Consumption and Income Inequality in the U.S. Since the 1960s
Official income inequality statistics indicate a sharp rise in inequality over the past five decades. These statistics do not accurately reflect inequality because income is poorly measured, particularly in the tails of the distribution, and current income differs from permanent income, failing to capture the consumption paid for through borrowing and dissaving and the consumption of durables such as houses and cars. We examine income inequality between 1963 and 2014 using the Current Population Survey and consumption inequality between 1960 and 2014 using the Consumer Expenditure Survey. We construct improved measures of consumption, focusing on its well-measured components that are reported at a high and stable rate relative to national accounts. While overall income inequality (as measured by the 90/10 ratio) rose over the past five decades, the rise in overall consumption inequality was small. The patterns for the two measures differ by decade, and they moved in opposite directions after 2006. Income inequality rose in both the top and bottom halves of the distribution, but increases in consumption inequality are only evident in the top half. The differences are also concentrated in single parent families and single individuals. Although changing demographics can account for some of the changes in consumption inequality, they account for little of the changes in income inequality. Consumption smoothing cannot explain the differences between income and consumption at the very bottom, but the declining quality of income data can. Asset price changes likely account for some of the differences between the measures in recent years for the top half of the distribution.
We have benefited from the comments of Robert Moffitt and seminar participants at the American Economic Association, Brookings Institution, Bureau of Labor Statistics, Canadian Economic Association Annual Meetings, Cornell University, Indiana University-Purdue University Indianapolis, Institute for Research on Poverty at the University of Wisconsin, MIT, National Tax Association Spring Symposium, Peking University, Society of Labor Economics, University of Chicago, and the University of Paris. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Bruce Meyer receives funding that supports his research from the Alfred P. Sloan Foundation, the Russell Sage Foundation, the Federal Reserve Bank of Chicago, and the American Enterprise Institute.