Distribution of Living Standards

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R. Blundell, L. Pistaferri and I. Preston, 2008,"Consumption inequality and partial insurance" American Economic Review 98, 18871921.

This paper examines the link between income and consumption inequality. We create panel data on consumption for the Panel Study of Income Dynamics using an imputation procedure based on food demand estimates from the Consumer Expenditure Survey. We document a disjuncture between income and consumption inequality over the 1980s and show that it can be explained by changes in the persistence of income shocks. We find some partial insurance of permanent shocks, especially for the college educated and those near retirement. We find full insurance of transitory shocks except among poor households. Taxes, transfers, and family labor supply play an important role in insuring permanent shocks.

R. Blundell, H. Low and I. Preston, 2008,"Decomposing changes in income risk using consumption data " Institute for Fiscal Studies Working Paper W08/13.

This paper concerns the decomposition of income risk into permanent and transitory components using repeated cross-section data on income and consumption. Our focus is on the detection of changes in the magnitudes of variances of permanent and transitory risks. A new approximation to the optimal consumption growth rule is developed. Evidence from a dynamic stochastic simulation is used to show that this approximation can provide a robust method for decomposing income risk in a nonstationary environment. We examine robustness to unobserved heterogeneity in consumption growth and to unobserved heterogeneity in income growth. We use this approach to investigate the growth in income inequality in the UK in the 1980s.

I. Preston, 2007, "Inequality and income gaps," Research on Economic Inequality 15, 33-56.

This paper discusses inequality orderings based explicitly on closing up of income gaps, demonstrating the links between these and other orderings, the classes of functions preserving the orderings and applications showing their usefulness in comparison of economic policies.

R. Blundell and I. Preston, 1998, "Consumption inequality and income uncertainty," Quarterly Journal of Economics 113, 603-640.

This paper places the debate over using consumption or income in studies of inequality growth in a formal intertemporal setting. It highlights the importance of permanent and transitory income uncertainty in the evaluation of growth in consumption inequality. We derive conditions under which the growth of variances and covariances of income and consumption can be used to separately identify the growth in the variance of permanent and transitory income shocks. Household data from Britain for the period 19681992 are used to show a strong growth in transitory inequality toward the end of this period, while younger cohorts are shown to face significantly higher levels of permanent inequality.

I. Preston, 1995, "Sampling distributions of relative poverty statistics," Applied Statistics ( Journal of the Royal Statistical Society: Series C) 44, 91-99.

This paper considers the statistical reliability of poverty estimates widely used in the policy making statistics community. It derives exact small and large sample distributions for proportions of a sample falling below given fractions of sample median income (or other sample quantiles) and uses the resulting formulae to assess statistical significance of changes in relative poverty in the UK over the 1980s.

Ian Preston
Department of Economics
University College London
Gower Street, London WC1E 6BT
Email: i.preston@ucl.ac.uk