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Economic inequality through the prisms of income and consumption
David S. Johnson, Timothy M. Smeeding, and Barbara Boyle Torrey
Alan Greenspan recently stated, "There is a surprising difference between the trends in the dispersion of holdings of claims to goods and services (income and wealth) and trends in the dispersion of actual consumption, which is, of course, the ultimate determinant of material or economic well-being."1 The "surprising difference" between income and consumption distribution trends is the subject of this article.
Between 1981 and 2001, economic inequality has increased substantially in the United States. This increase occurs regardless of which data or formulas are used to measure it. And inequality increases regardless of whether the resource measured is income or consumption.2
Most studies of poverty and inequality are based on income measurements for practical reasons. But conceptual limitations of income have led to an increasing number of studies using consumption measures, even if they are not as complete as the income measures that we have available. We think that income and consumption are two different prisms through which to view well-being. Their spectrums overlap, but it is their differences that this article addresses.
This article begins with a brief discussion of the strengths and weaknesses of both income and consumption measures. It then uses both measures to show how the trends in inequality differ by household type and for the individuals in each of those households. It illustrates how the two resource measures produce different individuals at the top and bottom of the general population’s distribution. The article concludes with an examination of the group that looks the most disadvantaged regardless of the prism used—children and the adults they live with.
This excerpt is from an article published in the April 2005 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.
Greenspan, "Job Insecurity and Technology," in J.C. Fuhrer and J.
Sneddon Little, eds., Technology and Growth: Conference Series No. 40
(Federal Reserve Bank of Boston, 1996).
2 D. Johnson, and T. M. Smeeding, "Measuring the Trends in Inequality of Individuals and Families: Income and Consumption," manuscript (Bureau of Labor Statistics, 1998).
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