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Has Consumption Inequality Mirrored Income Inequality?

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  • Mark Bils

    (University of Rochester)

  • Mark Aguiar

    (University of Rochester)

Abstract

last 30 years has been mirrored by consumption inequality. We do so by constructing two alternative measures of consumption expenditure, using data from the Consumer Expenditure Survey (CE). We first use reports of active savings and after tax income to construct the measure of consumption implied by the budget constraint. We find that the consumption inequality implied by savings behavior tracks income inequality closely between 1980 and 2007. Second, we use a demand system to correct for systematic measurement error in the CE's expenditure data. Specifically, we consider trends in the relative expenditure of high income and low income households for different goods with different income elasticities. Our estimation exploits the difference in the growth rate of luxury consumption inequality versus necessity consumption inequality. This ``double-differencing,'' which we implement in a a regression framework, corrects for mis-measurement that can systematically vary over time by good and income group. This second exercise also indicates that consumption inequality has closely tracked income inequality over the period 1980-2007. Both of our measures show a significantly greater increase in consumption inequality than what is obtained from the CE's total household expenditure data directly.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1334.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1334

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  1. Dirk Krueger & Fabrizio Perri & Luigi Pistaferri & Giovanni L. Violante, 2009. "Cross Sectional Facts for Macroeconomists," NBER Working Papers 15554, National Bureau of Economic Research, Inc.
  2. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009. "Unequal we stand: an empirical analysis of economic inequality in the United States, 1967-2006," Staff Report 436, Federal Reserve Bank of Minneapolis.
  3. Fatih Guvenen, 2006. "Learning your earning: are labor income shocks really very persistent?," Discussion Paper / Institute for Empirical Macroeconomics 145, Federal Reserve Bank of Minneapolis.
  4. Richard Blundell & Ian Preston, 1997. "Consumption, inequality and income uncertainty," IFS Working Papers W97/15, Institute for Fiscal Studies.
  5. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers 702, Stockholm University, Institute for International Economic Studies.
  6. Mark Huggett & Gustavo Ventura & Amir Yaron, 2007. "Sources of Lifetime Inequality," NBER Working Papers 13224, National Bureau of Economic Research, Inc.
  7. Orazio Attanasio & Erich Battistin & Hidehiko Ichimura, 2004. "What Really Happened to Consumption Inequality in the US?," NBER Working Papers 10338, National Bureau of Economic Research, Inc.
  8. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  9. Bruce D. Meyer & James X. Sullivan, 2009. "Five Decades of Consumption and Income Poverty," NBER Working Papers 14827, National Bureau of Economic Research, Inc.
  10. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2005. "Two Views of Inequality Over the Life Cycle," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 765-775, 04/05.
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  1. Reagan and the role of the past in shaping the future
    by Jonas Feit in Conscience Warrior on 2013-12-14 18:10:00
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Cited by:
  1. Federico Ravenna & Nicolas Vincent, 2014. "Inequality and Debt in a Model with Heterogeneous Agents," Cahiers de recherche 1408, CIRPEE.
  2. Broer, Tobias, 2011. "The wrong shape of insurance? What cross-sectional distributions tell us about models of consumption-smoothing," CEPR Discussion Papers 8701, C.E.P.R. Discussion Papers.
  3. Coibion, Olivier & Gorodnichenko, Yuriy & Kueng, Lorenz & Silvia, John, 2012. "Innocent Bystanders? Monetary Policy and Inequality in the U.S," IZA Discussion Papers 6633, Institute for the Study of Labor (IZA).
  4. Orazio Attanasio & Erik Hurst & Luigi Pistaferri, 2012. "The Evolution of Income, Consumption, and Leisure Inequality in The US, 1980-2010," NBER Working Papers 17982, National Bureau of Economic Research, Inc.
  5. Leonardo Martinez & Juan Carlos Hatchondo & Juan M. Sanchez, 2012. "Mortgage Defaults," IMF Working Papers 12/26, International Monetary Fund.
  6. Carroll, Christopher D., 2014. "Representing consumption and saving without a representative consumer," CFS Working Paper Series 464, Center for Financial Studies (CFS).
  7. Carroll, Christopher D. & Parker, Jonathan A. & Souleles, Nicholas S., 2014. "The benefits of panel data in consumer expenditure surveys," CFS Working Paper Series 465, Center for Financial Studies (CFS).
  8. Christopher D. Carroll & Thomas F. Crossley & John Sabelhaus, 2014. "Introduction to "Improving the Measurement of Consumer Expenditures"," NBER Chapters, in: Improving the Measurement of Consumer Expenditures National Bureau of Economic Research, Inc.
  9. Wong, Arlene, 2014. "Population Aging and the Aggregate Effects of Monetary Policy," MPRA Paper 57096, University Library of Munich, Germany.
  10. Lisandra Flach & Eckhard Janeba, 2013. "Income Inequality and Export Prices across Countries," CESifo Working Paper Series 4298, CESifo Group Munich.
  11. Jonathan A. Parker & Annette Vissing-Jorgensen, 2010. "The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares," NBER Working Papers 16577, National Bureau of Economic Research, Inc.
  12. Laura Blow & Valérie Lechene & Peter Levell, 2014. "Using the CE to Model Household Demand," NBER Chapters, in: Improving the Measurement of Consumer Expenditures National Bureau of Economic Research, Inc.
  13. Steven N. Kaplan & Joshua Rauh, 2013. "It's the Market: The Broad-Based Rise in the Return to Top Talent," Journal of Economic Perspectives, American Economic Association, vol. 27(3), pages 35-56, Summer.
  14. Mike Brewer & Ben Etheridge & Cormac O'Dea, . "Why are households that report the lowest incomes so well-off?," Economics Discussion Papers 736, University of Essex, Department of Economics.
  15. Amy Beech & Rosetta Dollman & Richard Finlay & Gianni La Cava, 2014. "The Distribution of Household Spending in Australia," RBA Bulletin, Reserve Bank of Australia, pages 13-22, March.

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