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…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.
What does inequality look like when viewed through the lens of consumption?
Official measures of income inequality suggest a steady rise in the U.S. since the early 1970s. An important limitation of the official statistics is that they are based on pre-tax money income, which does not account for tax credits and in-kind transfers, such as housing benefits and food stamps, which have increased sharply over time. Income inequality still rises for measures of income that more closely reflect family resources available for consumption, but the rise is less noticeable. Using our improved measure of consumption, however, a very different story emerges.
These differences are evident in Figure 1, where we report the ratio of the 90th percentile to the 10th percentile (the 90/10 ratio) for pre-tax money income, after-tax money income, and well-measured consumption. Since the early 1960s, the rise in after-tax income inequality as measured by the 90/10 ratio (26 percent) has significantly exceeded the rise in consumption inequality (7 percent). 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 (28 percent) than for consumption (5 percent). After 2005, these measures moved in opposite directions: income inequality rose sharply while consumption inequality fell.
The center and right panels of Figure 1 show that income inequality has risen for the top (90/50 ratios) and bottom (50/10 ratios) of the distribution, but increases in consumption inequality are only evident for the top. The finding that the patterns of consumption and income inequality at the top are fairly similar from the early 1960s through 2005 suggests that underreporting of consumption by the rich is not behind the differences in inequality over time.
Our evidence of only a modest rise in consumption inequality over the past five decades contrasts sharply with evidence from tax data that an increasing share of the nation’s income is going to the very highest income families, though several papers using broader and more consistent measures of income reported on income tax forms do not show large increases in the top 1 percent’s income share. Our analyses are distinct from these studies that focus on the highest income households. We do not include the extreme tails of the distribution because resources are likely to be poorly measured in survey data for these observations. Tax returns alone are also unsuitable for measuring incomes at the bottom, since they miss non-filers and important sources of income such as TANF, SSI, SNAP and housing benefits, which are not taxable.
Most of the discussion around recent trends in inequality highlights growing dispersion. However, the evidence from consumption data indicates that changes in inequality in economic well-being are more nuanced than a simple story of rising income dispersion would suggest. In the bottom half of the distribution there is little evidence of rising consumption inequality, and in the top half of the distribution the rise in consumption inequality has been much more modest than the rise in income inequality, particularly since 2000.