Underestimating financial inequality
There are major financial benefits to living together with a partner, however these benefits are not equally distributed. Men derive the greatest benefit. Women consume much less.
Couples who share the expenses in a joint household enjoy major financial benefits. However, in contrast to what research often shows, the benefits are not equally distributed between the parties.
We therefore underestimate the actual financial inequality, both between men and woman and in society as a whole.
This is the view of Aline Bütikofer, Associate Professor at the Department of Economics at the Norwegian School of Economics (NHH) and researcher affiliated with the Centre for Empirical Labor Economics (CELE) (see below). She has looked at the financial benefits of living together and how these are shared between the genders.
Bütikofer has found that people who live together consume on average an entire 139 percent of their combined income. This assumes that the parties maintained the preferences they had from before they started the relationship and therefore value material items in the same way as they did previously.
The increased consumption comes from the economies of scale of living as co-habitants.
For example, they can share the kitchen and bathroom, and both rent and electricity costs per person can be reduced significantly when one becomes two, says Aline Bütikofer.
There are an increasing number of people in Norway who live alone. According to Statistics Norway (SSB), one in five, or 960,000 people, lived alone in 2014. This represented 41 percent of all households.
Adults in collective households
“Everyone knows it pays to live together. In other countries it is also more common that adults live in collective households. What is perhaps more remarkable is that this is linked to financial inequality,” Bütikofer says.
A measurement of the economies of scale in relationships is the proportion of the total income a partner must have to be able to live an equally comfortable life on his/her own. If one only stands for 50 percent of the household consumption, there are no economies of scale.
“In the average distribution of consumption between men and women, women need 64 percent of the total income to be able to live as well on their own, while men require 75 percent,” says Bütikofer.
A normal starting point is to imagine that the household places all of its income into a pot and that they then allocate the consumption based on what is in the pot. The distribution will therefore be a type of measurement of the negotiating power in the home. Bütikofer has found that the women's proportion of the consumption varies in accordance with the share of the total income she contributes.
“Men earn more and make more decisions about what the household consumes. When their incomes are equal, the women's consumption is almost exactly half.”
In Bütikofer's study, the women's share of consumption is between 30 and 60 percent of the total.
“There are therefore some who have more than half, however about 30 percent of women consume significantly less than half of the total household consumption,” she says.
Inequality between countries and households
The study is based on figures from Switzerland in the period from 2000 to 2008. Bütikofer believes that such inequality is also found in Norway. Among people in their 30s, men and women earn about the same amount, while the differences are greater among older people. This is a trend in many European countries.
Normally researchers identify inequality in a country by measuring inequality between households. However, if there is also inequality within the household, the total inequality will be greater than what was identified.
“If one measures the differences between households and adds the internal differences of the households, the result is 16 percent higher in our case,” says Bütikofer.
Part of what is new with this scientific paper is that the researchers used data about how satisfied people are with their financial situation, instead of the usual methodology of using consumer data. Consumer data is reported by households stating the number of items and services they consume.
By defining utility functions, the researchers find the values for the benefit of what each individual consumes. A challenge with this set of data is that it is often based on a small sample and that it is difficult to determine who consumes what in the household.
If, for example, the household purchases a new car, it is not easy to determine who gets enjoyment from this. However, the degree of financial satisfaction can be found by asking each individual how satisfied they are with their financial situation. Researchers use this as a measure of indirect utility.
Happy in different ways
“We wanted to show that one can find the same information with data regarding financial satisfaction as one can with consumer data. We have a panel where we observe people over time as they go in and out of relationships. Given that people have roughly the same assessment of financial satisfaction when they are single as when they are in a relationship, we can see how they develop in terms of purely financial satisfaction,” Bütikofer says.
Findings from studies with consumer data in many different countries provide largely the same results as Bütikofer's study when concerning financial satisfaction. Household consumption varies in terms of the individual’s income.
She emphasises that even though they also have data for general satisfaction and job satisfaction, only the financial satisfaction is used to measure indirect utility.
“People are happy in so many different ways. If we think about how satisfied they are in general, then the entire model collapses,” Bütikofer says.
Text: Bendik Støren. This article was first published in NHH Bulletin no 3 2015.