Macroeconomic Conditions and the Distribution of Income in Spain

This paper analyses 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. In estimation, we use a semi-parametric least squares procedure that allows a flexible interaction between the level of income and a first index of individual characteristics and a second index that captures the role of macroeconomic variables. 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 1990s 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.