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December 1994, Vol. 117,
No. 12
CE data: quintiles of income versus quintiles of outlays
John M. Rogers and Maureen B. Gray
The Bureau of Labor Statistics (BLS) Consumer Expenditure (CE) Surveys are among the oldest of the BLS surveys; more than a century has passed since the first survey was undertaken in 1888-89. The specific purpose and design of the surveys have evolved over time, but all have been based on the idea that data collected from the surveys can be used in analyzing and evaluating economic and social problems.
The primary advantage to users of CE Survey data is the ability to associate consumer expenditures on all types of goods and services with the demographic and financial characteristics of the consumers making those expenditures. Data on expenditures, consumer unit characteristics, and income from the current CE Survey, which began in 1980, are published in tables classified by standard variables such as income, age, consumer unit size, and consumer unit composition.1 Income has been used as a primary means of classifying households for presenting CE Survey results. Two different income tables-quintiles of before-tax income and classes of income levels ranging from less than $5,000 to $70,000 or more - are used to classify households in the current survey.2 An additional characteristic by which the data can be classified-quintiles of expenditures-has some advantages over the standard income classifications and is examined in this article.
Income as a classifying variable
Intuitively, income is a natural choice for a classifying
variable because it is an indicator of consumers' financial
ability to purchase goods and services and therefore is assumed
to be a measure of their economic well-being. However, there are
theoretical and practical drawbacks pertaining to income that
make alternative measures more attractive, at least for some
applications.
With regard to theory, consumers' income is subject to transitory variations that result from events such as changes in employment, changes in the family unit (for example, through marriage or divorce), and windfall gains or losses. Income losses may be mitigated somewhat to the extent that consumers are able to draw on savings, borrow, use credit, or obtain support from persons outside the consumer unit to maintain their expenditure levels. Consumers may spend more or less in response to income gains or losses, but will not make long-term adjustments to spending if they believe that the changes in their income are temporary. Thus, expenditure levels are less variable over time than income levels and may be a better indicator of the economic welfare of the consumer unit.3 This has been discussed extensively in the economic literature pertaining to what is known as the permanent-income hypothesis.4 According to this hypothesis, as a result of transitory income losses and gains, low-income consumers will include those consumers with temporary reductions in their incomes that result in high ratios of expenditures to income, and high-income consumers will include those with temporary increases in income that result in low rations of expenditures to income.
This excerpt is from an article published in the December 1994 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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Footnotes
1 A consumer unit is defined as (1) a single
person living alone or sharing a household with others, but who
is financially independent; (2) members of a sample household
related by blood, marriage, adoption, or some other legal
arrangement; or (3) two or more persons living together who share
responsibility for at least two out of three of the following
major types of expenses: food, housing, and other expenses.
2 Quintiles of before-tax income are defines by ranking complete income reporters in order, by the level of their before-tax income. The ranking is then divided into five equal groups. For a definition of complete income reporters, see next section in text.
3 See H.S. Houthakker and Lester D. Taylor, Consumer Demand in the United States ( Cambridge, MA, Harvard University Press, 1970), pp. 255-59.
4 See Angus Deaton and John Muellbauer, Economics and Consumer Behavior (Cambridge, England, Cambridge University Press, 1980).
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