December 2006

IZA DP No. 2512: Macroeconomic Conditions and the Distribution of Income in Spain

published in: Labour, 2008, 22 (3), 383-410

This paper analyzes the impact of changes in macroeconomic conditions on the income distribution in Spain. Using household data from the Encuesta Continuada de Presupuestos Familiares (ECPF) from 1985 to 1996, we disentangle the effect of aggregate variables on the income distribution by estimating counterfactual densities conditional on different macroeconomic scenarios. Our empirical approach allows for a flexible relationship between the income level and two constructed indices. The first index captures the influence of individual characteristics while the second captures the role of macroeconomic variables. The contribution of each of these variables to their respective indices is estimated by a semiparametric least squares procedure. We find that although inequality displays a decreasing trend over the earlier part of the period examined, the poor performance of the Spanish economy during the early 1990's appears to have reversed this trend. We also conclude that while inflation appears to have no impact on the distribution of income for the period examined, there were important redistributive roles for unemployment, government expenditure and the level of GDP.