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Research on Consumption Inequality of Household in China

Author: LiAoLei
Tutor: ZouHong
School: Southwestern University of Finance and Economics
Course: Western Economics
Keywords: Consumption inequality Consumption structure Birthcohort decomposition Formation mechanism Income inequality Socialsecurity mechanism
CLC: F126.1
Type: Master's thesis
Year: 2013
Downloads: 51
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Abstract

Consumption inequality is an important complement to economic inequality, which can reflect the real welfare difference between the residents. This paper uses the1989-2009CHNS data to measure and decompose consumption inequality of durable goods, and explore the formation mechanism of durable goods consumption inequality, comparing with income inequality.Meanwhile, using2002-2009data of Guangdong Province Urban Household Survey (UHS), the paper studies delicately the causes of non-durable goods consumption inequality from perspective of internal structure of consumption; finally, the paper verifies the positive role of social insurance mechanisms to alleviate the consumption inequality, and proposes relevant policy recommendations. The main findings are:First, since the1990s, the durable goods consumption inequality has been greater than income inequality. Income inequality is rising while durable consumption inequality declining. This is mainly related to the characteristics of "durability" of durable goods,"public goods within the family" and the purchase decision. When household durable goods reach the target number of durable goods owned stock, generally they will not rashly adjust durables scale. In addition, the high-income groups first enjoy the fruits of economic growth. Their consumption of durable goods is always leading and has experienced a number of upgrades when low-income groups of durable goods are more the first purchase. The reasons cause household durables consumption’s high level over the years. Especially in the late1990s, our durable goods showed a significant phenomenon of the "assembled" purchase. Durables’large-scale structure upgrade greatly increases consumption inequality. But since2000, with the gradual saturation of household daily durables, the durables’consumption inequality indicators have showed a downward trend while income inequality declined.Second, the group patterns of income inequality and consumption inequality are significantly different. The birth cohort income inequality and durable goods consumption inequality show inverted U-shaped trend; birth cohort of1970s has a higher income and consumption inequality. Age effect on income inequality and consumption inequality is not significant. Expected permanent shocks mainly explained consumption inequality’s fall.Third, durables and non-durables born group inequality law have showed significant difference. The purchase and consumption of non-durable goods is continuous and its curve more twists more when durable goods purchasing decisions tend to be discrete and its curve shows the only peak of which the time is regular. The younger of the birth cohort, the sooner of the time of durable goods consumption inequality appears. For instance, people born in1970s have the most severe consumption inequality when they were30years old and the value of people born in1950s was45, indicating that the consumption time and patterns of different birth cohorts are different. Youngest prefers early consumption and peak of the consumption gap appears early.Fourth, both sub-periods and sub-urban and rural income inequality are the most important factors of durable goods consumption inequality changes. In reform deepening period, income inequality’s compact on consumption is significantly higher than in the early days of reform.In those two periods, the impact in countryside is more obvious. It means that "home appliance to the countryside" policy to activate the durable market there can effectively reduce the durables consumption inequality and total consumption inequality. Different from western developed countries, durables consumption has a certain "habit formation" feature, which probably because non-durables are far from saturated and the structural upgrading and replacement are promising. Unlike non-durables consumption inequality, except family size, family characteristics show small and basically not significant impact.Fifth, the robustness test confirms durables habit forming effect is much lower than the non-durable goods. Income inequality is not only the durables consumption inequality changes’the main reason, but also the determinants of total consumption inequality widening. Improving the income level of the low-income groups in China, to reduce the revenue impact of risk, is the key to stimulate durable goods consumption and reduce consumption inequality. Sixth, the paper finds that non-durable goods consumption inequality has been lower than income inequality. Through deep decomposition of non-durable goods consumption inequality from the perspective of the internal structure of consumption spending, food expenditure inequality is found to be lowest in which vegetable consumption inequality is greater than meat consumption inequality. Education-culture-entertainment-service consumption inequality is highest. And relative to compulsory education expenditure, high school and higher education expenses show greater inequality.Seventh, the article also argues that consumption inequality is the sum variance of uninsured shocks and variance of unexpected shock. Using IV instrument, through sub-sectors, sub-income group, the sub-birth cohort research, the extensive coverage of social security mechanism especially the pension and medical insurance have play a significant role in reducing consumption inequality and prompting household consumption. Health insurance show positive effect for low-income groups promoting effect, but excessive payment contribution rate may inhibit residents overall consumption.Reducing the residents’income inequality and consumption inequality is an important way to improve people’s livelihood and promote the welfare and consumption inequality is better able to explain the true welfare gap. Especially in the situation of income inequality among the high and economic growth has slowed down, consumption inequality is not just fair, but also efficiency. Consumption inequality as one of the welfare gap and economic efficiency metrics should get more attention. In order to protect and improve the livelihood of the people, to broaden and develop areas of consumption, we should grasp the strategic basis for the expansion of domestic demand; continue to implement policies to stimulate consumption. The next round should focus on the field of non-daily consumer durables, energy and service consumption; optimize the income distribution policy; improve the income level of low-and middle-income groups in China; complete the social security system and reduce the welfare of each income class differences, and guide the consumer market driven by policy stimulus gradually to independent growth.

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