Inequality for Wage Earners and Self‐Employed: Evidence from Panel Data*
| DOI | http://doi.org/10.1111/j.1468-0084.2009.00549.x |
| Author | Raquel Carrasco,Maite Martinez‐Granado,Pedro Albarran |
| Date | 01 August 2009 |
| Published date | 01 August 2009 |
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©Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2009. Published by Blackwell Publishing Ltd,
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 71, 4 (2009) 0305-9049
doi: 10.1111/j.1468-0084.2009.00549.x
Inequality for Wage Earners and
Self-Employed: Evidence from Panel DataÅ
Pedro Albarran†, Raquel Carrasco‡ and
Maite Martinez-Granado§
†Departamento de Economía, Universidad Carlos III de Madrid, Getafe, Spain
(e-mail: pedro.albarran@uc3m.es)
‡Departamento de Economía, Universidad Carlos III de Madrid, Calle Madrid 126,
28903, Getafe, Spain (e-mail: raquel.carrasco@uc3m.es)
§NAIDER and Departamento de Fundamentos del Análisis Económico II,
Universidad del País Vasco, Bilbao, Spain (e-mail: maite.mtzgranado@ehu.es)
Abstract
In this paper we highlight the importance of analysing the evolution of income inequal-
ity separately for employees and self-employed workers. Using Spanish panel data
on income and consumption for the period 1987–96, we find noticeable differences
across these groups in the evolution of income inequality, and in the relative impor-
tance of the transitory and permanent components of income variance. The evolution
of inequality is mainly explained by movements in the transitory component for
the self-employed and by the permanent component for the employees. Our results
suggest that different policies should be implemented for each group.
I. Introduction
The evolution of inequality has been widely analysed in the literature in recent years.
Many studies have tried to identify the contribution of permanent and transitory
income shocks to the variation in inequality (Moffit and Gottschalk, 1995, 2002;
Blundell and Preston, 1998). Accounting for these two different types of income
*We are grateful to an associate editor, two anonymous referees, and participants at the 12th Conference
on Panel Data, COST Conference, IAE and Banco de Espa˜na seminars for helpful comments on this work.
All remaining errors are our own. Research funding from Fundaci´onRam ´on Areces and the Spanish Ministry
of Education, Grants SEJ2006-05710 and SEJ2007-63098, is acknowledged.
JEL Classification numbers: D12, D31, D91, E21.
492 Bulletin
shocks is crucial as they have very different implications for welfare and policy. In
general, changes in the permanent component of income inequality have been asso-
ciated with changes in the price of skills, while changes in the transitory component
have been related to income uncertainty, changes in labour market instability and
measurement error.
Typically, in the literature, two distinct groups of workers have been pooled
together: self-employed and employees. This can be problematic to the extent that
employees and self-employed might receive different types of shocks and might cope
with them in different ways. In particular, the volatility of their income shocks, that
is, their income risk, will be, in general, different. Therefore, conclusions can be
misleading as regards the evolution and decomposition of inequality when pooling
self-employed and employee workers together. Given that many governments have
promoted policies to foster self-employment as a way to alleviate unemployment,
it might as well be useful for policy-makers to take into account the possible side
effects of such policies in terms of inequality.
The purpose of this paper is to identify the contribution of permanent and transi-
tory shocks to the evolution of income inequality separately for households headed
by self-employed or employee workers. The results are compared with the standard
case, where this distinction is neglected. We measure inequality in terms of the vari-
ance of household income instead of individual wage rates. Household income is the
relevant measure when analysing household inequality, as it allows accounting for
crucial issues such as insurance among household members.1Following the approach
proposed by Blundell and Preston (1998) and Blundell, Pistaferri and Preston (2008),
we use the evolution of the variances and covariances of income and consumption
to identify the parameters of interest, that is, the variance of the permanent and the
transitory shocks to income.
The data we use are derived from the Spanish Family Expenditure Survey (Encu-
esta Continua de Presupuestos Familiares, ECPF hereafter). It is a rotating panel
that covers the period 1986–97, containing information on income and consumption.
Other microeconomic data used in most of the literature so far either lack the longi-
tudinal dimension or the information on both income and consumption. For instance,
Blundell and Preston (1998) use Family Expenditure Survey (FES) data from the
UK, which contain only cross-sectional information on income and consumption. As
the same household is not consecutively observed, they have to aggregate data to
obtain a pseudo-panel for cohorts. Then, the variances of the shocks are identified
only under some restrictive assumptions. Blundell et al. (2008) combine US panel
data on income from the Panel Study of Income Dynamics (PSID) with consumption
data from repeated Consumer Expenditure Survey (CEX) cross-sections. They create
1Baker and Solon (2003) and Kalwij and Alessie (2007) use individual wage rates. This is convenient as
one can directly relate the increase in inequality to, for instance, changes in the price of skills. Nonethe-
less, it overestimates the actual inequality in the economy because individual inequality is partly undone by
intra-household agreements.
©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2009
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