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

Conventional wisdom predicts that changes in the aggregate unemployment rate may significantly affect a country’s income distribution and, as a consequence, have a relevant impact on the evolution of the poverty rate. However, the relationship between labour macroeconomic indicators and poverty seems to have become weaker in recent times. Using panel data on unemployment and poverty for Spanish regions we estimate a System GMM model in order to model this relationship taking into account that the intrahousehold distribution of unemployment can be more relevant than aggregate unemployment in order to explain poverty changes. We also test the hypothesis of asymmetric effects of the business cycle on the share of poor individuals in the population. Our results show that unemployment has a positive impact on severe poverty, while inflation has a negative effect. Among the three unemployment measures considered in order to predict poverty, the percentage of households where all active members are unemployed registers the highest explanatory power. We also find that a change in unemployment has a larger effect on poverty during a period of economic recession than during a period of expansion.