Household Income Inequality

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Household income inequality has increased in a large majority of Organisation for Economic Co-operation and Development (OECD) countries. The widening gap between the lower middle class, poor households, and especially the retired compared to the rest of society has become a major concern for policy makers and governments. An analysis of the social impact of the 2008 economic crisis by the OECD (2009) showed that pensioners had been largely spared from benefit cuts and sometimes their public pension benefits increased as part of economic stimulus programmes. In response to the financial and economic crisis in 2008, the macroeconomic effects of policy changes have received renewed consideration in the economic literature. Yet, as argued by…show more content…
I find that, on average, there is an immediate statistically significant response of consumer spending to changes in permanent Social Security benefits. The estimated contemporaneous effect of a 1 percent increase in permanent benefits payment is a 0.11 percent increase in total consumption expenditure and is statistically significant at the 5 percent level. There is a large effect on durable consumption with an immediate impact response to the benefit changes. There is no significant impact on non-durable consumption. The finding that a real permanent Social Security benefitd increase immediately raises consumer spending in the quarter of an increase is consistent with Romer and Romer (2014) results for the US. The impact is statistically significant. This also agrees with the fact that, in general, consumption is sensitive to changes in income. On the other hand, it contradicts the Ricardian Equivalence theory that increases in benefits equal increase in future taxes hence no response to consumer spending. My findings also contradict the Rational Expectations theory; fully anticipated changes in income should have no effect on consumer spending. When consumers receive news of a future increase in income, they smooth consumption as much as capital markets permit. This is in line with much literature that posits that permanent income hypothesis does not provide a complete explanation of consumer behaviour. The impact on…show more content…
My findings of the labour force participation rate response to the benefit increases show that portion of the changes in the labour force participation rate is driven by non-cyclical factors such as benefit payments. Cyclical reasons such as a change in wages and preferences could play a role in the changes in labour force participation. It should be noted that most of the studies develop alternate analytical frameworks which involve extreme assumptions for studying effects of benefit payments rather than the use of time series data. Hence, the results I obtained using the time series provide an exciting contribution to the literature and has important implications for the assessment of the current state of the Canadian labour
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