Income Inequality Impacts Consumption

In this post I explore the great increase in income inequality during US economic expansions.  But does income inequality lead to inequality in relative consumption of necessities and luxuries?  Here’s an analysis by quintile since 1984:

http://www.clevelandfed.org/research/commentary/2014/2014-18.cfm

The data overall show (quote): “for lower and middle income quintiles, the share of total inflation-adjusted (real) consumption going to purchase necessities has contracted since 1984, while the share of the total going to purchase luxuries has remained fairly constant or slightly increased. For the highest income quintile, however, there has been growth in the relative consumption of luxuries.”

Wait – lower income folks are now spending less on necessities, more on luxuries?

Relative Real Consumption Shares by Income Quintile

We are not shown the trends for individual items by quintile but when we get to the end of the piece, “implications”, we do get one example of the impact of classifying items as “necessities” or “luxuries”:

Average Share of Total Real Consumption

Education is classified as a necessity although parents struggling to get by and/or maintain their customary enjoyment of luxuries such as “entertainment” and “public transportation” (!) might have a different view.

(Quote): “if the necessity “education” continues to decline as a share of real consumption for all but the highest income quintile, it may exacerbate the income inequality trend over the coming years; increased education is one of the most reliable paths to increased income. However, the lowest, second-lowest, middle, and second-highest income quintiles have all seen their shares of education decline significantly over the analysis period (8.1 to 2.6 percent, 2.8 to 1.2 percent, 2.5 to 1.1 percent, and 2.6 to 1.6 percent, respectively). The highest income quintile has seen its share of education consumption remain relatively steady, declining only slightly from 3.4 to 3.2 percent.”

The devil is famously in the details.

One comment on “Income Inequality Impacts Consumption

  1. This data-heavy World Bank analysis of the relationship between inequality and growth establishes some very important facts:

    http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2014/07/02/000158349_20140702092235/Rendered/PDF/WPS6963.pdf

    (Quote): “We find that high overall inequality only appears to hurt income growth of the poor. While inequality is also found to have a positive effect on growth, this positive effect is exclusively reserved for the top end of the income distribution. This means that the type of growth that inequality stimulates is the type that further advances inequality.”

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