Jobseeker’s Allowance if you don’t qualify for Jobseeker’s Benefit or if you have used up your entitlement to Jobseeker’s Benefit.)
There are now more males aged 25 and over in the Allowance than in the Benefit category. The number of females claiming the Allowance is also rising very rapidly.

No doubt when details on the duration of claims are released, they will confirm the shift towards longer-term unemployment.

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How Behavioural Economics Should Influence Financial Regulation

RAND recently held a conference on the implications of behavioural economics for financial decision making. Among the talks include Sendhil Mullainthan on behaviourally informed financial regulation. All of the videos are available below including talks by Richard Thaler and others. The main implication so far of this literature is that consumers make relatively predictable mistakes when making financial decisions and that various ways of simplifying the choices involved and making them more active can improve people’s lives and the functioning of markets. People should watch some of the videos before making up their mind. The simplistic arguments about paternalism do not apply here in the same way as they would to arguments around policy proposals such as mandatory pensions.

link here

Addendum: The NBER have also posted up a number of very useful videos on how to implement experimental methods in real-world economics.

link here

Dept Fin Capacity review

(from LorcanRK) The Department of Finance published their review today:

http://www.finance.gov.ie/documents/publications/reports/2009/Dfincapacityreview09.pdf

Well worth reading for any that want to get an insight to the way the place works (or is supposed to work)

Price inflation and income distribution

With the risk of being ridiculed for self-promotion, readers may want to have a look at some recent computations.

Earlier, Callan, Keane and Walsh had a look the impact of recent changes in taxes and benefits on nominal income. They found a sizeable redistribution from rich to poor.

An Bord Snip Nua argued that benefits should be indexed on the consumer price index, which would be tantamount to a 5% cut.

In the paper with Jennings and Lyons, we compute the consumer price index per income decile. The highest incomes have seen the fastest deflation, up to 5.1% for the period July 2008 to June 2009 for the top 10% earners. The three lowest income deciles have seen deflation in the range of 3.0 to 3.4%.

By the argument of An Bord Snip Nua, a 5% cut in benefits thus seems a bit harsh.

On the other hand, deflation has been slower for lower incomes because local authority rents have continued to go up even as the rest of the housing market collapsed. As local authority rents are indexed on renters’ incomes, a cuts in benefits would in fact induce deflation for this, particularly vulnerable group.

A 3% cut in nominal benefits would therefore mean that the poorest people in Ireland would see a rise in their real income.