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Working Paper: Inequality of Income and Consumption

August 1, 2012

Jonathan Fisher, former RSF scholars David S. Johnson and Timothy Smeeding have published a working paper, entitled "Inequality of Income and Consumption: Measuring the Trends in Inequality from 1985-2010 for the Same Individuals." Here is an excerpt from the paper's concluding section:

We present evidence on the level and trend in inequality over the last twenty-five years in the U.S. using disposable income and consumption for the same sample of individuals from the CE Survey. Our sample includes all individuals, not just those that live in urban areas or those that are of working age. While consumption inequality is always lower than income inequality, income and consumption inequality increase at approximately the same rate between 1985 and 2005. Over the entire 25-year period, consumption inequality increases by about two-thirds of the increase in disposable income inequality. These results contradict much of the existing research that finds that consumption inequality was relatively flat since the mid-1980s. Three recent papers argue that the increase in consumption inequality mirrored the increase in income inequality, but those papers make significant adjustments to the CE Survey data or impute consumption in other surveys. Our straightforward approach uses the entire CE Survey sample for both income and consumption and takes the consumption data as reported by the households. While we impute income for those households that do not report valid values for all of their components of income, the observed increase in income inequality in the CE matches the level and trend found in the CPS, the standard data set used to measure earnings and income inequality.

Examining income and consumption together using the same sample provides an important contribution to the literature on the economic well-being of individuals. That the trends in the two measures are nearly identical provides even more confidence in the results. We also show estimates of permanent income inequality using the maximum and minimum of income and consumption and find that the trend in inequality is approximately the same as seen using income or consumption by itself.

Read the full paper.