Income and Living Standards

Copyright, The New York Times Company

Perhaps the most important indicator in economics is the standard of living, often identified with “consumption”: the amount of consumer goods and services that people acquire. Despite a wealth of data on other economic subjects, our measurement of consumption is still rather primitive.

A recent study by my University of Chicago colleague Erik Hurst and Profs. Orazio Attanasio and Luigi Pistaferri attempts some repairs on the little consumption data we have, in order to get a better understanding of how living standards relate to income.

Economists believe that maintaining and enhancing one’s standard of living are among the most important motivators of economic behavior. A few people work purely for the sake of working, but many others work with the primary intention of providing for themselves and their families. A few people save purely for the joy of saving, but many others save so that they can maintain their living standard in the future, when they might be unemployed or retired. One criticism of the Soviet Union’s economic approach was that while it could create a vast military infrastructure it generated relatively little for consumers.

For these reasons, consumption may be a more important economic indicator than even gross domestic product, which is the total production in the economy.

Although much attention is accorded to the various monthly reports of United States consumer-spending statistics, we economists have surprisingly little information about the amount and nature of consumer spending. A large number of household surveys carefully measure family incomes and their various sources but offer little or no indication of how much those households spend.

One reflection of the lack of consumer spending data is that we know a lot more about the income situation of the poor than we know about what they are spending and what their standards of living are.

We also know a lot about how incomes have evolved over time, especially how less-skilled workers saw little growth in their earning power over the last several decades while skilled workers saw sharp increases in their incomes. These trends are sometimes described as growing wage or income “inequality” – that is, say, a growing gap between the wages of people above average and the wages of those below average.

Less is known about the equality or inequality of living standards, because there is less data on consumer spending by households. To make matters worse, some of the relatively little household spending data we have appears to be ill suited for measuring the amount of inequality in living standards and how it has changed over time.

Among other things, higher-income households appear to underreport their consumer spending relative to low-income households and to an increasing degree over time.

The study by Professors Hurst, Attanasio and Pistaferri tried to correct for these measurement challenges by looking at, among other things, the gaps between high- and low-income households in terms of their spending on entertainment and on food and in terms of the number of vehicles they own.

The results suggest that consumer-spending inequality has increased over the last 30 years, much like the well-known increases in wage and income inequality.