Minding the Gap: How Welfare States Mediate the Dynamics Between Income and Consumption Distribution

This thesis aims at investigating the dynamics between income and consumption inequality. More specifically, it addresses the question of how welfare states, compared to other factors in Europe, impact on income and consumption distribution in different ways, thus causing them to be closely or more loosely aligned. I find that welfare states shape income and consumption distribution dynamics, though not in a uniform way. Whilst health provision primarily compresses consumption dispersion, income replacement programmes reduce inequality in income more than consumption. Moreover, house prices matter for the distribution of consumer spending at a given income distribution. Credit cannot be found to have a significant impact, potentially pointing towards borrowing constraints in the aftermath of the financial and economic crisis. Additionally, I give an explorative account of the role of the wealth distribution for the dynamics between income and consumption expenditure. While a bivariate relationship exists, I can only provide a speculative answer as to whether this is causal or driven by other factors, such as the welfare state. Using random effects estimation for a short panel, I capitalise on an exceptional dataset on income, consumption and wealth inequality for the same population covering 27 EU-countries. The findings highlight the importance of social policy as an explanatory factor in the analysis of the transmission of income to consumption inequality. Moreover, through demonstrating how different kinds of welfare state intervention do not impact on different distributional outcomes in a uniform way, I highlight the importance of considering inequality multidimensionally. Finally, it emphasises the role of the welfare state in smoothing both costs and income, relative to other private means.