Poverty and the business cycle: The role of intra-household distribution of unemployment

Resumen

Changes in macroeconomic conditions can have a substantial effect on the economic circumstances of low-income households. Conventional wisdom predicts that changes in unemployment, inflation and, in more general terms, economic growth can produce significant changes in a country�s income distribution. In general, economic downturns are associated with increases in inequality and poverty while periods of strong aggregate growth are supposed to contribute to reduce the share of poor individuals in the total population. Using panel data on Spanish regions we estimate a System GMM model in order to estimate these relationships. Our results show that both unemployment and inflation are significant variables in order to explain the evolution of poverty in Spain. More precisely, unemployment has a positive and significant impact on extreme poverty, while inflation has a negative and significant impact on extreme poverty. Among the three specified unemployment variables, the aggregate rate of unemployment has the lowest coefficient, while the percentage of households where all active members are unemployed has the highest coefficient. Moreover, we find that the alternative estimation procedures exhibit largely biased estimates, which call our attention to the importance of considering a suitable estimation method.