Consumption and earnings patterns and income redistribution

THE HYPOTHESIS TESTED IS THAT THE POOR TEND TO CONSUME GOODS AND SERVICES PRODUCED WITH FACTORS OF PRODUCTION OWNED PRIMARILY BY THE POOR, WHILE THE RICH CONSUME THOSE PRODUCED BY FACTORS OWNED PRIMARILY BY THE RICH. THE METHODOLOGY EMPLOYS AN INPUT-OUTPUT TABLE WHICH IS CLOSED TO THE HOUSEHOLD SECTOR BUT WHICH DISAGGREGATES THAT SECTOR IN TERMS OF BOTH THE CONSUMPTION OF FINAL GOODS AND SERVICES AND THE ALLOCATION OF VALUE ADDED IN EACH PRODUCING SECTOR. CONSUMPTION DATA ARE GROUPED BY THREE INCOME CLASSES: ROUGHLY THE BOTTOM 70%, THE MIDDLE 24%, AND THE 6% OF THE WORK FORCE. VALUE ADDED IS DISAGGREGATED FURTHER INTO FACTOR SOURCE OF INCOME AND SECTORAL SOURCE (AGRICULTURAL VS. NONAGRICULTURAL). THE INTERRELATIONSHIP OF CONSUMPTION AND EARNINGS PATTERNS IS ANALYZED BY STIMULATING A TAX-TRANSFER SCHEME IN WHICH A TAX OF 10% OF FACTOR EARNINGS IS LEVIED ON THE TOP 6% AND THE REVENUE ALLOCATED EQUALLY AMONG THE BOTTOM 70%. THE RESULTS OF THE STUDY SHOW NO SUPPORT FOR THE HYPOTHESIS TESTED; EXPENDITURES BY THE POOR TEND TO INCREASE FACTOR EARNINGS BY THE RICH MORE THAN THOSE OF THE POOR. THIS CONCLUSION IS AT VARIANCE WITH THOSE OF OTHER STUDIES FOR COLOMBIA AND OTHER COUNTRIES. THOSE STUDIES GENERALLY SHOW THE EFFECT OF A TAX-TRANSFER SCHEME TO BE AN INCREASE IN THE DEMAND FOR LABOR AND A DECREASE IN THE DEMAND FOR CAPITAL. THIS STUDY SHOWS THAT THE DISTRIBUTION OF FACTOR EARNINGS IS LITTLE AFFECTED BY A REDISTRIBUTION OF INCOME. THERE ARE THREE POSSIBLE REASONS FOR THE DISCREPANCY. THE DATA EMPLOYED MAY NOT BE RELIABLE ENOUGH. SECONDLY, STUDIES WHICH HAVE LOOKED ONLY AT FACTOR DEMAND HAVE TYPICALLY USED A HIGHLY AGGREGATED SERVICES SECTOR, WHILE THE INPUT-OUTPUT TABLE USED IN THIS STUDY SEPARATES OUT PERSONAL SERVICES. THIRDLY, BECAUSE OF WAGE DIFFERENTIALS, CHANGES IN EMPLOYMENT MAY NOT CORRELATE VERY STRONGLY WITH CHANGES IN LABOR EARNINGS. FINALLY, IT IS IMPORTANT TO REMEMBER THAT THE RESULTS OF THIS STUDY REFLECT THE EFFECTS OF A TAX-TRANSFER SCHEME ON THE DISTRIBUTION OF FACTOR EARNINGS, GIVEN THE PRESENT DISTRIBUTION OF WEALTH AMONG THE DIFFERENT INCOME GROUPS. POLICIES WHICH ATTEMPT TO ALTER THE DISTRIBUTION OF INCOME BY CHANGING THE DISTRIBUTION OF WEALTH WILL HAVE DIFFERENT EFFECTS. FOR EXAMPLE, IF THE DISTRIBUTION OF LAND OWNERSHIP WERE CHANGED IN FAVOR OF THE POOR, THE SECOND-ROUND EFFECTS OF THIS POLICY WOULD REINFORCE THE INITIAL CHANGE. THE