The Great Recession and Consumer Demand for Alcohol: A Dynamic Panel-Data Analysis of U.S. Households

Abstract

For those looking to design policies that mitigate the deleterious consequences of alcohol abuse, understanding how consumer demand for alcohol responds to changes in the local economic conditions is of great importance. We use high-frequency purchase data from a large panel of U.S. households between 2004 and 2011 to examine how alcohol demand changes over the business cycle in a dynamic panel-data estimation framework. We find strong evidence that demand for packaged alcohol is procyclical. Changes in the state-level unemployment rate and personal per capita income between the most recent business cycle peak and trough imply a 6.5% decrease in the demand for packaged alcohol (ethanol by volume). The results also show that the decline in alcohol expenditures is primarily due to a decrease in quantity rather than an overall decrease in the price per ounce of ethanol purchased. Moreover, we improve on the related literature methodologically by accounting for consumption dynamics, as long-run demand for alcohol may differ from short-run demand because of habit formation in the quantity and type of alcohol consumed. Our results also indicate that failing to account for consumption dynamics will tend to understate the long-run association between macroeconomic conditions and alcohol demand.

Keywords: alcohol demand, unemployment, macroeconomic conditions, business cycle

JEL Classification: I1, J68, E32