A New Measure of Consumption Inequality

July 18, 2012

In recent times, the debate surrounding middle-class welfare has tended to focus on the issue of income inequality. In a popular 2006 paper, economists Thomas Piketty and Emmanuel Saez use tax return data from the Internal Revenue Service to suggest that income inequality has widened significantly over the period 1913 to 2010.

Kevin A. Hassett and Aparna Mathur of the American Enterprise Institute, however, argue that income data are not the best measure of overall welfare. What matters for household wellbeing is consumption, since households are better able to smooth consumption rather than income over their lifetime. To that end, they use two sources of data to assess changes in consumption inequality.

The first source, the Consumer Expenditure (CEX) Survey, shows aggregated changes in consumption expenditures for households at all levels of the income distribution.

  • In 1984, the first year of their analysis, households in the top income quintile accounted for 37 percent of total expenditures, while those at the bottom accounted for only 10 percent.
  • Hence the ratio of top to bottom consumption was approximately 3.8.
  • By 2010, that ratio had increased to 4.4, which is only marginally larger than the average ratio of 4.3 over that entire time period.
  • This undermines the much-exaggerated tale told by measures of income inequality, which suggest that the gap has become much wider than this new data explains.

The second data source, the Residential Energy Consumption Survey (RECS), allows for assessment of consumption inequality in durable goods. Consumption of durable goods is recorded less well in the CEX data but is important in thoroughly assessing consumption inequality.

  • The RECS survey includes questions on household use of appliances such as microwaves, dishwashers, computers and printers.
  • Simple tabulations of these data across years suggest that a higher percentage of low-income households are able to afford and possess these items.
  • In addition, the quality of dwelling spaces has improved, and more low-income households have heating and air conditioning today than at any time in the past.
  • For nearly all durable goods, furthermore, the gap between high-income and low-income households has either narrowed significantly or remained the same.
  • This too, undermines the narrative of growing income inequality.

Source: Kevin A. Hassett and Aparna Mathur, "A New Measure of Consumption Inequality," American Enterprise Institute, June 25, 2012.

For text:

http://www.aei.org/papers/economics/a-new-measure-of-consumption-inequality/

 

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