1 Introduction

New Zealand went into recession[1] in the first quarter of 2008 and did not grow in the 6 subsequent quarters. As a result, real GDP was 3.3% lower in the June quarter 2009 than it was in the December 2007 quarter.[2] The recovery has been slow. At the December 2011 quarter, real GDP had only just regained its December 2007 level.

Recessions can affect households in many ways; these include falling asset values, rising unemployment, and increased uncertainty. Additionally these phenomena affect different types of household with varying levels of severity. Generally, for example, older households have much of their wealth in assets (namely housing) and some, through downsizing to a smaller home, use this wealth to fund (the majority of) their retirement (Smith, 2007). This means that some older households are disproportionately affected by falls in asset prices relative to, say, young households, particularly renters. Conversely, increased unemployment in a recession may disproportionately affect younger cohorts. First, recessions make it harder to find a job upon initially entering the working age population and, second, recessions may make it harder to find a job that utilises one's skill set. For young people this means relevant skills become harder to acquire and/or skills gained elsewhere (for example in formal qualifications) depreciate, affecting their future labour market prospects. Finally, the increased uncertainty associated with a recession affects the behaviour of those with less of a buffer to absorb shocks, perhaps those highly in debt and those with large fixed outflows (relative to income).

In addition to the phenomena discussed above, the 2008/09 recession in New Zealand was also coincident with some large relative price movements in goods and services. [3] The varying weights of goods that rose and fell in price in different households' expenditure bundles mean there are likely to be heterogeneous impacts on different households' welfare owing to these price changes. One example is rents, which rose over the recession, whereas mortgage rates fell.

Using aggregate level data, such as private consumption and disposable income from the National Accounts or the Consumers Price Index, to draw conclusions on the impact of the recession on welfare is not ideal. This is because movements in these aggregates represent "the average" impact, and possibly mask the large differences that could have occurred across household types. This paper recognises the possibility there have been varying welfare changes for different household types over the recession and seeks to measure these changes using microeconomic data from the Household Economic Survey,[4] hereafter HES. This raises two issues: first, defining household "type"; and second, measuring the changes in welfare.

Section 2 discusses issues defining household type and measuring welfare. In Section 3, we look at the household types created using the traditional method in the literature. Section 4 outlines our alternative approach to creating household types, clustering, and reports the household types we create from applying this technique to the HES data. Section 5 reports how our first two measures of welfare: income and expenditure changed during the recession by household types - both those created on the traditional basis and those created by the clustering process. Section 6 initially looks at how the welfare impacts of the different price changes varied across different household types depending on the composition of their budget. It then discusses what happens when the welfare changes from expenditure and price movements are aggregated to give a sense of the overall effect of the recession on welfare for our different household types. Section 7 concludes.