Consumption and Income Inequality since the 1960s.

• Author: Meyer, Bruce D.

Concerns about rising inequality inform important debates on some of our most significant issues, including income tax design, immigration, and globalization. The debate over inequality relies almost exclusively on income data that indicate that inequality has increased sharply in recent decades. Yet economists generally prefer using consumption rather than income to measure well-being. (1) For this reason, and because consumption is better reported than income for some segments of the population, I have reexamined inequality patterns using consumption data. In several papers, mostly with James Sullivan of the University of Notre Dame, I find that income data paint an incomplete and at times distorted view of how inequality in economic well-being has changed in the United States. Because public and private transfers, and in some cases the drawdown of prior saving, raise consumption relative to income for the lowest income groups, consumption patterns indicate a much more modest increase in inequality than the income data suggest.

Why Consumption?

Although income is the most commonly used measure of the economic well-being of U.S. households, there are a number of reasons why measuring how much people spend on food, shelter, transportation, and other goods and services provides a more accurate picture of their circumstances. Income typically fluctuates more than economic well-being, because people can save when income is temporarily high and borrow when it is temporarily low. Income also fails to reflect the flow of services received if one already owns a house or a car, and has no expenditures but significant consumption. A retired couple in their own home living off the savings accumulated over a lifetime may be living quite comfortably even if they have no income.

Consumption measures will reflect the loss of housing-services flows if homeownership falls, the loss in wealth if asset values fall, and the belt-tightening that a growing debt burden might require--all of which an income measure would miss. Furthermore, consumption is more likely than income to be affected by access to public insurance programs, and to capture the effects of changes in access to credit or the government safety net.

Consumption is better than income at reflecting deprivation. In a series of papers, Sullivan and I show that measures of material hardship or adverse family outcomes are more severe for those with low consumption than for those with low income. (2)

Several researchers have documented the patterns in consumption inequality. The evidence from this literature is mixed. Some studies show little change in consumption inequality over the past few decades and others show a proportional rise equal to or exceeding that of income. (3) These differences arise from the use of different data sources or definitions of consumption--for example, total consumption or nondurable consumption--and different methods of addressing measurement error.

Addressing Concerns about Data Quality

While consumption has a number of conceptual advantages relative to income as a measure of well-being, previous studies have raised concerns about the quality of both income and consumption data. There is considerable evidence that income is substantially under-reported in national surveys, especially in categories of income important for those with few resources, and that the extent of underreporting has increased...