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. Such limitations suggest that consumption inequality would more accurately reflect inequality in economic well-being. Highly cited recent work concludes that the rise in consumption inequality mirrors, or even exceeds, the rise in income inequality. We revisit this finding, constructing 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. We show that our results are robust to several different approaches, including one that accounts for measurement error using a demand system. Previous work that concluded that consumption inequality rises at least as much as income inequality is sensitive to how consumption is measured; excluding small, poorly measured components of consumption yields results very similar to ours. The declining quality of income data is likely an important reason for the differences between income and consumption at the very bottom. Asset price changes likely account for some of the differences between the measures in recent years for the top half of the distribution.