Is income inequality reflected in consumption inequality in Iran?

ABSTRACT

This paper presents a descriptive analysis of the evolution of labor supply, income, and consumption inequality in Iran using the 2005–2015 waves of the survey of Household Expenditure and Income (HIES). We document that the sharp decline in income and consumption inequality after the Subsidy Reform in 2010 was accompanied by a slight but persistent rise in respective inequality measures. We find that not only the level of income inequality is higher than consumption inequality but also that the fluctuations in income inequality are larger than those of consumption inequality. Moreover, income and consumption inequalities among rural households are higher compared to urban families. Finally, we show that within-group inequality, the inequality due to circumstances, can explain a considerable portion of the divergence observed between income and consumption inequalities.

KEYWORDS:

• Inequality
• consumption
• income
• transition
• Iran

JEL CODES:

• D63
• E20
• H29

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Some research suggest that consumption is a more suitable proxy for material well-being (Meyer & Sullivan, 2012, p. 2013). A small strand of literature investigates the link between inequality in income, wages, wealth, and consumption (Aguiar & Bils, 2015; Blundell & Etheridge, 2010; Blundell & Preston, 1998; Brzozowski et al., 2010; Cai et al., 2010; Fuchs-Schündeln et al., 2010; Gorodnichenko et al., 2010; Jappelli & Pistaferri, 2010; Krueger & Perri, 2006; Lise et al., 2014; Singh, 2012).

2 The dataset and its documentation is publicly available in Statistical Centre of Iran’s website: https://www.amar.org.ir/english/Metadata/Statistical-Survey/Household-Expenditure-and-Income; some cross-section and time series analysis on these data is conducted by Central Bank of Iran and can be found at this address (in English): http://www.cbi.ir/simplelist/1421.aspx

3 See https://djavadsalehi.com/2014/07/03/micro-data-for-analysis-of-Irans-economy/

4 Magnitude of utility bills and transportation differs seasonally and most clothing expenditure happens preparatory to March in which Persian New Year is celebrated. For more information on this issue see Taheri (2013).

5 Utility bills include: water, electricity, gas, sewage, general apartment cleaning fees, elevator fees, gardening fees, janitor fees, street sweeper fees.

6 It is calculated based on the method described in Fisher et al. (2013). Price purchase of vehicles is subtracted from expenditures. Then, the service flow of vehicles are added as a depreciation value with straight-line depreciation method based on 15 years lifetime.

7 For tenants, besides the rental payments, a deposit is paid which we have to subtract from total expenditures and calculate its service flows based on its deprecation value. However, finding the appropriate interest rate is somehow problematic. Since Central Bank of Iran stipulate obligatory cap on saving accounts interest rates, there always have been a convergence in their rates of return for deposits. However, interest rate in unofficial markets excel these rates substantially. While official rates are reported by Central Bank Data to be ranged between 16 to 23% in the years 2005-2015, in housing market traditional rates of 36% per year has been widespread. For instance, a tenant could usually pay 1,000,000 Rials as deposit and reduce its rent by 300,000 Rials. Although this sort of deal might face restrictions in real market, for the tenant, the opportunity cost of one additional million Rials in deposit is 36%. Thus, we used this latter rate to compute depreciation value of the deposit. See http://donya-e-eqtesad.com/news/630988 .

8 In the durable segment of the questionnaire, there are replicated items labeled as semi-durable. For example, clothing appears in the durable expenditure during the last year with the label of semi-durable while it also appears in nondurable expenses during the last month. They refer to expenses on clothing that are not considered durable nor non-durable.

9 Recall that HIES was initially aimed to capture consumption behavior of only rural families. The urban sample was appended later starting at 1968. Although the migrations made a huge compositional change in urban-rural residence, the tradition seems to continue.

10 Using CPI data from Central Bank, Average annual rate of inflation since 1970 until 2015 is 18.25%. The sinusoidal waves, observed in inflation rate during our selected interval, is an aggrandized version of inflation history for the last half- century. For more on inflation in Iran see Bonato (2008) and Samimi and Jamshidbaygi (2011).

11 We use OECD-modified scale as follows: the first adult member is assigned a value of 1. Each additional adult member takes a value of 0.5 and each child a value of 0.3. The adult-equivalent size is then calculated by adding all values within a household. The lower values reflect the fact that expenditures might exhibit economies of scale within the household.

12 Adding more dummies for education did not change our results nor were their coefficients meaningful.

13 In a general discussion that is available upon request, we show that women employees earn on average more compared to men.

14 Based on the central bank independence index (CBI) extracted from Garriga (2016), Iran’s central bank has been ranked 141 among roughly 180 countries in the world in terms of central bank independence. For related literature on central bank’s independence and inflation, refer to Fischer (1995) and Klomp and De Haan (2010).

15 Refer to Albanesi (2007), Easterly and Fischer (1999), and Shakeri et al. (2014).

16 Refer to Fisher et al. (2015) for details.

17 Some discussions on housing expenditure crisis in Iran for recent years and its effects on marriage and divorce rates using microdata can be found in Farzanegan and Gholipour (2016) and Gholipour and Farzanegan (2015).

18 For the relation between wealth and intertemporal elasticity of substitution, and rate of time preferences, refer to Lawrance (1991) and Ogaki and Atkeson (1997).