Nominal and discretionary household income convergence: The effect of a crisis in a small open economy

Regional economic imbalances have considerable negative effects on society that might be amplified during an economic recession. We study changes in the cross-regional household income imbalance in the small open economy of Slovakia before and during an economic recession. Apart from the usual nominal income, we study discretionary income, which accounts for consumption of necessity goods. Our analysis uses household budget survey data from January 2004 until December 2012 with 43,188 overall observations. Our main results are based on the σ-convergence framework, and we observe that only nominal regional household income converged before the economic recession. However, during the crisis, neither nominal nor discretionary household income converged. The β-convergence framework shows that only discretionary income converged during both periods. These results support the hypothesis of Stiglitz et al. (2009) that income and consumption need to be evaluated jointly to assess (regional) economic imbalances and inform the design of appropriate policies.