“Consumption and Income Inequality in the United States Since the 1960s”, 2023-02 ():
Recent research concludes that the rise in consumption inequality mirrors, or even exceeds, the rise in income inequality. We revisit this finding, constructing improved measures of consumption, focusing on its well-measured components that are reported at a high and stable rate relative to national accounts.
While overall income inequality rose over the past 5 decades, the rise in overall consumption inequality was small. The declining quality of income data likely contributes to these differences for the bottom of the distribution.
Asset price changes likely account for some of the differences in recent years for the top of the distribution.
…Until recently, the debate over inequality relied almost exclusively on earnings and income data. Official income statistics indicate that inequality has increased sharply. But these official statistics may not accurately reflect changes in economic well-being. They ignore taxes and transfers and rely on income that is badly reported in surveys. Even improved income measures reflect transitory changes and fail to capture consumption out of financial wealth and durables such as housing and cars and, therefore, provide a narrow, short-term view of how well-being has changed.
Consumption may provide a better indicator of economic well-being for several reasons. Consumption better reflects long-run resources and is more likely to capture disparities that result from differences across families in the accumulation of assets or access to credit. Consumption will reflect the loss of housing service flows if home ownership 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. Thus, consumption will do a better job of capturing the effects of changes in access to credit or the government safety net. In addition to these conceptual advantages, consumption may better reflect economic well-being because of measurement issues—income has been shown to be substantially under-reported in surveys, especially for those with few resources, and the extent of underreporting has increased over time (2003, 2011; et al 2015). Empirical evidence supports the notion that consumption is a better measure of well-being than is income. For example, consumption has been shown to be more strongly correlated with other indicators of economic well-being than income (2003, 2011, 2012a).
…We report measures of inequality for income and consumption over the past 5 decades, using income data from the Current Population Survey and consumption data from the Consumer Expenditure Interview Survey. We investigate inequality patterns in different parts of the distribution by reporting ratios of percentiles, focusing on the 90∶10, 90∶50, and 50∶10 ratios that are less affected by errors in the extreme tails. Thus, our analyses capture changes in the bulk of the distribution but not in the extreme tails.
Using our improved measures of consumption, we show sharp differences in the patterns for consumption and income inequality. Since the early 1960s, the rise in income inequality as measured by the 90∶10 ratio (25%) has substantially exceeded the rise in consumption inequality (9.5%). Furthermore, this much smaller percentage increase in consumption inequality started from a considerably lower base. In some decades, such as the 1960s and 1990s, income and consumption inequality moved in parallel, but in other decades the differences were sharp. In the 1980s, inequality for both measures rose, but the increase was much greater for income (26%) than for consumption (5%). After 2005, these measures moved in opposite directions as income inequality rose sharply while consumption inequality fell. The differences between income and consumption through 2005 are almost exclusively in the bottom half of the distribution, indicating that the underreporting of consumption by the rich is not an explanation for the differences.