Has Consumption Inequality Mirrored Income Inequality?

TLDR

The study examines whether the rise in income inequality since 1980 has been reflected in consumption inequality. The authors build a demand‑system–based consumption measure that corrects for systematic measurement error by double‑differencing high‑ and low‑income households’ spending on luxuries versus necessities. Consumption inequality tracked income inequality more closely than direct expenditure responses suggest. JEL codes: D31, D63, E21.

Abstract

We revisit to what extent the increase in income inequality since 1980 was mirrored by consumption inequality. We do so by constructing an alternative measure of consumption expenditure using a demand system to correct for systematic measurement error in the Consumer Expenditure Survey. Our estimation exploits the relative expenditure of high- and low-income households on luxuries versus necessities. This double differencing corrects for measurement error that can vary over time by good and income. We find consumption inequality tracked income inequality much more closely than estimated by direct responses on expenditures. (JEL D31, D63, E21)