NCPA - National Center for Policy Analysis

Using Consumption to Measure Inequality

June 6, 2014

While standard inequality measurements look at income and earnings, consumption is critical to getting an accurate picture of inequality, explains Bruce Meyer, professor at the University of Chicago.

Comparing groups' incomes is not the best way to measure inequality:

  • Income tends to fluctuate over time.
  • Moreover, income does not necessarily provide an accurate picture of a person's financial well-being, as it does not include all resources and wealth. For example, Meyer notes that a substantial number of Americans over 65 (more than 80 percent) own a home and make very small, or no, payments on it, yet that asset is not reflected in their "income."
  • Income does not reflect changes in the price of assets, such as houses or stocks, and it provides no indication of a person's access to credit.
  • Income does not take into account the value of government transfer payments or the impact of taxes.

Consumption, on the other hand, does not have all of these problems. While it is not a perfect measurement, surveys will more accurately capture a person's consumption than they will income, especially for those at the bottom of the income distribution. Moreover, consumption tends to reflect a person's typical income and is more permanent that measured income, which changes year to year.

In the Consumer Expenditure Survey, accuracy largely depends on what consumption item is being measured. Reports of a person's rent, utilities, groceries, cars and gasoline tend to be highly accurate.

Over the last 50 years, income and consumption inequality have risen, but consumption inequality is much lower than that for income and has risen significantly less than has income inequality. Moreover, since 2006, consumption inequality has actually been falling.

Policymakers should take a closer look at consumption, writes Meyer, rather than relying on official measures of income inequality.

Source: Bruce Meyer, "The Importance of Consumption for Measuring Inequality," in Income Inequality in America: Fact and Fiction, Economics 21, May 2014. 


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